Book 2003 - NAPFA

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This book is designed to provide information in regard to the subject matters covered as of the date of publication. It is sold with the understanding that the information presented is of a general nature and should not be construed as financial advice directed to any specific person. For advice applicable to you, consult your professional financial advisors. Performance data on both mutual funds and stocks are presented; the information was gathered from sources believed to be reliable and every reasonable effort was made to present the figures accurately. However, no guaranty of accuracy is made and none is to be implied. Also, past investment performance is never a guaranty of future performance. It is but one of the considerations in the selection process, along with such others as consistency, volatility, and plunge protection.

ISBN: 0-9636537-3-3 Library of Congress Catalog number: PENDING

Copyright © 2003 by Dee and Gene Balliett Published by PCI Professional Communications, Inc., 631 South Orlando Ave. (400), Winter Park, Florida 32789-7191.

1st Edition

All rights reserved.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without prior written permission of the publisher.

Printed in U.S.A. iv

Dedication We dedicate this book to the survivors of September 11, including the many loved ones whose lives were shattered by the terrifying events of that day, and to those injured or killed in the battles for Iraqi Freedom, and their loved ones.

Acknowledgments This publication exists only because of the considerable help we received from Ken Rankin, Chris Hale, Kathleen Stevens, Ruth Porch, Richard Almeida, Phil Balliett, and Tedi Balliett. Certain chapters, appropriately identified, were contributed by Ken, Kathy, and Tedi. -Dee and Gene

Also, visit Balliett Financial Services’ Internet site: BalliettFS.com

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The authors Dee Balliett, MS Dee shares a byline with Gene on this book and two others, “Your Financial Plan” (1997) and “Your Financial Plan Is a Vision of Riches” (1999). She is our chief operations officer. Also, she heads our financial planning team and is a member of our investment team. When pressed to reveal her proudest achievements, she admitted to these: • “I admire seniors who never quit learning and never quit doing. So, I am proud to have been the oldest member of my financial-planning class at Rollins College and the oldest member of my graduating class when I was awarded a master of science degree (in mental health counseling) at Nova University. I started my master’s studies at age 59.” • “I admire people who willingly accept responsibility. So, I am proud to be a member of the board of NAPFA South.” It is one of the four regional organizations of NAPFA (National Association of Personal Financial Advisors), which in turn is the nation’s foremost organization of fee-only financial advisors. Unlike fee-based practitioners, fee-only advisors are compensated only by their clients. • “I admire skilled, effective teachers and leaders. So, I am proud that I have always been, even in my teen-age years, a teacher, coach, tutor, and, more recently, a lecturer.” For 25 years, Dee was deeply involved in Girl Scouting, both as a district advisor and senior troop leader. One year, she and some of her Scouts were pictured on the cookie boxes. More importantly, she led a group of high-school scouts who participated in a three-week exchange program with Girl Guides in England. Dee was president of the community-service Junior Women’s Club of Teaneck, New Jersey, “where we lived for 25 years.” As a speaker, Dee presents the usual financial-planning topics, but “my favorites are those of special interest to women.” In sports, she was among the earliest women inducted into the previously all-male Ohio Wesleyan Athletic Hall of Fame. She lettered there in golf, field hockey, basketball, and synchronized swimming. At 16, she was women’s golf champion in Eaton, the southwestern Ohio town where she was raised. For many years, while living in Teaneck, she was a tennis-team coach and teaching pro. She helped develop a competitive tennis-team program for kids in New Jersey. Also, she has taught swimming, lifesaving, tennis, softball, golf, basketball, archery, lacrosse, and soccer, plus winter camping and survival. After moving to Florida in 1986, she taught exercise skills and low-impact aerobics to senior citizens. “When you’re doing what you love to do, you’re as retired as you can ever be,” she says. “By that measure, I have been retired all my life.” Dee is a general practitioner with a special interest: Women in transition. Gene Balliett, CHBC Gene is a past-chairman of the Central Florida Chapter of the FPA (Financial Planning Association), pastpresident of a chapter of IAFP (International Association for Financial Planning), and past-president of NAPFA South. He has authored nine financial books of his own and now three with Dee. He has been a fee-only advisor since 1967. He has been a portfolio manager since 1984. As chief investment officer, he heads our investment team. He is also a member of Dee’s financial-planning team. Gene is a CHBC (Certified Healthcare Business Consultant), a certification that requires special knowledge of medical-practice business management as well as the full range of personal finances. He has served doctorclients and business owners since he left Medical Economics magazine as a senior editor in 1967. One notable business-client: City Federal Savings, then the nation’s 11th-largest savings bank, with scores of branches throughout New Jersey and Florida. In 1984, he launched the investment advisory firm Gene Balliett Investment Corp., of Red Bank, New Jersey. He closed it in 1987 after he and Dee relocated to the Orlando suburb, Winter Park, where he organized the new advisory firm now known as Balliett Financial Services, Inc. Since 1967, Gene has written scores of articles for national magazines, a financial column for Medical World News (McGraw-Hill), and for two years, he was the financial commentator on a televised program for physicians; it was syndicated nationally, in 120 markets. Gene was first listed in Marquis’ "Who’s Who in America" in the mid-’seventies, when he was editor of Physician’s Management magazine (Harcourt Brace Jovanovich), in New York. He was graduated (B.A.) from the Ohio State University after seven quarters.

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Introductory remarks

What is Resource Planning? Opinions differ, but we believe it’s about the quality of the lives we lead

Dee Balliett

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or nearly 50 years, Gene and I have often disagreed about this or that. We do agree that Resource Planning has much

to do with taking the time to decide what the rest of your life will be about, what you must do to make such a vision work, and then making it happen with the help of your own inner resources and three others—informational, advisory, and financial. Among the core issues that must be faced are these two: • Time moves so slowly when you’re young. We honestly believe there’s time for, well, everything. At some point, quite suddenly, we may realize it’s too late to prepare for a career we may actually like, to save enough money to send the kids to college, to take a vacation of a lifetime, to retire to the life we might have envisioned, and to leave something wonderful behind so that people can remember who we were. • Too soon old, too late smart. That’s an ancient truism that makes young people laugh and old people wince. Make your daughter’s IRA contributions for her every month for 10 or 15 years when she turns 15 or 20, and maybe she won’t live in desperate poverty when she’s old. Rather than go into hock to pay for her dream wedding, keep the event plain and simple so that you can put as much seed capital as you can into the college fund for the children she may bear. Start the fund on her wedding day, or sooner if you can. Before that, start funding your own IRAs and 401(k) plans to the hilt, so that you and your loved one may enjoy a financially secure old age whether or not Social Security and Medicare go bust. Tell your grandchildren to learn a blue-collar skill even while preparing for a white-collar career, so that they can find employment no matter what the economy of their future may be. If such dual training somehow puts them into a successful business of their own, doing work they love doing, rejoice. Such planning is seldom seen. The present gets in the way, and all too soon the future has us by the throat. Life needn’t be like that, not for everyone. Perhaps this book will help you decide for yourself what resource-laden financial planning is about. We earnestly hope so.

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The present gets in the way, and all too soon the future has us by the throat. Life needn’t be like that, not for everyone.

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table of contents

Resource planning CHAPTER

CONTENTS

Page

Introductory remarks: What is Resource Planning? ......................... vii 1

Internet, money, and you ...................................................................... 1 Entertainment: more than enough .................................................................................................... 3 Insurance: seek a good deal .................................................................................................................. 5 Investment research: great resources ................................................................................................ 7 Manage your portfolio: do it online ................................................................................................... 9 Personal finances: practical assistance ............................................................................................ 11 Real estate: buy or sell it online .......................................................................................................... 13 Shopping: save time and money ....................................................................................................... 15 Travel: stretch your budget .................................................................................................................. 17

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Rescuing cash to invest. Get serious. .................................................19 Take control of your credit cards ....................................................................................................... 21 Eliminate your costly bad habits ....................................................................................................... 23 More ways to cut spending ................................................................................................................. 25 See how the big guys rescue cash .................................................................................................... 27 Get out of debt ........................................................................................................................................ 29 Retire on the cash you rescue ............................................................................................................ 31 See what a nondeductible IRA can do ............................................................................................ 33 Learn to invest rescued cash ............................................................................................................... 35

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Let’s consider tax shelters ..................................................................37 Defer capital gains .................................................................................................................................. 39 Start your own business ....................................................................................................................... 41 Be a gentleman farmer ......................................................................................................................... 43 Get a conservation easement ............................................................................................................. 45 Embrace pension and profit-sharing plans ................................................................................... 47 Embrace the lesser retirement plans ............................................................................................... 49 Consider the residence rollover ......................................................................................................... 51 Consider the two legacy trusts .......................................................................................................... 53

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Eight investment steps ...................................................................... 55 1: Put the nut where you can reach it if you must ....................................................................... 59 2: See if the market is rising ................................................................................................................. 61 3: Select one balanced fund ................................................................................................................ 63 4: Select one asset allocation fund ................................................................................................... 65 5: Select one common stock fund ..................................................................................................... 67 6: Select three broad-based ETFs ...................................................................................................... 69 7: Select up to 16 common stocks or sector ETFs ........................................................................ 71 8: Consider conservative alternative investments ....................................................................... 73

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The case for real estate ...................................................................... 75 Consider your home an investment ................................................................................................. 77 Home Buying 101: Find a good deal ................................................................................................ 79 ix

Get top dollar when you sell ............................................................................................................... 81 Get comfortable with creative financing ....................................................................................... 83 Let your second home pay for itself ................................................................................................. 85 Rentals: a stock-market alternative ................................................................................................... 87 Investors in raw land sleep easily ...................................................................................................... 89 Reverse mortgage: It’s mo’ money .................................................................................................... 91

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Collectors: know your toys ................................................................ 93 Invest in art, live with beauty .............................................................................................................. 95 Antiques: living with the past ............................................................................................................. 97 Rare wines are liquid assets................................................................................................................. 99 Rare books: read all about them ..................................................................................................... 101 Jewelry, gems: sentimental value ................................................................................................... 103 Classic cars: the road to riches? ....................................................................................................... 105 Sports memories: not child’s play .................................................................................................. 107 Where to buy or sell collectibles..................................................................................................... 109

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Planning to wed? OK, let’s get practical ......................................... 111 Pay off debts before tying the knot ............................................................................................... 113 Money management for newlyweds ............................................................................................ 115 Register online for wedding gifts ................................................................................................... 117 Avoid these wedding rip-offs .......................................................................................................... 119 Put a lid on wedding costs................................................................................................................ 121 Watch out for ‘the marriage penalty’ ............................................................................................ 123 Learn the financial ropes ................................................................................................................... 125 Set your course for financial security ............................................................................................ 127

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Face the troublesome family issues ................................................ 129 Marriage: Learn to play it right ........................................................................................................ 131 Face it: parenting may be the toughest job ............................................................................... 133 Vacations: make them quality time ............................................................................................... 135 Plan your family’s finances................................................................................................................ 137 Enrich your life ...................................................................................................................................... 139 Keep learning your whole life long ............................................................................................... 141 Make a commitment to extend your life ..................................................................................... 143 Don’t give up on your marriage too soon ................................................................................... 145

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Vacations: North America’s best ..................................................... 147 Best of the Northeast .......................................................................................................................... 149 Best of the South .................................................................................................................................. 151 Best of the Midwest ............................................................................................................................. 153 Best of the West .................................................................................................................................... 155 Best of Canada and Mexico .............................................................................................................. 157 Best family vacations .......................................................................................................................... 159 Best cruise vacations ........................................................................................................................... 161 Best honeymoons ................................................................................................................................ 163

10

Yes, you can cope with insurance .................................................... 165 Disability and LTC insurance ............................................................................................................ 167 Health insurance: Will it disappear? ............................................................................................... 169 Medical Savings Accounts ................................................................................................................ 171 Homeowners and renters policies ................................................................................................. 173 Vehicle coverage: cars, boats, and more ....................................................................................... 175 Liability insurance: a necessity ........................................................................................................ 177 Business insurance: filling the gaps ............................................................................................... 179 x

Life insurance: covertly adversarial ................................................................................................ 181 Cash value life insurance: the straight story ............................................................................... 183 Life insurance: let’s compare the numbers ................................................................................. 187

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Help your kids learn to handle money ........................................... 189 Weekly allowance: think Money 101 ............................................................................................. 191 The spending plan: a vital lesson ................................................................................................... 193 Wants and needs: there’s a difference .......................................................................................... 195 Money skills: one step at a time ...................................................................................................... 197 Setting goals: targeting savings ...................................................................................................... 199 Earning money: how and where .................................................................................................... 201 Credit cards: avoid a tragedy ........................................................................................................... 203 How to invest: worth learning ......................................................................................................... 205

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Divorce: try not to go to war ............................................................ 207 First, consider the alternatives ......................................................................................................... 209 Avoid divorce court, if you can ........................................................................................................ 211 Choose the right attorney ................................................................................................................ 213 Agree on a fair financial settlement .............................................................................................. 215 Custody: put the child first ................................................................................................................ 217 Think about a tax-smart divorce..................................................................................................... 219 Tie up the loose ends ......................................................................................................................... 221 Heal the inevitable wounds ............................................................................................................. 223

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Career tips for 35 & younger ........................................................... 225 First, set your career goals ................................................................................................................. 227 Design a roadmap for career success ........................................................................................... 229 Enhance your employability ............................................................................................................ 231 Get paid what you’re worth ............................................................................................................. 233 Climb the organizational ladder ..................................................................................................... 235 Cope with the inevitable setbacks ................................................................................................. 237 Use the military as a training ground ........................................................................................... 239 Start your own business .................................................................................................................... 241

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Career tips for those over 35 ........................................................... 243 Decide what to be the rest of your life ......................................................................................... 245 Update your job-hunting skills ....................................................................................................... 247 Learn 21st-century job-hunting strategies ................................................................................. 249 Morph to your dream job ................................................................................................................. 251 Make it a career with financial security ........................................................................................ 253 Build on what you know .................................................................................................................... 255 Turn your hobby into a career ......................................................................................................... 257 Consider a government career ....................................................................................................... 259

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An objective look at employee benefits......................................... 261 Most popular employee benefit: 401(k) ....................................................................................... 263 Retirement plans benefit everyone ............................................................................................... 265 Health insurance: top priority benefit .......................................................................................... 267 Insurance coverage is a key component ..................................................................................... 269 Educational benefits help the company, too ............................................................................. 271 Lifestyle perks can be inexpensive ................................................................................................ 273 A smarter schedule is burnout insurance ................................................................................... 275 Flexible perks stretch a benefits budget ..................................................................................... 277

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Don’t let retirement be a trap ......................................................... 279 What if you live beyond your nestegg? ....................................................................................... 281 Work for Uncle Sam ............................................................................................................................. 283 Work for the Peace Corps .................................................................................................................. 285 Work in the private sector ................................................................................................................. 287 Travel the world .................................................................................................................................... 289 Make a difference at home ............................................................................................................... 291 Get into politics .................................................................................................................................... 293 Take the witness stand ....................................................................................................................... 295

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College for fun or a new career ....................................................... 297 Retire by going back to school ........................................................................................................ 299 Is college the key to your next career? ......................................................................................... 301 Pick the right school for you ............................................................................................................ 303 Go to college on the Internet .......................................................................................................... 305 More ways to add to your education ............................................................................................ 307 Go back to school to enrich your life ............................................................................................ 309 Educational expenses may not be a problem ........................................................................... 311 Give college to your grandchildren ............................................................................................... 313

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The magic trusts can spin ................................................................ 315 Buy asset protection for your family ............................................................................................. 317 Buy financial security for the kids .................................................................................................. 319 Protect life insurance from taxes .................................................................................................... 321 Defer a big capital gains tax ............................................................................................................. 323 Create a legacy, avoid the death tax ............................................................................................. 325 Get a safer alternative to a FLiP ....................................................................................................... 327 Try on a trust while it’s still revocable ........................................................................................... 329 Protect a nestegg outside the U.S. ................................................................................................ 331

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Death as an inevitability taken in stride ........................................ 333 Assure your loved one that you care ............................................................................................ 335 Find help when death draws near ................................................................................................. 337 Help your loved one let go ............................................................................................................... 339 Find your head after the loss of a loved one .............................................................................. 341 Make the right funeral decisions .................................................................................................... 343 Cope with your grief ........................................................................................................................... 345 Handle the financial fallout .............................................................................................................. 347 Settle up with the IRS ......................................................................................................................... 349

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You’re going to die. Plan on it. ......................................................... 351 Put your financial house in order ................................................................................................... 353 Be clear about your wishes ............................................................................................................... 355 Make sure your business survives you ......................................................................................... 357 A will protects wishes but faces probate ..................................................................................... 359 Wills, trusts: write your own? ............................................................................................................ 361 Prepare for the high cost of dying ................................................................................................. 363 Make the most of your final days ................................................................................................... 365 Create a legacy: leave a better place ............................................................................................. 367 Planning ahead ..................................................................................................................................... 369 Your last words on paper .................................................................................................................. 371

The last word: It’s about more than money .................................... 377

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Chapter 1

Internet, money, and you Here’s an introduction to some of the best of the Net

Dee & Gene Balliett

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ven before we had a Web site of our own, we at Balliett Financial have been gently urging our clients to tap into

the resources of the Internet. Some have done so, but others have yet to make it to the entry ramp of the information superhighway. Too many restrict their online experience to sending e-mail or playing solitaire. If that’s you, we’d like to escort you on a tour of the Internet. It’s a wonderful world of entertainment and information on just about anything imaginable. What do we like most? The Internet’s great strength resides in the realm of personal and family financial matters and lifestyle issues. Within it, the shortcomings are few. However, sites come and go, and the quality and usefulness can waver. Inevitably, you will discover that some of the sites we like well enough to highlight in this book will have vanished by the time you try to find them. Some others will no longer show signs of frequent updating and improvement. Still others will disappoint for some other reason. So, don’t look for a satisfaction guarantee. We have made a best-efforts attempt to shine some light on the sites we like just now, but please understand that the people who run them do not answer to us. The value of the Internet isn’t limited to financial applications. In this special issue, my staff and we will focus exclusively on ways to use a home computer to make life more useful, rewarding, and enjoyable, with emphasis on family finances. We are a gateway to investment strategies, tax-saving ideas, lifestyle issues, and the straight story on three challenging segments of personal finances that every family needs to know how to deal with: insurance, investment, retirement. Also, you will find a laugh or two on the Net. In fact, it’s loaded with fun. Here’s a sampling of where to find some of what tickles our funnybone and fills our leisure time: • Cartoons: nytimes.com/pages/cartoons; cagle.slate.msn.com; boondocksnet.com; loc.gov/rr/print/swann/herblock; dilbert.com; doonesbury.com; and snoopy.com. • Jokes: workjoke.com/projoke and nolo.com/humor/jokes.cfm. • Puzzles: nytimes.com/pages/crosswords; thinks.com/puzzles; and mathpuzzle.com.

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We are a gateway to investment strategies, taxsaving ideas, compelling lifestyle issues, and the straight story on three challenging segments of personal finances that every family needs to know how to deal with: insurance, investment, retirement.

We freely share the data, ideas, resources, and other information we gather for a self-serving reason: Wellinformed clients are our best clients.

For computer help, consult a kid or a young adult. Dee and I most often ask Phil Balliett, our son, systems analyst, hardware technician, Webmaster, resident consultant on hardware and software, and an escapee from big corporations and mainframes. He helps our visiting clients by demonstrating any of something over 100 software programs. His daughter, Jessica, when a toddler, sat on his lap and pounded his computer’s keyboard many, many days before she could walk or talk, and she was playing computer games long before kindergarten. Like so many of the young people you know, she has never been intimidated by information technology. Her likeness has been the female half of our company logo for more than 18 years. The other, Bryan, is her cousin and another computer whiz. At this writing, he is in college, studying electrical engineering. That reminds us: Favorite online sites among college students. Not long ago, The New York Times reported that these sites are the most popular among college students for travel assistance: expedia.com, orbitz.com, travelocity.com, priceline.com, cheaptickets.com, southwest.com, hotwire.com, aa.com, delta.com, hotels.com, greyhound.com, hoteldiscounts.com, amtrak.com, travelnow.com, and sunfinder.com. The first of these next eight pages adds more fun sites. Entertainment and diversion, however, are the least of what this book is about. We are fee-only only, NAPFA-registered personal financial advisors, and active participants in the National Association of Personal Financial Advisors. As you may infer from this book, many of our waking hours are consumed by never-ending research into the subjects of the Internet, money, and other issues that affect the clients we counsel by Internet, phone, and in visits to our offices. We freely share the data, ideas, resources, and other information we gather for a self-serving reason: Wellinformed clients are our best clients. These are the subjects discussed in the balance of this chapter: • Entertainment: more than enough. Welcome to the world of real music and virtual sports, games, and hobbies. • Insurance: seek a good deal. Buy the insurance you need without the salesman you don’t. • Investment research: great resources. You’re just a few clicks away from being a better-informed investor. • Manage your portfolio: do it online. Buy and sell stocks, ETFs, mutual funds, bonds, and alternative investments. • Personal finances: practical assistance. For openers, automate your banking, billpaying, and recordkeeping. • Real estate: buy or sell it online. Also, rent or finance property there. • Shopping: save time and money. Convenience is also an important factor. • Travel: stretch your budget. Find some of the sweetest vacation deals online. 2

internet

Entertainment: more than enough Welcome to the world of real music and virtual sports, games, and hobbies

Use the Internet to download the world’s best music. The infamous song-swapping Napster Web site was shut down by music industry copyright lawyers, but there are still plenty of ways to gain free (or nominally priced) online access to all of your favorite tunes. For less than $1 per month, subscribers to Web sites such as mp3u.com and mp3downloadhq.com can receive unlimited downloads of music files, as well as movies and TV programs. Check afternapster.com for a list of more than 30 music-sharing sites where you can download everything from CD-quality opera to classic rock ‘n roll. Manage a fantasy sports team online. Fantasy baseball leagues were around before the Internet, but teams are being organized online with computerized tracking of player statistics and trades, participation in this hobby is skyrocketing. You can manage your own virtual pro baseball, football, basketball, or other sports team, and you can compete online against thousands of other armchair coaches. FantasySports.Yahoo.com— a joint venture of Yahoo! and The Sporting News—offers free online fantasy leagues during baseball, football, and basketball seasons. ESPN hosts similar leagues at games.espn.go.com. Find a gaming partner on the Net. Thanks to the Internet, you can play bridge with Brazilian coeds, chess with a diplomat in Moscow, and Tank Hunter against a housebound grandmother in Wisconsin—if you wish, all in the same afternoon. Many interactive online games allow you to chat with other players; some offer rewards (recognition, trophies, even cash prizes) to consistent winners. Check out the free action at pogo.com and MSN’s Game Zone (zone.msn.com). Share your hobby with online messages. The Internet is teeming with specialized online discussion groups composed of aficionados of virtually every imaginable pastime, hobby, or interest. They’re called newsgroups, and they draw participants from every walk of life and every corner of the world. You can access them through Google’s search engine. Begin by going to google.com, and near the top of the opening page click Groups. Sci Fi fanatics who can’t get enough of Seven-of-Nine can swap Klingon war stories by entering this notation in the search box: rec.arts.startrek.misc. Bluegrass music fans share jam-session reviews at alt.music.bluegrass. The horsey set congregates at rec.equestrian. Poker players trade Texas Hold’em strategy tips 3

The Internet is teeming with specialized online discussion groups composed of aficionados of virtually every imaginable pastime, hobby, or interest. They’re called newsgroups, and they draw participants from every walk of life and every corner of the world.

on rec.gambling.poker. Reptile lovers chat among themselves at rec.pets.herp. Whatever rings your bell, you’ll find others to share messages with online.

Whatever rings your bell, you’ll find others to share messages with online.

Here’s where to look for more fun online: • apple.com/music/store is the Macintosh site for 99-cent downloads. • dir.yahoo.com/entertainment is the Yahoo! gateway to hundreds of Web sites specializing in humor, games, music, trivia, magic, contests, movies, and more. • fantasybaseballcafe.com is a free site offering news and player statistics to hobbyists who manage fantasy baseball teams. • netflix.com has a deal for you. For $19.95 a month, subscribers may order unlimited DVD movie rentals from the company’s online library of 12,000 titles. Movies are mailed to subscribers and Netflix pays the postage both ways. • radio.real.com offers online access to more than 2,000 radio stations organized by content (jazz, classic, hip hop, talk radio, foreign broadcasts, whatever).

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We could improve our standard of living. We could sneak up on them while they’re sleeping.

What a concept! What’s your next idea, life insurance?

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I’ve been thinking.

The rabbits run away and the panthers fight back. Mostly, we’ve got to eat cereal and salads. And tofu.

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What’s that?

I’ve been thinking about how we sneak up on panthers and rabbits and stuff. I think we could do it better.

I like the way we do it now. Why change?

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Ooh talks to himself. I do it, too, even if I am just a stupid caveman named Oh. Ah, you never will.

internet

Insurance: seek a good deal Buy the insurance you need without the salesman you don’t

What would you rather do than discuss life insurance with a salesperson? Some of us would rather prepare for a colonoscopy. Don’t get me wrong: We know that some of the nicest people in the world sell insurance. Trouble is, they speak a language the rest of the population doesn’t comprehend. Our point is that you don’t need to deal with salespeople just to buy an insurance policy. You can comparison-shop for insurance, pay premiums, and file claims over the Internet. Before you shop, though, better learn about the coverage you need. If you don’t, the money you risk overpaying could be all the money you’d need to invest your way to wealth. So: Go to insuranceconsumerguide.com for a crash course. It can give you a grounding on an array of insurance products available. Also, WebMD (webmd.com) contains useful articles on health-insurance issues. The AARP (American Association of Retired Persons) site (aarp.org) offers common-sense guidance to help the 55-plus crowd decide on LTC (long term care) and other insurance products. Compare notes about disability policies with other consumers at disabilityinsuranceforums.com. Look online for life insurance you can live with. The pure term-life coverage we tend to recommend as a financial security cornerstone for breadwinners’ survivors—is widely available and affordable on the Net. For premium quotes from 90 or so termlife carriers, check insure.com, advantageoneinsurance.com, 4bestquotes.com, and bestprice.com. How much can you save by running an online premium check? This morning we comparison-shopped a $250,000, 10year term life policy for a healthy 60-year old man in good health, a nonsmoker. We found a 100% cost difference between the lowest priced carrier (Zurich at $69.17 per month) and the highest (Northwestern Mutual at $139.37). We run comparisons all the time for clients. First, though, we answer this question: How much life insurance is needed? Over 10 years ago, we gave up the search for an appropriate answer from someone else, so we developed a procedure of our own. Too often, a new client carries lots of life insurance but needs less or none. Since 1967, we’ve seen only one situation where a cash-value policy 5

Too often, a new client carries lots of life insurance but needs less or none. Since 1967, we’ve seen only one situation where a cash-value policy in place was appropriate.

The well-off tend not to need life insurance so much as a better estate plan.

in place was appropriate. The well-off tend not to need life insurance so much as a better estate plan. Surf the Net to strengthen your family’s health coverage. Netquote (netquote.com) offers health insurance policy premium quotes for individuals and families in all 50 states. Competitor eHealthInsurance.com provides side-by-side comparisons of more than 40 different U.S. health plans. Medicare beneficiaries can compare various private Medigap policies at the U.S. government’s official site, www.medicare.gov/Mgcompare/ home.asp. DeltaDental.com offers individual and group dental insurance plans online. Self-employed individuals and small businesses can open a tax-sheltered Archer Medical Savings Account online at msahealthplans.com. Medical and hospital coverages for college students are available at chickering.com. Insur e your car, home, and other valuables. Check quotesmith.com or insweb.com to shop a number of top carriers for auto insurance premiums, homeowners coverage, business insurance, and more. For disability insurance, check disability-insurance.tv. Small businesses can find insurance protection against errors and omissions, sexual harassment suits, and other types of liability at allquotesinsurance.com. Sift through options in LTC at longtermcare.com. Check www.thedoctors.com for medical malpractice coverage from a physician-owned insurance company. Fidelity Investment’s insurance.com offers contacts that provide coverage for boats, RVs, all-terrain vehicles, travel, and pets. Here’s where to find more online help with insurance issues: • iii.org is where the Insurance Information Institute maintains an extensive list of studies of insurance benefits, coverages, and costs. • insuremytrip.com can be good for comparing coverage and premiums for 30 different travel insurance plans offered by 11 carriers. • www.naic.org is the official Web site of the National Association of Insurance Commissioners. You will find regulatory information and alerts for consumers. • businessinsurance.com is an online newsletter covering developments affecting the cost and availability of business insurance. • insurance.yahoo.com offers car insurance claim-filing tips, information on renters’ insurance, advice on personal computer insurance, and a comparison of term vs. whole-life policies.

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internet

Investment research: great resources You’re just a few clicks away from being a better-informed investor

Tap the wealth of investment resources available online. As recently as the early 1990s, few individual investors had any hope of keeping pace with the information-gathering capabilities of institutional investors. Thanks to the Internet, that’s no longer the case. Today, a do-it-yourself portfolio manager with a computer, a modem, and a modest nestegg enjoys access to an immense quantity of investment intelligence on individual securities, general business conditions, industry developments, and technical market activity. Better yet, the information superhighway allows us to research stocks, bonds, and other investments instantly—often for little or no cost. Start with our own favorite resource. It’s balliettfs.com —our own site. Everyone at Balliett Financial has helped Phil Balliett, our webmaster and information technology specialist, to engineer a powerful site brimming with information and resources selected as tools designed to strengthen our clients’ knowledge base. Our home page provides updated numbers on the most closely watched stock indexes on Wall Street, with links not just to text but also to charts, graphs, and tables. Our Daily Hotline Message serves up our latest thinking about the market. Our Concierge section, accessed through the bingo board in the opening window, provides a one-click look at any of the more useful (and used) online addresses among the many hundreds of links we offer. Online excerpts from our previous book, A Vision of Riches, and from an earlier title, Make Your Kid Rich, offer information, strategies, facts, and informed opinion that can enhance a family’s financial security. Our reference sections provide links to scores of the Internet’s most useful, most interesting investment sites. From our site, choose from many of the favored online resources among investors. They include the following: • quicken.com screens key data to identify the likely stock selections of value investors like Warren Buffett, among others. • tradetrek.com scans the stock universe to identify stocks with potential to break to the upside out of the bases they’ve formed. • vectorvest.com provides up to 100 free evaluations, three daily, on the stocks of your choice. (Then, you need to subscribe to get more.) • www.morningstar.com is the site for the most respected mu7

A company’s site may provide critical intelligence on new product development, corporate leadership, earnings, and dividend history. Many companies offer their latest quarterly or annual report, free for the asking.

The U.S. Securities and Exchange Commission’s Web site makes it easy to obtain current and historical financial statements for virtually every company traded publicly in the U.S.

tual-fund tracking service. Also, it offers news, analysis, and ratings for stocks and bonds. • fool.com is an irreverent but fact-filled resource for investment strategies, portfolio management, and personal finance. • dailystocks.com is a source for current and historical price quotes on more than 8,000 publicly traded stocks. • ipo.com provides information on current initial public offerings as well as data on venture-capital activity and secondary filings. Don’t overlook corporate Web sites as information sources. If you’re considering an investment in corporate securities, you ought to consider going go the horse’s mouth for information. Most publicly traded companies (and many privately held ones) host corporate Internet sites offering a variety of information. It won’t be the most unbiased information source available, but the company’s site may provide critical intelligence on new product development, corporate leadership, earnings, and dividend history. Many companies offer their latest quarterly or annual report, free for the asking. Get instant access to every public company’s financial statements. The U.S. Securities and Exchange Commission’s Web site (www.sec.gov) makes it easy to obtain current (and historical) financial statements for virtually every company traded publicly in the U.S. Quarterly (10-Q) and annual (10-K) reports, proxy solicitation statements, 8-K filings, prospectuses, and other SECrequired financial reports can be downloaded, printed out, or viewed online. Also, the SEC site provides useful information about enforcement actions, proposed rules, and litigation. There’s more information and analysis for investors at these Web sites: • allamericangold.com gives you daily investing news and commentary covering the effects of politics on the gold markets. • cbs.marketwatch.com provides blow-by-blow reports from the trading floor plus research on individual stocks, IPOs, mutual funds, and more. • investors.com offers tons of data on stocks, plus extensive free instruction in a section called Investor’s Corner. • online.wsj.com is The Wall Street Journal’s Internet edition, offering financial insight and analysis for investors and a special section on personal finances. • thestreet.com is an online paradise for stock pickers, offering financial news and analysis plus online tools for comparing mutual funds, tracking portfolios, and researching earnings reports. • bloomberg.com is a broad-based financial news service covering developments affecting the securities markets, commodi-

8

internet

Manage your portfolio: do it online Buy and sell stocks, ETFs, mutual funds, bonds, and alternative investments

ties, mutual funds, and the economy. Trim your brokerage fees by buying stocks online. Some investors seem to need constant hand-holding and an occasional sales pitch by a salesperson who, before the Millennium Stock Market Crash, called himself a stockbroker. Today, such salespeople avoid the term and (laughably) describe themselves as a financial counselor or consultant or somesuch. Other investors do their own research at valueline.com, www.morningstar.com, or elsewhere online, and they place their trades through online discount brokerage houses. Some online brokers claim to be the fastest, easiest, or cheapest way to buy into the market. We leave to others the attempt to assess the players, but we can report that, at this writing: • aaii.com is the entry to American Association of Individual Investors, a not-for-profit membership organization ($49 yearly) that produces research for its members on discount brokers, DRIPs (dividend reinvestment plans), SIPs, (shareholder investment plans), and stocks (most notably through stocksuperstars.com). • Ameritrade (ameritrade.com) charges a flat $10.99 transaction fee for Internet equity trades regardless of quantity, including stop and limit orders. Even that modest fee is waived when a trade takes longer than 10 seconds to execute. • AFTrader (aftrader.com) offers $9.95 market and limit orders, no-fee IRA accounts, online access to over 8,000 mutual funds, and super-low margin interest rates. • ShareBuilder (sharebuilder.com) charges just $4 per online trade (more for limit or real-time market orders). For a $12 monthly fee, its customers make unlimited stock purchases for an IRA or Educational Savings Account. You needn’t give up service if you deal with an Internet broker. For example: • Most Internet brokers enable customers to monitor their portfolios online in real time. • Ameritrade (ameritrade.com) customers receive free streaming data containing the latest stock quotes. • E*Trade Financial (etrade.com) offers extended trading hours (8 a.m. to 8 p.m. ET) for trades outside of regular market hours. • Harrisdirect (harrisdirect.com) provides its online clients with downloadable stock research reports from Credit Suisse First Boston, live Internet market analysis by Briefing.com, and the 9

Most Internet brokers enable customers to monitor their portfolios online in real time.

HedgeWorld.com describes itself as the premier informational resource for the largely mysterious world of hedge funds.

option to speak with a “relationship manager” when hand-holding is needed. Use the Net to buy into more exotic investment options. Your online investment choices aren’t limited to listed securities such as stocks and mutual funds. For example: • Altegris Investments (managedinvestments.com) offers a variety of alternative investment vehicles, including hedge funds, individually managed futures accounts, and commodity funds. • HedgeWorld.com describes itself as the premier informational resource for the largely mysterious world of hedge funds. • OptionsXpress.com specializes in call and put option trades ($1.50 per contract). • www.Easy2Trade.com provides online investors direct access to the LIFFE and Eurex derivatives exchanges. • Bondsonline (bondsonline.com) offers research and purchase options for investors in corporate and government bonds. Also, you can trade commodities online. Among the choices available: • absolute-futures.com offers no minimum accounts, online commodity charts and price quotes, and 24-hour order desks. • gcitrading.com boasts zero-commission trades and 5% margin accounts for commodities, futures, and trading stock indices. • zapfutures.com gives its customers live audio from the commodities trading pits. Make online stock purchases direct from the company. Many major corporations offer bargain-rate stock purchase plans on their corporate Web sites—a saver of time and money for investors who plan to buy and hold shares in a company. For example, General Electric (ge.com) invites investors to buy commission-free GE stock directly from the company in increments of from $10 to $10,000 monthly. For a $1 transaction fee, GE will make electronic monthly withdrawals from your checking account to cover your purchases. Here’s a sampling of some other notable sites of special interest: • financialmuse.com is an online brokerage and financial services company that caters to women who invest. • stockpickcentral.com is a gateway to scores of online brokerage services, each one rated by customers. • scottrade.com is a traditional discount broker that has made the transition to online trading ($500 minimum accounts, $7 market orders.) • investinginbonds.com is a good starting point for online bond investors. It offers investing instruction, research reports, historical data, and links to other useful sites.

10

internet

Personal finances: practical assistance For openers, automate your banking, billpaying, and recordkeeping

Start by doing your banking online. E-banking eliminates costly paper-handling and teller interactions for banks, but it’s a winwin for depositors, too. Electronic accounts eliminate trips to the bank branch, save postage, and permit customers to review accounts, verify deposits, transfer funds, and balance checkbooks 24/7. Most employers happily e-deposit salary checks directly into your Internet account. Because of all that technology, you may never again need to wait in a bank line and pay a fee to talk with a teller who hasn’t a clue who you are. Pay your bills on the Internet. Arrange to have payments electronically debited from your account, and you will never incur late charges due to missed payments. For $9 a month or less, you can have all your paper bills sent to PayMyBills.com and PayTrust.com. Through either, you can pay bills on your computer—when you’re ready. For a yearly $15 to $25, each provides a year-end CD containing all your account information. Check your credit rating online. The national credit-reporting service Equifax.com offers instant Internet access to its own reports on your credit standing plus those of the two other major credit scoring firms—for as little as $29.95. For less than half that amount, you can tap into your credit report and FICO score at myfico.com. Also, cbs.marketwatch.com offers a free online credit report, plus monthly alerts to changes in your credit status. Other Internet sites, such as loanlinks.com, can help you repair your credit and increase your credit score. Use the Internet to nail the best interest rates. Whether you’re financing a car, a home, a business expansion, or a vacation, you can find the money online—and often at a rate that will embarrass your local bank. Internet lenders like PeopleFirst.com aggressively seek auto-loan customers with bargain-basement rates and 45-minute loan approvals. BankRate.com lets you comparison-shop hundreds of lenders for the lowest rates and most favorable terms. To find the best credit-card deals, go there or to credit-land.com. This site lets you compare hundreds of credit-card plans for interest rates, annual fees, and best cash rebates, frequent flyer bonuses, and other rewards. Find a better paying job online. The World Wide Web is brim11

Because of all that technology, you may never again need to wait in a bank line and pay a fee to talk with a teller who hasn’t a clue who you are.

Chances are, fewer than 5 in every 100 adults retain an advisor on personal finances. The 5 prefer to delegate the ongoing research to reliable, informed, interested advisors.

ming with resources that can help you increase your earning power by landing a better job. One of the most popular, Monster.com, boasts a staggering 1,000,000 help-wanted postings every month. CareerBuilders.com offers an employment opportunities database that’s almost as large, and it hosts online career fairs for job hunters. Besides listing employment opportunities throughout the U.S. and abroad, the sites offer free resume preparation advice, up-to-the-minute salary data for many industries, and tips on making the right impression during a job interview. Also, the site allows the posting of resumes online—or for a fee, it distributes a resume electronically to thousands of recruiters Why bother dealing with a financial planner? Chances are, fewer than 5 in every 100 adults retain an advisor on personal finances. The 5 prefer to delegate the ongoing research to reliable, informed, interested advisors. To find such an advisor— one who won’t try to sell you something—go to nafep.com. Here are some more online resources to give you control over household finances: • quicken.com is a powerful site for personal finances that includes options for online banking and billpaying as well as taxpreparation help, investment research, portfolio management, personal-finances recordkeeping, and instruction. • lowermybills.com provides online comparisons of rate programs offered by long-distance telephone services, Internet service providers, wireless phone services, and others. • money.cnn.com includes a personal-finance section with money-smart tips to reduce the cost of banking, college, and borrowing. • allcreditonline.com offers online credit-card applications and information on credit-card deals. • nationaladvisorstrust.com is a national trust company forged by Balliett Financial Services, Inc., and 81 other top independent financial advisory firms to provide high-quality, cost-effective trust and custodial services. That’s National Advisors Trust Company, 10881 Lowell Ave.(100), Overland Park, KS 66210, 1-913 498-8159.

12

internet

Real estate: buy or sell it online Also, you can rent or finance property there

Shop for your next home online. The National Association of Realtors’ official Web site (realtor.com) gives you instant access to photos and descriptions of tens of thousands of properties offered through the listing service in virtually every city, town, and zip code in the U.S. Also, the site provides reports on current market conditions for thousands of communities. To cast a wider net, check ired.com for property listings in hundreds of countries around the world. If you’re in a bargain-hunting mood, use the Internet to seek out property foreclosures. For a bit under $400, foreclosureworld.com says it will let you tap into its database of 40,000 U.S. homes and other real estate currently in foreclosure by banks and government agencies. Sell property yourself over the Internet. Offering real estate FSBO (for sale by owner) is still a tough project, but easier than it used to be, thanks to the Internet. Considering that a fullservice flesh-and-blood real estate agent will charge at least 6% of the sale price, a successful online sale could save $24,000 on a $400,000 transaction. Services such as FSBO.com offer ninemonth online property listings—including photos and description—for $59 or less. Competitors include FSBOnet.net, FSBOonline.com, FSBOfreedom.com, MLShub.com (free listings), and buyowner.com (international listings). Check out property values online. Real-estate sales transactions are public records, but until recently you had to trek to the local courthouse or property assessor’s office to discover the most recent sale price or assessed value of a particular property. Today, state, county, and local governments are making the records available online. Some, like Lee County’s property assessor’s office (leepa.org) in Florida, provide a searchable database offering the most recent sale price, assessed value, an aerial photo of every property, and the name and address of the current owner. Generate rental income from your vacation home. Online vacation rental services can make it easy for you to rent out your beach house, ski chalet, or mountain cabin when it’s not being used by you or your family. For $100 or less (a fraction of the cost of classified newspaper ads or rental agency commissions), companies like Cyberrentals.com will run a photo and descrip13

State, county, and local governments are making the records available online.

Find a search engine that lets you sift through hundreds of equity, mortgage, and hybrid REITs specializing in everything from racetracks to industrial parks.

tion of your property online for a full year. Better yet, prospective renters will contact you by e-mail. No more phone calls! Use your computer to nail the best mortgage rates. You no longer need to march from bank to bank in search of financing. Online services such as LendingTree (100bestlenders.com) can arrange for scores of banks to compete for your business. Competitors such as quickmortgagequotes.com claim to have more than 500 top lenders who are “eager to earn your business with discount real estate mortgages and home equity products.” Other sites, such as mortgage101.com, provide a search engine to shop for the best mortgage, home equity loan, or refinancing rates in your community. Seek out the best REITs online. If you want the benefits of a real-estate investment but need liquidity, the Internet can help you find a publicly traded real-estate investment trust that meets your investment goals. Find a primer on the investment alternatives at reitnet.com, as well as a search engine that lets you sift through hundreds of equity, mortgage, and hybrid REITs specializing in everything from racetracks to industrial parks. Check realogicinc.com for books (most free) containing information on the REIT industry as well as Web links to dozens of publicly traded REITs. Here are some more valuable online real-estate resources: • househunt.com offers residential real-estate listings in all 50 states, as well as links to real-estate agents in every U.S. community. • nolo.com provides useful information on real-estate law and landlord-tenant issues. • loopnet.com is a leading Internet directory of commercial offerings with over $100 billion in properties for sale. • homegain.com allows you to shop comparatively and anonymously among the top performing real-estate agents in your area in an effort to select one that meets your criteria. • realtytimes.com offers daily updates and features about the real-estate marketplace.

14

internet

Shopping: save time and money Convenience is also an important factor

Now the marketplace will come to you. Internet marketing pioneer Amazon.com offers a vast array of product lines that includes books, apparel, toys, auto parts, pet supplies, and cutrate magazine subscriptions. Competitors such as Buy.com and Outpost.com offer a somewhat narrower list of categories, but they absorb shipping costs on orders meeting minimum purchase requirements. Overstock.com specializes in name brands at clearance prices. All your favorite stores are online. Just imagine: doing your holiday shopping with Tiffany’s after midnight, tastefully attired in your naughties. Yes, you can do that. Traditional retail chains—from Tiffany’s to Nordstrom, from Wal-Mart to Home Depot—are flocking to the Internet. To remain competitive, the big retail chains commonly offer online customers special discounts not available to shoppers in their retail stores. (Tip: price-check your next prescription at your pharmacy and also at the store’s Web site. Some drug chains price the same medicine much lower online.) An added bonus: no sales tax is collected on many online transactions, and Internet merchants often throw in free shipping. Use a comparison-shopping robot to find low prices. Free comparison shopping ‘bots will scour the Internet for merchants offering the products you want. They display them starting with the lowest-priced outlet. Shopping ‘bots like C-net (cnet.com) and MySimon (mysimon.com) work best when you know the exact brand and model you want. But if you only know the type of product (e.g., a digital camera), many ‘bots will provide an array of detailed product descriptions, specs, and product reviews. The Net is also your doorway to upscale pleasures. Want a vintage Roll Royce Silver Spur ($39,995) or a new Porsche Speedster replica ($19,995)? Try vipclassics.com. How about a 59foot, three-level, six-figure motor yacht? Take a look at charteryachts.com. Get a 30-day money-back guarantee on wholesale-priced GIA and EGL certified loose diamonds at diamondsafe.com. Choose from among several original Picasso etchings ($2,500-$8,000) at artquest.com. Or surprise her with an ankle-length Royal Crown Russian sable coat for a mere 15

Tip: price-check your next prescription at your pharmacy and also at the store’s Web site. Some drug chains price the same medicine much lower online.

$61,900 at furcenter.com.

Free comparison shopping ‘bots will scour the Internet for merchants offering the products you want. They display them starting with the lowest-priced outlet.

Buy and sell treasure or trash through online auctions. At this writing, the most firmly entrenched of the Internet auction houses, www.ebay.com, draws millions of bidders each day seeking bargains on laptop computers, concert tickets, Mustang convertibles, Florida real estate, Babe Ruth autographs, and jillions of other items. On any given day, Ebay hosts auctions for more than 400,000 books, 60,000 watches, 10,000 wedding dresses, and 12,000 dollhouses. In addition to buying on Ebay, you can list your own treasures or trash at the auction site for a modest fee (often under $1 per item). Competitors include auctions.yahoo.com, uBid.com, Bid.com. Paying for purchases over the Internet is limited as to risk. Almost all commercial Web sites accept credit cards and, as with purchases from bricks ‘n mortar retailers, Federal law limits your liability for unauthorized charge-card purchases to $50 (a fee that is waived by some card issuers). Another option: electronic debit services such as paypal.com and neteller.com. They let you withdraw funds from a checking account electronically and to make cyberpayments to others, even including individuals who do not accept credit cards. To learn more about shopping online, visit these sites: • shopping.yahoo.com is the Internet’s equivalent of an outlet mall—at which Yahoo’s 14,000 merchant-partners offer brandname merchandise at clearance prices. • autotrader.com is a geographically organized site offering thousands of online listings for new and used cars. You can also sell your old car here. • diamondhelpers.com offers a tutorial on buying loose diamonds, including a useful price finder calculator to determine the approximate value of a stone based on the details of its diamond certificate. • pricingcentral.com will help you select the most appropriate Internet shopping ‘bot (e.g., C-Net, MySimon, DealTime, PriceGrabber) for the product category you are seeking. • adquest.com allows you to sort through the classified ads collected from more than 1,600 newspapers and other publications across the U.S. In addition to merchandise for sale, Adquest offers listings for real estate, automobiles, help wanted, and more.

16

internet

Travel: stretch your budget Find some of the sweetest vacation deals online

Thanks to the Internet, you can be your own travel agent. Not long ago, vacation travel options, such as cruises and desirable destination resorts, were available only through agents. That’s no longer the case. The Internet has made it easy for individuals to find great travel deals and to book their own trips—often, at savings not available through agents. Most airlines have slashed their payments to travel agents. So, many agents must now charge for booking flights. Many still perform valuable services, and there are times when even the most savvy Net surfer is wise to leave travel planning to a pro. For routine travel, though, you could be money ahead learning to do it yourself. The Internet gives you control. Online, you can sift through a variety of options—the timing of flights, number of stops, choice of airport, and price. Often, you can choose where to sit from a seating chart. For the best airfares, start by checking the top three online booking sites. While there are dozens of travel Web sites claiming to offer the lowest fares, none consistently offers them. You could focus your search on three leading sites: Expedia.com, Travelocity.com, and Orbitz.com. Compare the rates they offer for the itinerary you select. As a bonus for travelers whose plans are flexible, the three often show how to trim costs by 20% to 50%—or even more by traveling at a different time, a day earlier or later, or from a different local airport. You just may find even lower fares from an airline’s own Web site. At this writing, Southwest Airlines (southwest.com) is the nation’s largest low-price airline, and it doesn’t allow Internet booking sites to list its fares. Also, most airlines often offer bonus frequent flyer miles for passengers who book through their Internet sites. (If you’re not a frequent flyer club member, you can sign up online instantly.) The cheapest fares are typically reserved for those who forego a standard paper ticket in favor of an electronic ticket—the printout on your own printer of the airline’s confirmation of your purchase. Just bring the e-ticket (showing the airline’s logo) to the airport and use it like a regular paper ticket. Chances are, you will need to check in at the 17

While there are dozens of travel Web sites claiming to offer the lowest fares, none consistently offers them.

The major car-rental chains offer special online discounts at their sites. Hotel chains do the same, while consolidators provide a smorgasbord of discount lodging choices from romantic B&Bs to luxury penthouse suites in cities around the world.

airline’s counter before attempting to pass through the first security gate. Shop the Net for hotel rooms, rental cars, and cruises, too. The major car-rental firms (including Hertz, Avis, Alamo, Budget, National, Dollar) offer special online discounts at their sites. Hotel chains (like Hilton, Marriott, and Sheraton) do the same, while consolidators (such as Hotels4less.com) provide a smorgasbord of discount lodging choices from romantic B&Bs to luxury penthouse suites in cities around the world. Cruise.com and others allow comparison-shopping of cruise lines, itineraries, and rates. Online auction sites such as E-bay.com and Yahoo.com provide bidding on deeply discounted airline tickets, resort lodging, and other travel services. Set your own price. If you’re not fussy about the details of your travel, you may be able to get airlines, cruise ships, hotels, and car rental firms to bid for your business online. For example, Priceline.com allows you to specify your destination, the quality of the lodging, and the size of a rental car. The catch? Once you accept a bid, your credit card is billed and no cancellation is allowed. Be careful what you say Yes to! More ways to stretch your travel budget online: • bestfares.com offers literally thousands of deeply discounted air fares, cruises, car rentals, hotels, rail bargains, and vacation packages. The sweetest deals are reserved for Best Fares members ($59.90), but nonmembers may browse and pick up many discounts free. • cheaptickets.com is a discount-travel site with savings on airfare, lodging, car rentals, cruises, and full vacation packages. • cruisecritic.com has deep discounts on cruise vacations, reviews and ratings of ships, and online discussion groups where you can meet your fellow travelers before you board the ship. • jetblue.com is a low-fare airline’s way of offering its coach passengers leather seats, personal TV screens, and bargainbasement fares. • luxurytravel.com provides a searchable database with links to 2,000 of the best hotels and resorts in North America, Europe, Asia, and other international destinations.

18

Chapter 2

Rescuing cash to invest. Get serious. Max pension contributions are now up to $40,000; IRA, $3,000-$3,500

Tedi Balliett

G

ood for Junior and Jan. He’s 40, she’s 38, and they may live to be 125, given what’s ahead for 21st century health

care. They love their careers, and each makes enough money to qualify for a maximum contribution to a Keogh plan. In 2003, that’s $40,000. If invested in monthly increments ($3,333.33), $40,000 is enough to grow, at 9%, into $2,226,000 in 20 years and $8,100,000 in 30. The maximum contribution for an IRA in 2003 is $3,000 for those under age 50 and $3,500 for those who are older. Well, $3,000 yearly in monthly increments ($250) over 30 years grows, at 9%, into $458,000. But wait! They’re investing $86,000. Junior and Jan are both investing their Keogh plans and Individual Retirement Accounts to the max. Over those 30 years, $86,000 yearly ($7,167 monthly), growing at 9%, becomes $13,121,000. A lot of that growth involves the tax-free reinvestment of dividends and realized capital gains. Only distributions are taxed—and they needn’t commence till age 701/2.

You think America will become a nation of incredibly focused investors? Well, probably not. On the record, spenders will still outnumber savers (by a lot), and the savers will continue to outnumber the investors (by more). People are people, and the path to the poorhouse is littered with unrealized opportunities. Enlightened, determined investors, however, face an unprecedented opportunity to create wealth for themselves, financial security for their families, Rockefeller-like dynasties, and incredible charitable legacies. Without determination, none of that pie in the sky will be realized. Well, our Junior and Jan need to take full advantage of the opportunity. They will. Both comprehend Keogh, IRA, and investing for a target like 9% or 11%. They know about investment risks, that losses are possible, that there are no guarantees in the stock market (nor in life), and that the best time to invest, until now, was July 8, 1932, when the Crash of ’29 finally bottomed out. (Too bad your family and ours didn’t see it that way at the time.) Admittedly, $7,167 monthly is a lot to sock away. So is $40,000 yearly. For the young people in your family, among others, so is 19

People are people, and the path to the poorhouse is littered with unrealized opportunities. Enlightened, determined investors, however, face an unprecedented opportunity to create wealth for themselves, financial security for their families, Rockefeller-like dynasties, and incredible charitable legacies.

They know about investment risks, that losses are possible, that there are no guarantees in the stock market (nor in life), and that the best time to invest, until now, was July 8, 1932, when the Crash of ’29 finally bottomed out. (Too bad your family and ours didn’t see it that way at the time.)

$10,000 or $5,000 or $1,000 a year. So, maybe we and they had better explore a few ideas that can help to rescue cash for investment. In this chapter, let’s revisit the important points: • Take control of your credit cards. Stop diverting cash into interest payments. • Eliminate costly bad habits. Over 20 years, one pack of cigarettes daily steals six figures. • Find more ways to cut spending. You can earn more or spend less—or both. • See how the big guys rescue cash. They know wealth is not measured by money spent. • Get out of debt. Let’s visit some practical-minded suggestions. • Retire on the cash you rescue. Invest it monthly rather than at the end of the year. • See what a nondeductible IRA can do. Over time, it could grow into six or seven figures. • Learn to invest rescued cash. Our partial listing of good educational opportunities.

70 Billion years BC

I’ve been thinking about life insurance.

Ah

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Ah CH & GB 2000

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O OH h

O H O

Ooh

Ah Ah

h

Ah

Ooh

Gets better. You described term insurance. I’m thinking cash-value. It’s part reducing-term insurance and part savings or investments.

Wow! We call the product an investment tax shelter and charge 20 times the term premium. The death benefit stays the same. But who I don’t would buy it? get it. Neanderthals? But then, I never will.

20

Ooh

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O OH h

Probably like cave insurance, only better.

What’s that?

I’ll guess: We get lots of other cave men to pay us big bucks. In return, we promise to give lots of money to the wife when It will be the greatest they die. In an scam in the history of Robbing? average year, man. Safer than robbing Trains? not many die. trains. More lucrative Ponzi? than Ponzi.

rescuing cash

Take control of your credit cards Stop diverting cash into interest payments

Begin by reevaluating what’s a necessity and what’s a convenience. Unless you review television shows for a living, 500 TV channels is not a necessity. The extra $40 a month you pay for premium cable or a satellite dish translates to $480 at the end of the year; that’s almost three months of IRA deposits @$166. Develop a spending plan. Doesn’t matter what your income is, make the plan and stick with it. List the monthly bills that must be paid in order for you to live: housing, utilities, groceries, essential clothing, health care, and basic transportation. Then list the payments that must be met to pay off your consumer debt—monthly credit-card payments, outstanding loans, and any child-support or alimony payments. Then, list the amount you spend each month on “other,” such as eating out at work rather than carrying your lunch. That column reveals your initial investment money. If you are spending $10 eating lunch out on a daily basis, then brown-bagging only once a week, for 50 weeks, saves $500. That’s another three months’ IRA deposits. Lower your interest payments, and stop paying yearly fees. If you are paying more than 11% interest on any credit card, you are paying too much. Get rid of any card that charges more. While you are at it, cut up any card that charges a yearly fee. There are plenty of cards available that don’t. Check with bankrate.com, for a listing of the lowest credit card rates. Consolidate your credit-card debt. If your debt is spread over many cards, try consolidating onto one or two low-interest cards. Before you do, be sure to check the fine print. Many card companies consider an incoming transfer of debt to be the same as a cash advance. If so, they may charge considerably more than 13%—or even 18%—for the transfer. Pay down your debt. We paid out about $65 billion in interest payments in 2001 alone on credit-card debt. If you have an $8,000 balance on a credit card that charges 18% interest, and if you make only the minimum payment each month, you will need almost 26 years to pay off the debt—and you will shell out $15,432 in interest. Always make more than the minimum payment. Once you’ve cleared your debt, never charge anything that will take you more than two months to pay off. 21

List the amount you spend each month on “other,” such as eating out at work rather than carrying your lunch. That column reveals your initial investment money.

Can’t consolidate your debt? Then first pay off the card charging the highest interest by paying more than the minimum amount due. Make only the minimum payments on each of the others. Once the highest-interest card is paid off, cut it up. Also, add the amount you paid toward it to the minimum payment of the next card. Repeat the process until all your cards are paid off, leaving you only one or two cards that represent the best bargains available to you.

Cut up any card that charges a yearly fee. There are plenty of cards available that don’t. Check with bankrate.com, for a listing of the lowest credit card rates.

Alternatively, pay off the card with the lowest balance first. Then, add that payment to the minimum due on the next card. Financially, the first strategy makes more sense, but you have to take your personality into account. Some people get so frustrated paying down that first card, they soon quit trying. If paying off the smallest debt first will keep you motivated, then do it. Whichever way you choose, stick with it until you are debtfree. Maybe this thought will sharpen your motivation. If that $218 monthly credit-card payment had been invested every month at 12%, in 25 years you’d have accumulated $400,000. Makes that new DVD player you can’t figure out how to hook up look pretty foolish, doesn’t it? For more suggestions, go to: • bankrate.com regularly surveys more than 4,500 financial institutions in 174 markets in all 50 states to provide timely rate information. • BillSaver.com provides a ranking of many providers of consumer services, • ivillage.com offers a money section that offers lots of ways to save money everyday. Also, it presents a wealth of other information, from babies to working. • napfa.com takes you to NAPFA (National Association of Personal Financial Advisors), the organization of fee-only only advisors on personal finances.

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rescuing cash

Eliminate your costly bad habits Over 20 years, one pack of cigarettes daily steals six figures

Calculate the obvious cost of smoking. If you are anything like me, you probably aren’t consciously aware of how much money you spend purchasing cigarettes. Even though I ordered mine from an online source (saving about a third of the price of what premium smokes cost in New York), and I saw exactly what I was spending each month, the cost still didn’t register. One day I sat down and multiplied the amount I spent each month by 12. Believe me, that figure caught my attention! I was appalled by it—enough to do something that no warning label could ever do. I quit smoking. Need more convincing? One pack of cigarettes per day, at $4.00 a pack, equals $1,460 per year—nearly three-quarters of the maximum IRA contribution. Rather than smoke, invest $120 a month at a mere 5.5%, and in 20 years you’ll have $52,275. At 12% over 20 years? $118,710. Don’t forget the hidden cost. The money you spend purchasing just the cigarettes isn’t the only amount to take into consideration. You are also spending more for health and life insurance. Also, think about lighters, air fresheners, replacing damaged clothing and furniture, extra laundry costs, teeth whiteners, breath fresheners, and whatever else you use. What’s more, even if it hasn’t happened to you yet, as a smoker you will almost certainly incur more medical expenses in your lifetime than a nonsmoker will. While you’re at it, think about the future cost. Whenever we are in an economic state where there is strong political resistance to raising taxes, count on the government to raise what used to be called “sin taxes”—taxes on alcohol and tobacco products. And as more people quit smoking, count on the tobacco companies to continue to raise prices to keep their profits high. Also, think about the wealth-building potential of cash rescued from other unnecessary spending. Consider this fact: The average American spends more on food and alcohol than on shelter. Certainly there is a great deal of pleasure to be had sharing a bottle of good wine or sharing a drink or two with your buddies after work. But if you are stopping by the bar every night, better calculate how much those rounds are costing you. What’s more, as states continue to lower the blood-alcohol level needed for a person to be legally intoxicated, think 23

The money you spend purchasing just the cigarettes isn’t the only amount to take into consideration. You are also spending more for health and life insurance. Also, think about lighters, air fresheners, replacing damaged clothing and furniture, extra laundry costs, teeth whiteners, breath fresheners, and whatever else you use.

about how much a DUI charge will cost you, let alone a conviction. Are you determined to win the lottery? If you are purchasing lottery tickets, whether it’s the scratchers, the Lotto, or the numbers, keep track of how much you spend each week. Write it down. On paper. Right next to it, write down how much you won that week. Getting the picture?

If you are habitually spending money on something every week that you don’t really need, you have a bad habit—and are wasting investment dollars you could recover by changing your attitude.

Smoking, drinking, and gambling are not the only bad habits. Maybe you have a sweet tooth, get a rush whenever you buy something new, have a shoe fetish, or are a clothes’ horse. Whatever it is, if you are habitually spending money on something every week that you don’t really need, you have a bad habit—and are wasting investment dollars you could recover by changing your attitude. None of this will mean anything to you if you don’t put the calculations on paper. For help in calculating the amount of money you’ll have when you stop spending it on bad habits and invest it instead, go to www.financialchoices.com. Chances are, you could retire on the cash you rescue. For more suggestions, go to: • cheapskatemonthly.com has tips to maximize your present income and stretch your dollars. • familyfun.go.com features money-saving household tips and fun stuff. It’s sponsored by Disney Online • savingsecrets.com offers a free sample of its bimonthly newsletter. • tipztime.com has ideas for controlling household cash.

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rescuing cash

More ways to cut spending Little things can mean a lot

How much we Americans make and spend. The U.S. Bureau of Labor Statistics’ Consumer Expenditure Survey tells us our mean gross income is $44,649. After subtracting $3,116 for taxes, we’re left with $41,533, of which we spend $38,045. That leaves us with $3,488 for the year’s IRA contribution—or $67 a week for unscheduled recreation and entertainment, unexpected but necessary expenditures, or debt service—but no IRA contribution. Any wonder why so many of us in the richest nation on Earth are living from paycheck to paycheck? (For still more depressing numbers, go to bls.gov.) Let’s get back now to rescuing cash: Get rid of the clutter. Start by looking around your home. Are your cupboards and storage areas jammed with things? How many magazine subscriptions do you have? How many do you actually read? Are there clothes in the closet you haven’t worn in years, or worn ever? Get rid of everything you’re not using on a regular basis. Have a garage sale. Or at least rid your house of the clutter by giving it to charity. Then, be slow to fill it up again with stuff. Buy what you need rather than what you merely want, and learn how to shop right. Let Never pay retail be your mantra. If it’s not on sale, don’t buy it until it is. Compare prices and clip coupons. Just buying the store brand instead of the name brand will cut your grocery bill the first time out. Buying items in bulk can save you a lot of money, over time. Check your phone directory for wholesalers. Some have outlet stores where overstocked items can be purchased below retail. Become an educated consumer. Before you make a major purchase, research the product. Find out what features you can live without, and find out which manufacturer offers the best price for the best quality. There are many sites besides ours on the Internet that can help you, including mysimon.com, bizrate.com, and consumerreports.org (as well as the magazine Consumer Reports). Find out if you can rent rather than buy. Expensive power tools and other costly seasonal items can be rented as well as purchased. Check your Yellow Pages under Rental Service or Equipment Rental.

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Before you make a major purchase, research the product. Find out what features you can live without, and find out which manufacturer offers the best price for the best quality. There are many sites besides ours on the Internet that can help you.

Consider the real cost of any item before you buy it. Too often, there’s more involved than the sticker price. Will you need to take a training class to know how to use it? How about insurance, maintenance, storage, licensing, or repair fees? How much to upgrade if it is a product that will otherwise become obsolete? Include the real time involved in usage as well. A boat may sound like great fun. But if you don’t have the time to use it on a regular basis, it can be pretty hard to justify.

A boat may sound like great fun. But if you don’t have the time to use it on a regular basis, it can be pretty hard to justify.

Share cost-cutting ideas with your family and friends. You may be surprised to discover they feel the same way you do about rescuing cash—especially around the holidays. Find less-expensive ways of expressing your affection for each other, such as a spending cap or drawing names for exchanging gifts. Comes down to two choices. When it comes to finding investment money, you can either earn more or spend less. Chances are, spending less is more within your control. If you’re both lucky and smart, and disciplined, you will do both. Staying interested in the quest for ways to find more money to invest can pay off. Here are three Web sites that can help: • carsecrets.com takes you to author Corey Rudl, who says his book (Car Secrets Revealed) can thousands on a car repairs and purchases. • www.cheapskatemonthly.com offers lots of free money-saving suggestions and an $18-a-year monthly newsletter that promises even more. • couponqueens.com offers a $29.95 book on getting the most out of grocery coupons. • eere.energy.gov has everything you’ve ever wanted to know abut the U.S. Department of Energy, and more, including lots about saving energy. • frugaliving.com an index of books for sale about living the simple life. • ftc.gov/bcp/conline/pubs/general/66ways gives you the Consumer Literacy Consortium’s suggestions for ways to rescue cash. • homeparents.about.com: suggestions for stay-at-home parents. • LowerMyBills.com takes you to a comprehensive resource for rescuing cash. • money.msn.ca has a section on budgeting that lists 10 ways to waste your money mindlessly. •personal-budget-planning-saving-money .com offers personal budgeting and money-saving tips. • stretcher.com features ideas for living better for less. • ths.gardenweb.com features online forums where members share money-saving ideas.

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rescuing cash

See how the big guys rescue cash They know wealth is not measured by money spent

Here’s the bad news. There’s not much one can do to shelter money earned by working. IRS Form 1040 exemptions are fully phased out at $315,900. However: A business or professional practice offers some tax breaks. Within limits, you can extend your stay or arrive early for a business meeting or convention and still deduct all travel costs, possibly all lodging expenses, and half of your meal expenses. In 2003, you can immediately deduct (rather than depreciate over three or more years) up to $25,000 in computers, printers, copiers, and other equipment. You can possibly get a tax break on your car (and maybe for your office at home). If you’re the boss, look for a legitimate way to put your kids and parents on the payroll. Also, adopt a package of deductible employee benefits that include yourself and the others. Benefits can include major medical, LTC, and an MSA (Medical Savings Account). Also, you can consider term life insurance, educational assistance, and child care. When you and your employee-spouse go out to dinner, include business planning in the conversation and deduct half the tab. Don’t fudge, or you’ll risk expensive trouble with the Internal Revenue Service. For many, the best tax break is the qualified retirement plan. The max contribution to a profit-sharing plan in 2003 is $40,000, tax deductible and no payroll taxes. At that level, the nominal Federal and state tax savings may be $14,000-$19,000. A plan’s expenses reduce the gross savings, and you or your bookkeeper or accountant can figure to the dollar how much or how little. However, the more important issue is what that $40,000 of yearly investment will do for you. With an 11% return, $3,333.33 invested monthly ($40,000 yearly) provides you your first million in 13 years, two million in 18, four million in 24, and eight million in 30 years. Chances are, the yearly $14,000+ in yearly tax savings will cover all retirement-plan expenses, including your contributions to rank-and-file employees’ accounts, plus legal and administrative costs. Any net left can be taken as part of your year-end bonus. Other income-tax breaks are valuable for some, but not for all. Not everyone has much interest in being a gentleman farmer. A conservation easement can knock six or seven figures off a Form 1040 over one to five years, but there could be a drawback—someday, reduced appeal to a potential buyer. In time, 27

If you’re the boss, look for a legitimate way to put your kids and parents on the payroll. Also, adopt a package of deductible employee benefits that include yourself and the others. Benefits can include major medical, LTC, and an MSA (Medical Savings Account). Also, you can consider term life insurance, educational assistance, and child care.

residence rollovers could build a tax-sheltered fortune by letting you pocket a tax-free $500,000 every two years by selling your latest expensive house for that much more.

The max contribution to a profit-sharing plan in 2003 is $40,000, tax deductible and no payroll taxes. At that level, the nominal Federal and state tax savings may be $14,000-$19,000.

There are several ways to avoid capital gains. Anyone can defer a capital gain by holding an appreciated investment until it’s worth only what you paid. OK, that’s not such a good idea. Maybe better: avoid a capital-gains tax by holding the investment until death, when it passes to heirs at a step-up in basis. Also good: gift appreciated property to your family foundation trust or another charitable organization (and tax-deduct up to 50% on your Form 1040). Another possibility: Sell your appreciated assets to an irrevocable trust in exchange for a private annuity (not the insurance kind). How else to rescue big bucks for investment? Begin with the realization that wealth is measured by the capital accumulated, not by the dollars spent. Control your spending; stop trying to keep up with the village spendthrifts. Consider eating out less often; keeping the cars an extra year or two; vacationing less often and closer to home; selling off that third home, and maybe even the second; putting off retirement at least one or two years. While we’re brainstorming, let’s think about the future. You can rescue more tax money for your kids than you can possibly save for yourself. After your own long-term financial security is in place, fund an asset-protected irrevocable trust for them. Specify distribution as inflation-adjusted payments when they’re old, like 70, rather than chunks of capital from time to time. (By withholding the payments till then, you gain time for investments to multiply within the trust. In 20 to 40 years at a net 9%, after the trust’s taxes and management expenses, initial funding of $1,000,000 becomes $5,600,000 in 20 years and $31,000,000 in 40.) As long as the underlying capital remains in the trust, there’s no 55% estate tax to be paid. Over the generations, the savings in death taxes alone will provide enormous potential for dynastic wealth.

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rescuing cash

Get out of debt Let’s visit some practical-minded suggestions

Despite efforts to curb spending, there’s still more debt than you can handle? Contact your creditors immediately, Cancel all of your credit lines, and ask for lower interest rates. More often than not, lenders will cooperate. In extreme credit-card debt, lenders may even stop accruing interest altogether in return for a repayment program. As long as you stick to the agreement, your credit will probably remain undamaged. Bank lenders may be less forgiving—but you lose nothing by asking. Legitimate lenders want their money back, not your property. But be prepared to hear that, if you don’t cough up the payments, you risk losing whatever you put up as collateral, even your home and personal possessions. That means: You need to raise money quickly. Sell something—for example, any large-ticket items you own, such as a boat, jet ski, second car, expensive electronic gear, and even household items. You may even have to realize that the car or the house is out of your price range and that you must sell to pay off the loan. Better to sell them than to have them repossessed. Remember: Wealth is measured not by how much you spend but by how much capital you accumulate. Tap into or cash out your savings. Any money you have put aside beyond your three-month safety net may have to be sacrificed. If your savings are in a passbook savings account, we guarantee that the interest you are paying on your loans is far higher than any interest you are earning. Closing out savings is an emotional undertaking, so think of it this way: You aren’t losing ground; you are making your savings work harder by getting you out of debt. Along that same thought wave: Reevaluate your investments. Any investments that are earning less than the interest you’re paying usually should be liquidated to pay off debt. If you’re paying 12% interest, you’d have to be earning 18% before taxes on your investments to equal the outflow of cash. Chances are, you’re paying way more than 12% on your loans. If so, your investment is worth more if you liquidate it to pay off the debt. The solution is just that easy. Consider debt consolidation. Perhaps the bigger part of your debt problem is that you can’t keep track of your bills. Late payments hurt your credit, and late fees can eat up disposable cash. If so, debt consolidation may be a good option. Basically, 29

Any investments that are earning less than the interest you’re paying usually should be liquidated to pay off debt. If you’re paying 12% interest, you’d have to be earning about 18% before taxes on your investments to equal the outflow of cash.

Some debt-consolidation firms demand that you use your home as collateral and then set their terms in the hope that they will acquire the property. If you opt for debt consolidation, be sure and read the fine print and understand the terms completely before signing anything.

you take out yet another loan, large enough to cover all your unsecured loans, which gives you enough cash to pay off all the old debts and leaves you with one check to write each month. Before you proceed, do your research carefully. Some debt-consolidation firms demand that you use your home as collateral and then set their terms in the hope that they will acquire the property. If you opt for debt consolidation, be sure and read the fine print and understand the terms completely before signing anything. Consider refinancing your home. If you’ve made a good-sized down payment, have been paying your mortgage for several years, and live in an area where real estate values have been rising, chances are you’re sitting on enough money in the form of equity to take care of debt. If you’re paying more than 7% on your mortgage, you need to consider refinancing anyway, while mortgage rates are down. Before taking the step, talk with the mortgagor; be sure you can recover enough cash to pay off your debts. If you can’t refinance, you can borrow against equity by taking a second mortgage—and you can deduct the interest payments on your tax return. The downside, however, is serious: When you take out a second mortgage, you’re betting the ranch on your financial future. If you miss payments, you may lose the roof over your head. Second mortgages create street people. When all other possibilities are exhausted, borrow from your retirement fund. If you’ve built up significant cash in your 401(k) or 403(b) retirement plan, borrowing against it to consolidate your bills is a last-resort option. The loan is usually easy to get, but it short-changes your retirement—especially if you take the loan early in a bull market. Also, most loans from pensions and profit-sharing plans must be paid when leaving one’s place of employment or it will be treated as a taxable withdrawal.

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rescuing cash

Retire on the cash you rescue Invest it monthly rather than at the end of the year

Do you feel faint at the sight of a page half-filled with numbers? You do if you’re like Estelle, a musician- friend of mine. So, I’ll tell you what I told her: Before turning this page, concentrate on what I’m saying here. The tables merely provide evidence that my central point is true: The money you rescue for investment may or may not make you a zillionaire, but it could make your retirement years more comfortable. Invest your cash is in a Roth IRA. The take-home pay you invest in it not only grows tax-free but comes out that way when you retire. The maximum yearly investment at this writing is $3,000 under age 50, $3,500 above (with no age restriction on your contributions if you’re still working after age 701/2). You ought to try hard to rescue that much, because of the longterm tax-saving and wealth-building implications. At 11%, $3,000 invested by the end of each year grows to become $198,600 in 20 years, $597,000 in 30, and $1,745,600 in 40. In other words, big bucks could be your prize for rescuing cash for investment. If you are twenty-something, the $3,000 you rescue for investment each year could make you an IRA millionaire or multi-millionaire in retirement. If you have too few investment years ahead to anticipate seven-figure wealth from a $3,500 yearly investment, your alternatives may be to find more to invest or to try like mad to live modestly but happily. Here’s a concept: Invest monthly. No matter what your age, you can juice the investment returns in a rising stock market by putting cash into your investment program each month rather than at year’s end. $250 by the end of each month rather than $3,000 at the end of each year increases my 11% projections to $216,400 in 20 years, $701,000 in 30, and $2,150,000 in 40. What to invest in? I never will get ‘Stell to study the tables, but I did help her decide to put the $250 monthly into a no-load money-market mutual fund until the next bull market appears.

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The maximum yearly investment at this writing is $3,000 under age 50, $3,500 above (with no age restriction on your contributions if you’re still working after age 701/2). You ought to try hard to rescue that much, because of the long-term tax-saving and wealth-building implications.

How the cash you rescue may grow $120 invested at the end of each month

$1,440 invested at the end of each year

Years 1 2 3 4 5 10 15 20 25 30 35 40 45 50

Years 1 2 3 4 5 10 15 20 25 30 35 40 45 50

7% 1,487 3,082 4,792 6,625 8,591 20,770 38,035 62,511 97,209 146,397 216,127 314,978 455,111 653,769

9% 1,501 3,143 4,938 6,902 9,051 23,222 45,409 80,146 134,535 219,689 353,014 561,758 888,585 1,400,292

11% 1,515 3,205 5,091 7,195 9,542 26,040 54,563 103,877 189,136 336,542 591,396 1,032,015 1,793,810 3,110,888

13% 1,529 3,269 5,249 7,503 10,067 29,284 65,967 135,989 269,651 524,792 1,011,821 1,941,488 3,716,089 7,103,548

7% 1,440 2,981 4,629 6,394 8,281 19,896 36,186 59,034 91,079 136,024 199,061 287,475 411,479 585,402

9% 1,440 3,010 4,720 6,585 8,618 21,878 42,280 73,671 121,969 196,283 310,623 486,551 757,237 1,173,720

11% 1,440 3,038 4,813 6,782 8,968 24,080 49,544 92,452 164,755 286,590 491,889 837,830 1,420,760 2,403,030

13% 1,440 3,067 4,906 6,984 9,332 26,524 58,201 116,563 224,092 422,207 787,220 1,459,734 2,698,797 4,981,690

$250 invested at the end of each month

$3,000 invested at the end of each year

Years 7% 1 3,098 2 6,420 3 9,983 4 13,802 5 17,898 10 43,271 15 79,241 20 130,232 25 202,518 30 304,993 35 450,264 40 656,203 45 948,149 50 1,362,018

Years 7% 1 3,000 2 6,210 3 9,645 4 13,320 5 17,252 10 41,449 15 75,387 20 122,986 25 189,747 30 283,382 35 414,711 40 598,905 45 857,248 50 1,219,587

9% 3,127 6,547 10,288 14,380 18,856 48,379 94,601 166,972 280,280 457,686 735,446 1,170,330 1,851,220 2,917,275

11% 13% 3,156 3,185 6,677 6,810 10,606 10,936 14,989 15,631 19,880 20,974 54,250 61,009 113,672 137,431 216,410 283,311 394,033 561,773 701,130 1,093,317 1,232,074 2,107,960 2,150,032 4,044,766 3,737,103 7,741,852 6,481,016 14,799,059

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9% 3,000 6,270 9,834 13,719 17,954 45,579 88,083 153,480 254,103 408,923 647,132 1,013,647 1,577,576 2,445,251

11% 13% 3,000 3,000 6,330 6,390 10,026 10,221 14,129 14,549 18,683 19,441 50,166 55,259 103,216 121,252 192,608 242,840 343,240 466,859 597,063 879,598 1,024,769 1,640,042 1,745,478 3,041,113 2,959,916 5,622,494 5,006,313 10,378,521

rescuing cash

See what a nondeductible IRA can do Over time, it could grow into six or seven figures

Here’s your notice: IRA is back in focus as a significant wealthcreation tool. Unless the Congress changes its mind, the maximum yearly contribution to IRA plans will remain $3,000 for 2002, 2003, and 2004; $4,000 for 2005, 2006, and 2007; and $5,000 for 2008, thereafter to be increased in increments to offset inflation. Also: If you are 50 or older, you benefit from a catch-up provision in the law. You may add $500 to those figures for 2002, 2003, 2004, and 2005; and $1,000 for 2006 and each subsequent year until age 701/2 for a traditional IRA. For a Roth IRA, there’s no age restriction; you can make contributions as long as you’re working for money reported on your tax return. Max qualified-plan contributions are $40,000. For the financially successful among the legions of professionals and owners of small businesses, the outlook for long-term, tax-sheltered, asset-protected wealth creation has been made brighter. A married person who makes the $40,000 qualified-plan contribution can run up the yearly tax-favored investment to $46,000 by contributing $3,000 of rescued cash to two IRAs, one for each spouse. Two high-income spouses or life partners can double the $43,000 for one to $86,000 for two. Here’s the oft-overlooked tax advantage of IRAs. The takehome $3,000, $3,500, $6,000, or $7,000 you invest even in a nondeductible IRA enjoys tax-free compounding through the reinvestment of dividends, interest, and realized capital gains. What’s more, the balance transfers into a surviving spouse’s IRA free of income and estate taxes. At the death of the surviving spouse, the balance can transfer free of federal income taxes and estate taxes into the family’s charitable foundation trust. The wealth potential is displayed in the tables. They’re on the next page.

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For a Roth IRA, there’s no age restriction; you can make contributions as long as you’re working for money reported on your tax return.

How two IRAs may supplement a pension $3,333 invested in the pension at the end of each month

$40,000 invested in the pension at the end of each year

Years 7% 9% 11% 13% 1 41,309 41,692 42,080 42,472 2 85,603 87,295 89,029 90,806 3 133,100 137,176 141,410 145,811 4 184,031 191,736 199,854 208,409 5 238,643 251,414 265,060 279,648 10 576,949 645,048 723,327 813,456 15 1,056,541 1,261,353 1,515,632 1,832,420 20 1,736,422 2,226,290 2,885,460 3,777,475 25 2,700,239 3,737,073 5,253,778 7,490,305 30 4,066,570 6,102,478 9,348,399 14,577,566 35 6,003,515 9,805,948 16,427,655 28,106,130 40 8,749,378 15,604,401 28,667,091 53,930,218 45 12,641,982 24,682,928 49,828,044 103,224,698 50 18,160,236 38,897,006 86,413,550 197,320,788

Years 7% 9% 11% 13% 1 40,000 40,000 40,000 40,000 2 82,800 83,600 84,400 85,200 3 128,596 131,124 133,684 136,276 4 177,598 182,925 188,389 193,992 5 230,030 239,388 249,112 259,211 10 552,658 607,717 668,880 736,790 15 1,005,161 1,174,437 1,376,214 1,616,699 20 1,639,820 2,046,405 2,568,113 3,237,873 25 2,529,962 3,388,036 4,576,532 6,224,782 30 3,778,431 5,452,302 7,960,835 11,727,969 35 5,529,475 8,628,430 13,663,582 21,867,233 40 7,985,404 13,515,298 23,273,043 40,548,170 45 11,429,972 21,034,349 39,465,542 74,966,585 50 16,261,157 32,603,342 66,750,846 138,380,285

$3,833 invested in the pension and two IRAs at the end of each month

$46,000 invested in the pension and two IRAs at the end of each year

Years 7% 1 47,505 2 98,444 3 153,065 4 211,635 5 274,439 10 663,492 15 1,215,022 20 1,996,886 25 3,105,275 30 4,676,555 35 6,904,043 40 10,061,785 45 14,538,280 50 20,884,272

Years 7% 9% 11% 13% 1 46,000 46,000 46,000 46,000 2 95,220 96,140 97,060 97,980 3 147,885 150,793 153,737 156,717 4 204,237 210,364 216,648 223,091 5 264,534 275,297 286,479 298,092 10 635,557 698,875 769,212 847,308 15 1,155,935 1,350,602 1,582,647 1,859,203 20 1,885,793 2,353,366 2,953,330 3,723,554 25 2,909,456 3,896,241 5,263,012 7,158,500 30 4,345,196 6,270,147 9,154,960 13,487,164 35 6,358,896 9,922,695 15,713,120 25,147,318 40 9,183,215 15,542,592 26,763,999 46,630,395 45 13,144,468 24,189,502 45,385,374 86,211,573 50 18,700,331 37,493,844 76,763,473 159,137,327

9% 47,946 100,389 157,752 220,496 289,126 741,805 1,450,555 2,560,233 4,297,634 7,017,850 11,276,840 17,945,061 28,385,367 44,731,557

11% 13% 48,392 48,842 102,383 104,426 162,622 167,683 229,832 239,671 304,819 321,595 831,826 935,475 1,742,977 2,107,283 3,318,279 4,344,096 6,041,844 8,613,851 10,750,659 16,764,201 18,891,803 32,322,050 32,967,154 62,019,751 57,302,251 118,708,403 99,375,582 226,918,906

34

rescuing cash

Learn to invest rescued cash Our partial listing of good educational opportunities

It’s not easy, learning to invest. If it were, everyone you know would be rich. The sad fact is, the average savings is under $3,400 per person, according to the U.S. Bureau of Labor Statistics. Why not more? Our guess is that most of us know so little about personal finances that we haven’t guessed there’s anything to know. Growing up, how much useful financial advice did you get from teachers, neighbors, friends, parents, and other members of your family? If any, you’re the fortunate exception. It’s good to know who’s who in the investment world. Stockbrokers sell securities, and they work on commission and call themselves counselors, advisors, vice presidents, and—well, almost anything except stockbrokers and salespeople. Insurance agents sell insurance and work on commission. Most of us seem happy taking free advice from people who are also selling financial products, and many are unhappy paying for advice from someone who has nothing to sell but information and advice. Nearly all financial planners sell financial products on commission. That’s not a bad thing, provided you know enough about personal finances to judge the quality of the advice you’re getting. To find an advisor who won’t try to sell you a financial product, go to http://napfa.org. We say it’s the quality of the advice that counts. But then, we fee-only planners—fee-only only—sell nothing but information, advice, and portfolio-management services. We are fee-only investment advisors and fee-only financial counselors. Many of us give away lots of useful and free information on our Web sites because we think somebody ought to do so—so that more consumers will discover there’s a lot to know about personal finances. We earn our money by working for knowledgeable clients who prefer delegating some of the work involved in family finances and by serving as a sounding board when they brainstorm financial matters. It’s good to read an occasional book about investing. In Jeremy Siegel’s “Stocks for the Long Run,” we learn that, over time, stocks have grandly outperformed bonds, real estate , commodities, gold, silver, jewelry, tulips, life insurance, annuity contracts, baseball cards, and everything else except, possibly, one’s own business. In John Bogle’s “New Perspectives for the Intelligent Investor,” we learn what a no-load, broad-based index fund is and how easy (and effective) it is to put some money into one 35

Growing up, how much useful financial advice did you get from teachers, neighbors, friends, parents, and other members of your family? If any, you’re the fortunate exception.

every month. In any of the books about Warren Buffett, the world’s all-time most successful individual investor, we learn how to do what he does. To discover which stocks he’s probably looking at week by week, go to quicken.com.

In any of the books about Warren Buffett, the world’s all-time most successful individual investor, we learn how to do what he does. To discover which stocks he’s probably looking at week by week, go to quicken.com.

It’s good to know there are wonderful Internet resources. You’re looking at one when you’re looking at BalliettFS.com, but there are many others. Among our favorites for learning to invest are these: • aaii.com • armchairmillionaire.com • bloomberg.com • dju.prodj.com • investors.com • marketwatch.com • money.cnn.com • moneycentral.msn.com • motleyfool.com • quicken.com • smartmoney.com • wallstreetcity.com. It’s good to practice investing while you learn about it. You can play a game with family members or friends. If you can’t find an investing game you like on the Net (they’re there), you can compete against each other for best performance between now and, say, this time next year. Each player can invest an imaginary million bucks, choosing among nothing more than listed no-load mutual funds, common stocks, and cash. If you choose to become our financial-planning client, play our game. You will receive our monthly newsletters, and one (the Gene Balliett Monthly Report) has an investment game (on p. 12) that lets you create up to four mutual-fund portfolios and to compete against our selections. Mutual funds, ETFs, and common stocks are put to use in our second game (Diversified Portfolios Monthly).

36

Chapter 3

Let’s consider tax shelters We know of a few that are good and a few others that are very, very good

Gene Balliett

L

ike our colleagues in NAPFA (National Association of Personal Financial Advisors), we make our living by helping

our clients decide what to do and by helping them to get worthwhile stuff done. We find it much easier to work with wellinformed clients than the other kind, so we dispense information and general advice freely. We can help a client soften the blow of big capital-gains taxes, eliminate gift and estate taxes, create wealth over time, protect it from tort predators, and extend it as long as you wish through appropriate use of the tax laws and trusts. We’re easily on your side, because we are compensated only for the services we render and only by our clients. We are all about you. But there’s not much we can do to reduce ordinary income taxes on the money paid for working. The government has pretty much closed the door on the possibility of earning good money and giving up little of it to taxes. Over the years, we’ve been introduced to every size and shape of tax shelters, and even some of those once sanctioned by the Congress and made for shaky investments. The lesser of the legal kinds were accompanied by anxieties about tax audits and tax penalties that lessened the quality of life. Those have disappeared. What’s left in the here and now for lowering taxes through the use of legal deductions, credits, and income sharing is detailed in great volume on newsstands, in bookstores, and on the Internet. We won’t bother repeating much of it here, since excellent and exhausting information on deductions and credits is widely available on the Internet. Examples include: • bankrate.com. In the subject listing on the left side of the opening window, click Taxes. Once there, click How to cut your taxes. There, double-click Tax Tool Box. There, double-click Don’t overlook deductions and credits. • ican.com. In the subject listing on the left side of the opening window, click Money and Benefits. There, click Taxes. There, click Deductions help tax bill. There, be sure to check the links at the bottom of the article on deductions and credits. One is: • www.irs.gov. There, in the Contents section on the left side of the opening window, click Individuals. There, scroll down the menu to the link Publication 17. Click it, and you’ll be taken to Tax Guide for Individuals, which you can print out. 37

Over the years, we’ve been introduced to every size and shape of tax shelters, and even some of those once sanctioned by the Congress made for shaky investments. The lesser of the legal kinds were accompanied by anxieties about tax audits and tax penalties that lessened the quality of life. Those have disappeared.

No one needs to be a tax cheat, thief, gangster, lawyer, politician, corporate superstar, inventor, entrepreneur, professional athlete, or a professional anything to become financially secure. You can get that way merely by earning a living and living within your means.

We do see people ignoring some tax shelters and rejecting some others. The main reason is that poor people pay little or no taxes and thus have little need of tax shelter. Their larger problems are the inability to earn a decent wage because of physical or emotional impairment, the absence of opportunity for whatever the reason, and the lack of an employable skill. Another big problem: Many who do earn enough money to make tax-sheltered savings and investments would rather spend than save. America’s tax laws are an invitation to wealth. In our country, no one needs to be a tax cheat, thief, gangster, lawyer, politician, corporate superstar, inventor, entrepreneur, professional athlete, or a professional anything to become financially secure. You can get that way merely by earning a living and living within your means. To build capital, you need nothing more than an early start with the thoughtful use of an Individual Retirement Account. Wealth can grow enormously with the help of a qualified retirement plan. Wealth measured by six, seven, and even eight figures requires nothing more. Even so, our tax laws also provide a great deal more opportunity for saving taxes and creating your own financial security. Here’s a brief summary of the tax-sheltered opportunities discussed in this chapter: • Deferral of capital gains. Consider the private annuity trust along with the other alternatives. • Your own business. You don’t even need to sell it for big bucks; the tax breaks are enough to build wealth. • The gentleman farmer. Farming is hard work, and a gamble on the weather. But it does offer tax shelter. • Conservation easement. Got a spread with a great view? Then here’s a lucrative tax break you may love. • Pension and profit-sharing plans. They’re all you need. • Other qualified plans. Don’t know the difference between a 401(k), a SEP, and a SIMPLE? Each is an opportunity. • Residence rollover. Given motivation and skills, you could build your next fortune through tax-free residence rollovers. • The two legacy trusts. Combined, a dynasty trust and a charitable foundation trust may be the ultimate tax shelter.

38

tax shelters

Defer capital gains Consider the private annuity trust and the other alternatives

The 2003 federal tax act became law in May 2003. It lowers the tax rates of 38.6%, 35%, 30%, 27%, and 25% to 35%, 33%, 28%, 25%, and 15%. The 10% bracket remains 10%, but some of the taxpayers in the old 25% bracket will drop through the new 15% level into the 10%. Also, the capital-gains tax falls to 15% from 20% in all tax brackets higher than the 15%, and to 5% for those in the 15% and 10% brackets. The tax rates for dividends are the same as for capital gains, 5% and 15%. Unless some future Congress intervenes, the new rates are to stand through 2007, collapse to zero in 2008, and in 2009 revert to the 2002 levels. (For all the details on the new tax law, go to www.irs.gov.) What to make of all that? Well, stocks that pay dividends are a tad more attractive—but then, so are stocks with capital gains but no dividends. On the other hand, some states are raising their income-tax rates, so the net effect of the federal tax cuts may depend on where you live—and where your irrevocable trust makes its tax home. Given your tax adviser’s blessing, you can domicile a well-drafted, tax-wise, asset-protected trust pretty much wherever you wish, as in one of the states that has no income tax—Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. (New Hampshire and Tennessee apply state income taxes only to dividends and interest income.) An irrevocable trust domiciled in Florida, for example, can be given a life of 360 years (see p. 54). Capital gains provide tremendous wealth-building potential, because taxes are deferred. The appreciation in value of real estate, stocks, works of art, or other assets can produce significant capital gains for the owner. But the gains are not “realized,” or made taxable, until an asset is sold. The value of those shares of Coca-Cola and Procter and Gamble you bought back in the 1980s have been appreciating without capital-gains tax all these years. Your gain will remain untaxed until you sell the shares or die. Own appreciated assets until death. The new owner—your beneficiary—will inherit the property with a step up in basis. That means your heir’s taxable capital gain (realized when an asset is sold for profit) is measured from the property’s value at your death rather than from the your cost of acquisition. If there’s a drawback, it’s that the full value of the appreciated property will be in your taxable estate. That fact won’t neces 39

That advice works even for the zillion dollars remaining in a pension or rollover IRA; the 80%+ tax on retirementplan balances can disappear just that easily. So, if you’re charitably inclined, there’s no need to buy a big lifeinsurance policy to offset the tax.

sarily result in a tax, given the $1,000,000 lifetime exemption from estate taxes.

The new owner—your beneficiary—will inherit the property with a step up in basis. That means your heir’s taxable capital gain (realized when an asset is sold for profit) is measured from the property’s value at your death rather than from the your cost of acquisition.

Defer, cut, or eliminate a capital gains tax by selling your appreciated asset to your capital gains trust. The contract you receive in return provides cash payments to you (or to your and your spouse) for as long as you live. The payments can be delayed until age 70 or 71. Few lawyers know about this opportunity. Ours do. Eliminate your capital gains tax by giving the asset to your kids. The tax will assume your basis, so the tax burden is shifted from you to them. Make the gift either directly or by way of a capital gains trust or FLiP (family limited partnership). Or use your $11,000/$22,000 annual exclusion from gift taxes to make the appreciated asset disappear over time. Eliminate capital gains tax by giving your asset to charity. That advice works even for the zillion dollars remaining in a pension or rollover IRA; the 80%+ tax on retirement-plan balances can disappear just that easily. So, if you’re charitably inclined, there’s no need to buy a big life-insurance policy to offset the tax. Tax law now calls for an end to the step up in basis at death. That’s the compromise made in return for an end to death taxes in 2010. It’s one of two reasons why I’d like to see the legislation reversed by the Congress. I think the step up in basis is an appropriate way to deal with long-held assets. Too often, there’s scant evidence to indicate what the acquisition cost might have been; financial records weren’t retained. In the case of tangible assets, capital improvements are a part of the basis for tax purposes, and finding evidence of such expenditures can be an even bigger challenge. My second reason: The capital gains tax is harder to deal with than the death tax. To avoid estate taxes, each spouse leaves everything to the other, and the survivor leaves the taxable part of the remainder to charity and the exempt portion to family members and others—possibly including charity. How hard is that? For more about capital gains taxes: • www.gainskeeper.com is the CCH (Commerce Clearing House) page that introduces its process for dealing with capital gains taxes. • www.nafep.com takes you to a discussion of the capital gains trust (a.k.a., private annuity trust). • www.smartmoney.com has a worksheet that helps forecast the tax bite into capital gains. In the opening window, near the top, click Personal Finances, then Tax Guide, then Capital Gains Guide.

40

tax shelters

Start your own business You won’t even need to sell it for big bucks; the tax breaks are enough to build wealth

As a self-employed person, you can have your own retirement plan. You business will make tax-deductible contributions of up to 25% of your taxable earnings, to a maximum of $40,000 yearly. Invested at year’s end in an investment portfolio capable of appreciating at an average rate of 11% annually, you’ll have your first million in less than 15 years. In 25 years, your wealth will grow to $3.9 million. If you’ve got 30 or 35 years ahead of you, whoopee! You can piggyback tax-deductible vacations on to legitimate business travel. In most industries, business owners and other key employees have an opportunity to choose among a wide selection of tax-deductible business meetings, conventions, trade shows, continuing education seminars, and the like. More often than not, the travel opportunities take place in world-class cities, resort destinations, and other appealing locations that also serve as desirable vacation spots. As a rule, your travel expenses can be deducted in full or part. Your meal deduction is limited to 50% of the tab for any meal not accompanied by a business program. Liberalized expensing rules let you tax-deduct computers, software, copiers, and other gear instantly. Even TVs, cameras, boats, or other listed property that is partially used for personal enjoyment may qualify as a tax-deductible purchase for your business. The trick is to ensure that your nonbusiness use of the item is less than 50% of its total use. In 2003, the tax code allows businesses to expense up to $25,000 in business property. You may also get a tax break on your car. If you buy a car in 2002 and use it, say, 70% for business, you can claim a proportional tax deduction for operating expenses. (For a vehicle placed in service in 2002, expense up to $3,060 of the car’s cost.) Or lease the vehicle, and you can forego expensing or depreciation deductions in favor of letting the business deduct the car’s share of the operating and maintenance expenses and lease payments. A home-office may qualify for a tax deduction. Deductibility depends on all of the following: You’ve got a deduction if part of your house is used exclusively and regularly for business, 41

Business owners and other key employees have an opportunity to choose among a wide selection of taxdeductible business meetings, conventions, trade shows, continuing education seminars, and the like. More often than not, the travel opportunities take place in world-class cities, resort destinations, and other appealing locations.

and is either your principal place of business or a place where you regularly meet clients or patients, or is located in a structure physically separated from your home. Also, you may be able to deduct a proportionate share of your total mortgage interest, real estate taxes, insurance, maintenance and repair expenses, and utilities.

When a child does file the return, however, he (or you) can contribute (maximum $3,000 yearly) to the kid’s Roth IRA. You think that’s small potatoes? Over 60 years at 11%, a one-time investment of $3,000 grows to $11,572,000—and the distributions are free of federal income taxes.

For a parent, self-employment offers more tax saving opportunities. Start by putting the kids on the payroll. Instead of paying them an allowance, pay them a salary in return for chores they can legitimately do for the business. The payments will be tax-deductible to your business, and (assuming the children have no income from savings and investments) they will not need to pay income tax or even file a return unless income exceeds the standard deduction plus $250 (totaling $4,950 in 2003). When a child does file the return, however, he (or you) can contribute (maximum $3,000 yearly) to the kid’s Roth IRA. You think that’s small potatoes? Over 60 years at 11%, a one-time investment of $3,000 grows to $1,572,000—and the distributions are free of federal income taxes. Self-employment also allows you to piece together the benefit package that’s best suited for your family. Rather than the one-size-fits-all package offered by many employers, a self-employed person can customize benefits to include such ingredients as a retirement plan, long-term care coverage, educational assistance, disability policies, childcare assistance, or a medical savings account to go along with major medical insurance benefits. You will find detailed assistance in these sites: • www.sba.gov is impressive; by Small Business Administration. • www.startupjournal.com is a service to entrepreneurs staffed by The Wall Street Journal. • www.inc.com offers affordable, comprehensive how-to assistance.

42

tax shelters

Be a gentleman farmer Farming is hard work, and a gamble on the weather—but it does offer tax shelter

The long-term payoff for farmers and ranchers is from the land. The wealthiest people in many parts of the country are the sons and daughters of humble farmers—people who worked hard tilling the land or raising livestock. Not many got rich from such back-breaking labor, but more than a few achieved wealth through the appreciation in the value of their land. A 2,000- acre dairy farm 30 miles outside of town might have been considered raw land of little value for anything but agriculture 30 years ago. Today, with the suburbs encroaching on the cow pastures, the developers may soon be banging on Farmer Brown’s door. Also, there are immediate rewards for agricultural investors to reap. Although farmers can no longer count on Uncle Sam to shell out billions of dollars indiscriminately to encourage them not to farm their lands, the demise of the Federal crop subsidy has been greatly exaggerated. Despite legislation passed in the nineteen-nineties to phase out agricultural support payments altogether, the politicians are finding it difficult to stop providing tax subsidies to farmers. During 2002, the government paid out billions in farm subsidies. Livestock producers get particularly soft tax treatment. Under current law, when cattle and other livestock is sold, the profits realized by ranchers and dairy farmers are treated not as ordinary income but as a capital gain taxed at the 20% rate even if the producer is in a higher tax bracket. On the other hand, the costs of purchasing, breeding, and raising the livestock is not considered a capital investment but an ordinary business expense that’s deducted immediately. The expensing rules have helped to turn cattle and other livestock-raising operations into lucrative tax-sheltered ventures. Same goes for the raising of crops. The seed that goes into the ground does not represent a capital investment; it’s deductible as an expense. Congress has salted the tax code with a variety of breaks for agriculture. These begin with liberalized income-averaging standards; farmers may use a negative amount rather than zero as their taxable income for any base year. Other rules allow agricultural producers to buy tax-free fuel for farm use, such as undyed kerosene or diesel fuel. Also, ranchers and farmers with annual revenues of up to $25 million are allowed to use cashaccounting rules mostly unavailable to other small businesses. Under the cash accounting method, farmers are not required 43

The expensing rules have helped to turn cattle and other livestock-raising operations into lucrative taxsheltered ventures. Same goes for the raising of crops. The seed that goes into the ground does not represent a capital investment; it’s deductible as an expense.

There’s a risk the IRS will declare the farm a hobby rather than a business and thus disallow the deductible losses. Dr. E can shed the risk by reporting enough profit to cover expenses.

to match expenses to income when paying taxes—a standard that allows many operators to reduce their taxes significantly by manipulating expenses, inventory, and income. The IRS despises that particular tax break, but the agency’s efforts to undermine it have been unsuccessful to date. As part of the 1997 budget deal, Congress explicitly reversed a controversial IRS ruling that would have applied the AMT (Alternative Minimum Tax) to installment sales by farmers who use the cash accounting method. ‘Gentlemen farmers’ also have shelter opportunities. No need to dirty your nails growing peas or raising hogs; there are opportunities available to realize significant tax benefits from more gentrified agricultural pursuits. Case in point: Our old friend Dr. Example purchases some property outside of town, adds a manor house, stables, a few dozen thoroughbreds, and opens a horse farm. Although the business incurs substantial losses, the good doctor can use them to offset income from his surgical practice. After a few years, he sells the place and, thanks in part to the improvements he added, pockets a considerable capital gain on the deal. The potential pitfall: a risk that IRS will declare the farm a hobby rather than a business and thus disallow the deductible losses. Dr. E can shed the risk by reporting enough profit to cover expenses. For insight, information, and services: • www.sfc.ucdavis.edu provides workshops, other educational opportunities, and publications on small farm topics. • www.smallfarm.com is a magazine devoted to the needs and interests of those who run small farms. • www.smallfarmtoday.com is the magazine that sponsors the nation’s largest yearly small-farm conference and trade show. • www.usda.gov is the U.S. Department of Agriculture site. Go to the search window on the opening page, and enter the words small farms.

44

tax shelters

Get a conservation easement If you’ve got a spread with a great view, here’s a lucrative tax break you may love

A conservation easement is a charitable donation to promote preservation of natural areas. This device is a voluntary agreement that enables landowners to limit the type or amount of development on their property. If you’re fortunate enough to own a tract of land in the mountains, along the coastline, in a wilderness area, or some other scenic part of the country, and if you want to protect it from future development long after you’re gone, a conservation easement could do the job. Better yet, under IRC Section 170(h), the Federal government will sweeten the pot with potentially huge multi-million dollar tax breaks. This is one tax shelter that can put money in the bank right away. In return for donating the development rights to the government or to a non-profit entity committed to keeping the tract in its natural state, Uncle Sam offers charitable tax deductions that often amount to half of the market value of the land in question. Not long ago, the Wall Street Journal reported that a Colorado landowner pocketed a $4.5 million tax break for pledging not to develop his 2,000-acre parcel on the outskirts of the state’s trendy Teluride ski resort. There’s a secondary benefit to a conservation easement: a reduced estate tax bite. As an added benefit, the easement also lowers the land valuation for estate tax purposes. That can be a big tax advantage for ranchers or farmers who otherwise might have been prevented from keeping large tracts of land in the family. Example: Joe Example arranges a conservation easement for his 3,200-acre farm in Nebraska and pockets a Federal tax break that effectively cancels out his income tax liability for the next five years. When he passes on, the farm goes to his children, and the development restrictions from the easement reduce the market value of the property sufficiently to eliminate the estate tax bite altogether. You may be able to build on the land, even after development rights have been donated. Every easement is unique, and you don’t have to prohibit all types of development in order to arrange one. You may, for example, enter into an arrangement that prohibits logging and strip mining but lets you build a home, stables, tennis courts, and swimming pool. As an alternative, you may include a portion of your land in the donation but keep separate one or more sections. That way, you can develop the non-included sections. 45

Not long ago, The Wall Street Journal reported that a Colorado landowner pocketed a $4.5 million tax break for pledging not to develop his 2,000-acre parcel on the outskirts of the state’s trendy Teluride ski resort.

You may, for example, enter into an arrangement that prohibits logging and strip mining but lets you build a home, stables, tennis courts, and swimming pool. As an alternative, you may include a portion of your land in the donation but keep separate one or more sections.

But here’s the catch: lower resale values. A conservation easement could backfire horribly on a landowner who elects to sell the property a few years down the road. Because you’ve placed restrictions on future development, the land figures to be less valuable to potential buyers. Indeed, you may have a hard time selling at all. If you do, theoretically at least, the market value will drop by an amount equal to the charitable deduction you received. Moreover, once you take this route, there’s no turning back. Uncle Sam allows the deduction only if the easement is perpetual and donated “exclusively for conservation purposes.” If you’re looking for a legacy, this may be it. Conservation easements existed even before the government decided to encourage them by offering tax breaks to property owners. The original goal, and still the primary reason that many landowners enter into such arrangements, is to protect and preserve a beloved property literally forever. Regardless of who owns the property in the future, it will be protected from unwanted development in perpetuity. Summing up: If you love the view of the lakefront from your mountain chalet, you can preserve it for future generations through a conservation easement—and get a tax break, too. For detailed information from the Internet: • www.LTA.org provides a comprehensive look at conservation easements, including an advanced view of tax options available. • www.jhlandtrust.org is the Jackson Hole, Wyoming, organization that offers free downloading of its 50-page report by attorney C. Timothy Lindstrom, “A Simplified Guide to the Tax Benefits of Donating a Conservation Easement.” In the opening widow, left side, click Our Work. There, click the link to “A Simplified Guide….”

46

tax shelters

Embrace pension and profit-sharing plans They could be all you need

If you’re to have only one tax shelter, make it a qualified retirement plan. If appropriately used, the American pension system is an enormous tax shelter and a first-rate wealth-creation machine. One of the most lucrative benefits to result from incorporating a business is the ability to establish a tax-sheltered retirement plan that will provide financial security to you and to your valued, long-term employees. An employer can contribute and tax-deduct an amount equal to 25% of each participating employee’s income—in 2003, as much as $40,000 annually. The employer’s contribution represents tax-free income to the employees, including himself. Also, there’s no tax on the capital gains and income generated by the employer’s contributions as long as the money remains in the retirement plan. An employer-employee who receives the full $40,000 annual contribution at year’s end will accumulate, at 11%, $4,576,000 in the final 25 years in business or $7,960,000 million in the last 30. Or, if the contributions are made in monthly increments of $3,333.33, raise those figures to $5,253,000 for 25 years and $9,348,000 million for 30. Given the pension wealth, the owner needn’t be anxious about selling the business. A sale will be a windfall. Failure to sell won’t much matter with four to nine million cranking out interest, dividends, and capital gains. Added benefit: By law, the capital remaining in the retirement-plan trusts can continue to accumulate tax-free profits for reinvestment until age 115. All the earnings and capital gains are tax-free; only the sums distributed are taxed (at ordinary rates, like wages). Even individuals with modest incomes can amass considerable wealth. Rank-and-file employees can become pension millionaires by devoting their careers to an employer who maintains a fully funded retirement plan. Imagine a young clerk or technician who earns a modest $16,000 per year, whose employer makes the maximum 25% contribution to her pension account. Suppose, too, that the annual $4,000 yearly goes straight into her money-purchase pension account in monthly increments of $333. Even if she never gets a raise, she can anticipate becoming a millionaire. If participating from age 25 to 65, she will have, at an 11% annual return, $2,800,000 at 65 and $4,900,000 at 70. (Given increased longevity, retirement at 70 may be commonplace long before she turns 60.) 47

An employer-employee who receives the full $40,000 annual contribution at year’s end will accumulate, at 11%, $4,576,000 in the final 25 years in business or $7,960,000 million in the last 30.

A $40,000 contribution by the business to the owneremployee’s retirement account rescues as much as $16,000 to $20,000 of the income taxes that would be due if the $40,000 were a year’s end bonus. The savings cover some, most, or all of the contributions to rank-and-file employee accounts and the plan’s administrative expenses.

The tax laws are structured to encourage employers to provide retirement benefits. The public policy rationale behind the generous pension tax breaks is to provide inducements for employers to offer retirement benefits to their employees, not just to themselves. Sadly, many employers have avoided or closed retirement plans because their contributions to employees’ accounts reduce the cash available to the owner as a year’s end bonus. Sadder still, by avoiding or closing a retirement plan, the owner-employee takes himself out of the best available tax shelter and millions of dollars of personal wealth because the plan costs money. What’s more, a $40,000 contribution by the business to the owner-employee’s retirement account rescues as much as $16,000 to $20,000 of the income taxes that would be due if the $40,000 were a year’s end bonus. The savings cover some, most, or all of the contributions to rank-and-file employee accounts and the plan’s administrative expenses. For more information: • www.pensionguides.com takes you to a publisher with over 30 years’ experience specializing in legal and compliance issues in qualified-plan administration. • www.ebri.org takes you to Employee Benefit Research Institute, a nonprofit organization committed to research and education on employee benefits. • www.riahome.com is the site of a tax and pension resource for accountants, lawyers, and financial advisors.

70 Billion years BC

Gets better. After we’ve collected premiums for four years, we’ll encourage customers to let the cash values pay the annual premium. Most won’t notice those are loans, too.

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By the time they’re old enough to present a risk of dying from old age, all the debt rolled up will equal the policy’s remaining cash value.

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But every year, the debt gets bigger. Is that good?

Ooh

O oh

Ah

48

Ooh

O oh

O OH h

We must be the first geniuses in history!

Good for us! We’ll call it Vanishing Premium, and they will think they’re getting something for nothing. They’ll love it.

CH & GB 2000

Wow! Can I be the first lifeinsurance agent? Please?

O OH h

For our sales force, we recruit the nicest people on the planet. We’ll tell ‘em cash-value life insurance is the best thing since canned beer. We’ll tell them to sell life insurance to their friends and relatives. We’ll pay straight commission.

To pay off the loan, we lapse the policy. When we drain off the rest of the cash values, the death benefit vanishes. Meantime, the population and the sales force are growing. For every policy lapsed, we sell three or more new policies. We’ve invented a perpetual What, then? motion money machine!

tax shelters

Embrace the lesser retirement plans The other qualified plans: 401(k), SEP, SIMPLE, IRA, Roth IRA

Never before have there been so many options for building wealth through tax-sheltered retirement plans. They are available in a variety of flavors for self-employed individuals as well as owner-employees and other employees. Here’s the menu: • 401(k) Plan. Few realize this is a type of company profit-sharing plan. It allows employees to elect to reduce their compensation in order to make contributions to their own plans with pre-tax dollars. Employers may (and usually do) match each employee’s contribution, up to a specified amount. Depending on their salary, employers in 2003 may contribute up to $12,000. • SIMPLE (Savings Incentive Match Plan for Employees). This program is available to employers with 100 or fewer employees and offer no other retirement plan. It can be structured either as an IRA or a 401(k) but without the nondiscrimination rules and other complex requirements of qualified pension plans. Each employee may contribute up to $7,000 annually and the employer must make matching contributions ranging from 1% to 3% of each participating employee’s pay. • SEPP (Simplified Employee Pension Plans). Under this program, an employer may set up an IRA for each employee who meets certain age and service requirements. All employees (including part-timers) are 100% vested from the onset, and the employer is not limited to the $3,000-$3,500 annual contribution ceiling that applies to regular IRAs. Instead, maximum SEP contributions are set at the same 25%/$40,000 standard that applies to profit-sharing arrangements. Any participant may supplement by contributing to his own IRA, following the customary rules for individual IRAs. • IRA (Individual Retirement Account). Even if you or your spouse is covered by a pension plan at work, you may also be able to make annual tax-deductible IRA contributions of up to $3,000 (under age 50) or $3,500 (50 to 701/2) to an IRA. The benefit begins to phase out as your income rises. A married joint filer covered by a pension plan at work can make only a partial IRA deduction when modified AGI (Adjusted Gross Income) creeps above $60,000. The deduction evaporates altogether after $70,000. A key exception: Even if you’re covered by a retirement plan at work, if your spouse isn’t, the non-covered spouse will continue to be eligible to make a full IRA contribution until 49

This program is available to employers with 100 or fewer employees and offer no other retirement plan. It can be structured either as an IRA or a 401(k) but without the nondiscrimination rules and other complex requirements of qualified pension plans.

the couple’s modified AGI exceeds $150,000. Well-meaning accountants everywhere have advised clients to stop making IRA contributions because the contributions are not tax-deductible, citing the $150,000 limitation. We say the deductibility of the $3,000-$3,500 isn’t much of an issue compared with the remaining tax break: years of tax-free capture and reinvestment of dividends, interest, and realized capital gains.

All employees (including part-timers) are 100% vested from the onset, and the employer is not limited to the $3,000-$3,500 annual contribution ceiling that applies to regular IRAs. Instead, maximum SEP contributions are set at the same 25%/$40,000 standard that applies to profit-sharing arrangements.

• Roth IRAs. Unlike traditional IRAs, contributions to a Roth plan are not tax-deductible. Instead, the benefit comes after retirement, because distributions are tax-free. A single taxpayer may make the full $3,000 or $3,500 annual contribution with less than $95,000 of AGI, while couples with AGIs under $150,000 may contribute $3,000 or $3,500 each. You needn’t start taking distributions at age 701/2, as generally required by the rules for other tax-sheltered retirement plans. Also, you may continue to make contributions as long as you meet the participation standards, even if you work beyond age 100. For Internet assistance, try: • www.401khelpcenter.com gives you online 401(k) plan news and guidance for employees and employers. • www.rothira.com offers technical and planning information to consumers and administrators of Roth IRAs. • www.iraplanning.com provides distribution information that helps optimize the benefits available from Individual Retirement Plans, Qualified Retirement Plans and Tax Sheltered Annuities under IRC (Internal Revenue Code) Sec. 403(b). • www.aspa.org takes you to the American Society of Pension Actuaries. It’s a national organization of employee benefits professionals of all types—consultants, administrators, accountants, attorneys, chartered life underwriters, and more. • www.ifebp.org takes you to the International Foundation of Employee Benefit Plans. It’s the largest educational association serving the employee benefits field. Its membership includes 35,000 individuals representing 8,400 multi-employer trust funds, corporations, public employee groups, and professional advisory firms. • www.nipa.org takes you to the National Institute of Pension Administrators. It’s a national association representing the retirement and employee benefit plan administration profession.

50

tax shelters

Consider the residence rollover Given motivation and skills, you could use it to build your next fortune

Now you can sell your principal residence, one after another, with no capital gains tax. Before the Taxpayer Relief Act of 1997, homeowners were offered two valuable though somewhat limited capital gains tax breaks. One was a “once in a lifetime” tax exclusion on the gain from the sale of their home (up to $125,000). The other was a renewable deferral of the taxable gain from the sale of their home, as long as the proceeds were promptly reinvested in a new principle residence. The ‘97 law greatly expanded the shelter by eliminating the requirement that the gain from the sale of one home be reinvested in another home—and by allowing repeated tax-free rollovers as often as every two years. The new rules don’t apply to all home sales, so read the fine print. Rental properties and vacation homes generally don’t qualify for the tax break. Only your principal residence does. To qualify, you must have lived in the place for at least two out of the past five years. In addition, don’t expect to sidestep capital-gains taxation on the appreciation from an estate worth millions of dollars. The ceiling for the exclusion for any one sale is $250,000 for single taxpayers or $500,000 for joint filers. For people on the move, the rules make tax-free residential rollovers a gold mine. If you are a corporate executive or someone else who must relocate frequently for business purposes, the new tax rules can be a windfall. That’s especially true when residential property values are rising 6%, 8%, 10%, or more annually (as they have been for the past few years in some parts of the country). Older people anxious to scale back on their residential holdings also come out way ahead. Thanks to the new rules, empty nesters no longer have to plow all of the gain from the sale of their original home into their new one. They can unload the six-bedroom money pit, replace it with a two-bedroom bungalow, and pocket the difference, tax-free. Better yet, your principal residence doesn’t even have to be a house. It could be a condo, a mobile home, or even a houseboat. Small business owners can cash in on this tax break big time. If you own your own business, you may be able to have your corporation build a home for your family and eventually turn it over to you free and clear. Thanks to the new residential tax 51

They can unload the sixbedroom money pit, replace it with a two-bedroom bungalow, and pocket the difference, tax-free. Better yet, your principal residence doesn’t even have to be a house. It could be a condo, a mobile home, or even a houseboat.

Start by buying the land yourself, and then lease it to your company. The corporation can then build the house for you to lease and live in. The company, meanwhile, pays you rent for the land. You’re taxed on the rental income, but the business deducts what it pays you, so it’s a wash.

law, you may not owe a nickel in taxes. Start by buying the land yourself, and then lease it back to your company. The corporation can then build the house for you to lease and live in. The company, meanwhile, pays you rent for the land. You’re taxed on the rental income, but the business deducts what it pays you, so it’s a wash. Also, the company depreciates the cost of the structure as a business expense, and it writes off maintenance costs. The real payoff comes at the end of the lease. Since the land is leased, the improvements (the house) added by the tenant (your company) revert to the owner (you) at the end of the lease. Since you didn’t pay a farthing for the house, under the old tax rules you would have been socked with a monstrous capital gains tax based on the full value of the home. Under the new rules, you can sell the house (after living in it for two years) and pocket a gain of up to $500,000 tax-free. You can turn a vacation home into a principal residence for a tax-free rollover. Although second homes, rental properties, other real estate holdings that you don’t use as your principal residence don’t qualify for the tax exclusion, there’s no reason why you can’t convert your vacation home into your main residence and double dip. Suppose you bought your home in the nineteen-sixties for $100,000 and 10 years later bought a beach house for $30,000. If you’re able to sell your principle home today for $600,000, you and your spouse will have tidy tax-free gain of $500,000. If you move to the beach house, live there for a couple years, and then sell that place for, say, $200,000, you will pocket another tax-free gain of $170,000—even if you had used the beach house as an income producing rental property. The key is to own and live in the new place two out of five years before selling it. The two years need not be continuous. If you spent five months a year in the vacation home for five years, you would satisfy the two-in-five-year requirement with a month to spare. For more detail, try: • www.realtytimes.com is an online real-estate newsletter with numerous articles explaining the rules governing the sale of a principal residence. • www.taxprophet.com has a section with FAQ (frequently asked questions) that includes a discussion of the tax implications of residence rollovers. • www.irs.gov/faqs has a FAQ section that offers the IRS explanation of federal tax rules governing the sale of a principal residence. • Buy or Sell Real Estate After the 1997 Tax Act: A Guide for Homeowners and Investors, by Robert Irwin, $14.95.

52

tax shelters

Consider the two legacy trusts They may be the ultimate tax shelters

An irrevocable family trust can help you shelter wealth from taxes for generations to come. Under the U.S. tax code, a GST (Generation Skipping Tax) is assessed against property passed down to grandchildren. The GST tax is the same as if the wealth had been passed from father to daughter to granddaughter—a tax bite of up to 55% each time the wealth passes to another generation. However, tax law also gives each of us a $1,000,000 lifetime exemption from the GST, adjusted for inflation after 1997. The transfer taxes saved may be enormous. You can take that million dollars (or any portion of it) and place it in trust for your grandchildren or other family members, and the money (along with all subsequent profits from its investment) becomes exempt from the estate tax. No matter how many millions accumulate in the trust, no matter how long it exists, the escalating capital balance is sheltered from estate taxes by the GST exemption—generation after generation. Transfer taxes, by the way, is the name given to gift taxes and estate taxes. The tax savings arise from a trust that’s irrevocable. When you establish a trust that way, you abandon your right to recover the money or other assets that you donate to it. In return, the tax code offers you a key break: All future profits from the investment of capital placed in an irrevocable trust are taxable to the trust, not to the settlor (the person who creates the irrevocable trust). In contrast, a revocable trust—one that allows you to take part or all of your contribution back at a future date—does not provide tax relief. However, that kind, like the irrevocable trust, avoids the legal fees and court costs of probate. As a dynasty builder, an irrevocable trust has awesome potential. Suppose Uncle Charlie establishes an irrevocable trust to provide financial security for children and grandchildren. Let’s say that he funds it with a gift of $500,000 (an amount that, not coincidentally, happens to be exempt from Federal gift taxes, since it’s less than the $1,000,000 lifetime exclusion permitted under the law). If he’s lucky enough to meet his growth target (11%), the value of Uncle Charlie’s $500,000 trust will more than double about every seven years. When Charlie’s 25-year-old daughter Sara reaches 65—the age set by her dad to start receiving payments from the trust—the trust’s initial $500,000 will have ballooned to more than $39,900,000—to keep 53

You can take that million dollars (or any portion of it) and place it in trust for your grandchildren or other family members, and the money (along with all subsequent profits from its investment) becomes exempt from the estate tax. No matter how many millions accumulate in the trust, no matter how long it exists, the escalating capital balance is sheltered from estate taxes by the GST exemption.

Sara financially secure in her golden years, and her children and grandchildren, too.

Growth of $100 in a 360-year Florida trust At 3% Year $100 grows to 1 100 2 203 3 309 4 418 5 531 6 647 7 766 8 889 9 1,016 10 1,146 100 60,729 200 1,227,853 300 23,658,378 360 139,402,080

At 5% $100 grows to 100 205 315 431 553 680 814 955 1,103 1,258 261,003 34,583,162 4,547,990,257 84,952,790,817

At 7% $100 grows to 100 207 321 444 575 715 865 1,026 1,198 1,382 1,238,166 1,075,615,174 933,330,084,493 54,083,143,534,869

It’s possible for a trust to build wealth for your heirs in perpetuity. How long can an irrevocable trust continue to provide financial security for your descendants? That depends on a number of variables, including where you decide to domicile your trust. If in Alaska, Delaware, or one of the other states that permit perpetuities trusts, it might include language designed to keep it alive forever. If your trust is domiciled in Florida, where the maximum life for a trust is 360 years, it may achieve immortality by eventually transferring its assets tax-free to your family’s charitable foundation trust. Why 360 years? Most of Florida’s legislators believe other states’ perpetuity trusts are flawed and will eventually be shot down in some U.S. Supreme Court case. I’d say a trust designed to live 360 years accomplishes pretty much anything one might hope to get from a perpetuities trust. To put 360 years into perspective: • Dating from the launching of the United States in 1776, 360 years takes us forward to the year 2136. • 360 years back from 2003 takes us to 1643—the year King Louis XIII died and Sir Isaac Newton was born. • From 2003, 360 years runs to 2363. Also, a charitable foundation trust offers exciting tax benefits. A supporting organization offers considerably more flexibility and tax advantages than a private foundation. Contributions to it are 50% tax-deductible, rather than the customary 20%-30%. What’s more: There’s no need to distribute 5%+ annually. A supporting organization incurs no income tax liability on the contributions it receives, and it is not required to distribute 5% or more of its net value each year (as other private foundations are). For more information on legacy trusts: • www.aboutlivingtrusts.com is an estate-planning forum hosted by California attorney and columnist Merwin J. Miller. • www.estateplanninglinks.com clicks you to numerous Internet resources offering information on family trusts and other estate planning strategies. • www.nafep.com takes you to a thorough discussion of cutting-edge trusts, including the charitable foundation trust. • Harnessing the Power of the Charitable Remainder Trust (6th Edition), by Marc D. Hoffman, Leland E. Hoffman, Jr., 2002, $69.95. • Splendid Legacy: The Guide to Creating Your Family Foundation, by Virginia M. Esposito (Editor), National Center for Family Philanthropy, 2002, $100.

54

Chapter 4

Eight investment steps How much to invest, when, how, and in what—and when to sell

Gene Balliett

S

tarting the year I was graduated from Miamisburg High School, I carried a one-hundred-dollar bill in the secret

hiding place of my birthday-gift billfold—my emergency stash, always on my hip. It rode there during the months I worked nights on the assembly line at Delco in Dayton and later as a deckhand on an ore boat that circled the Great Lakes. It remained there through my enlistment in the U.S. Air Force, to Lackland Air Force Base, Vance AFB, Army War College, Eielson AFB, and Air University Command. It was still there through my months in the public relations department at NCR and as a reporter/photographer for the Hamilton (Ohio) Journal & Daily News. It finally disappeared in the early months of marriage, at the Ohio State University. Dee taught school in Worthington to supplement my GI Bill income, allowing me to study full time in my quest to earn a liberal arts degree in 21 consecutive months. I made it, but the $100 was gone (as were the coins in the penny jar), but we had no debt. The stash, while it lasted, was invaluable. Later, it reappeared as a larger number in Cincinnati, where I became a news editor at The Enquirer before moving east. Today, that hundred-dollar bill would be worth only $12.50. That’s how inflation eroded the dollar’s value in the second half of the 20th century. To equal the purchasing power of $100 in 2003 or 2004, you’d need about $800. The effective annual rate of inflation in that half-century was a tad larger than 4%. No one knows that inflation will be much different over the first 50 years of the 21st century. So, an $800 stash on the hip may now provide a very young single adult with as much safety net as I had, but that sum is barely a start on an emergency fund for an adult with financial responsibilities that include another person. To figure the right amount, you need to determine: How much money supports your lifestyle? Tally your 12-month figure, and don’t forget to include taxes and the cost of occasional expenses like car maintenance and insurance, gifts, vacation, parking tickets, bad habits you’re not willing to break, doctor’s bills, and debt service. Divide your year’s total by four. And: 55

Before you do any investing, you need to build and maintain your own nut in some form of savings that can be accessed quickly—to cover a layoff, injury, illness, or some other delicate financial situation.

Immediately unload a security that falls 7% to 9% soon after you’ve bought it. Or later, after a successful run upward, sell it when it falls below its 50-day moving average without quickly bouncing back.

Let’s call the answer your nut. As in a 12-month total of $25,000 divided by 4 equals $6,250; or $50,000 divided by 4 equals $12,500; or $100,000 divided by 4 equals $25,000; or $200,000 divided by 4 equals $50,000. A nut equals three months’ living expenses. Before you do any investing, you need to build and maintain your own nut in some form of savings that can be accessed quickly— to cover a layoff, injury, illness, or some other delicate financial situation, like getting through the last college semester. As your income increases, so will the price of your lifestyle and the size of your nut. Your first investment needs to be conservative, but you cannot afford to invest until additional savings are equal to your nut; hold off until you’ve got nut times 2 banked. Before we talk more about buying, let’s discuss selling. Here are two simple rules that work not all of the time but much of the time: Immediately unload a security that falls 7% to 9% soon after you’ve bought it. Or later, after a successful run upward, sell it when it falls below its 50-day moving average without quickly bouncing back. For a thorough examination of when to sell, go to the Investor’s Business Daily site (investors.com) and find Investor’s Corner. There, you will find a series of short articles that thoroughly cover the question; it’s easy to ask but hard to answer quickly, simply, and well, because investing is too complicated for quick and simple solutions. In the balance of this chapter, I provide details about each of the Eight Steps—the flexible investment process my family and staff have helped to develop since I started managing portfolios for clients in 1984. Here’s a quick preview: Step 1. Put the nut where you can quickly reach it. That includes a CD (certificate of deposit), interest-bearing checking account, passbook savings account, U.S. Treasury securities, an ultra-short bond fund, or some other low-risk, interestbearing equivalent of cash. If you need to cash in a CD, do it; the interest forfeited is the interest not yet earned. Many traditional no-load money-market mutual funds offer free checking, but pay attention to the conditions (such as a minimum sum for any check you write against the account). Ask the fund you like for a free prospectus, and read it carefully before investing; it lists the conditions, including the amount of MIP (minimum initial purchase). The amount of interest paid to you will not be guaranteed; it bounces up and down, along with other interest rates in the economy. After your nut has been placed where you can easily get to it, save that much more, again and again— for a series of sums equal to your nut. Step 2. See if the market’s rising. When the stock market is healthy, it tends to trend upward for months and even years at a time, with occasional steps backward or sideways to allow total returns on investment to catch up with rising, overenthusiastic 56

valuations. A rising trend in the Standard & Poor’s 500 Index, the Dow Jones Industrial Average, and the NASDAQ Composite Index generally indicates upward momentum and a good time to invest in stocks—until a certain oscillator (p. 61) shows the market is way overbought. When that’s the case, keeping any noninvested cash in reserve may be the prudent decision. Also, that may be a good time to sell any security as it reveals an indication of weakness. But when all three indexes appear to be trending upward: Step 3. Select one balanced fund. That kind of traditional mutual fund invests in a mix of stocks, bonds, and interest-bearing cash equivalencies. Invest an amount of cash equal to your nut. A balanced fund with a good track record is an appropriate first real investment in securities. But should you invest? In investing, there’s never a guaranty of profitability, and there’s always a possibility of loss. If you cannot tolerate living with a risk of loss, keep your money in savings. If you work hard enough long enough and save like mad, perhaps you will eventually save your way to financial security. If you can tolerate the risk, take this next step: Step 4. Select one asset allocation fund. That kind, too, owns a mix of stocks, bonds, and cash—but the weighting tends to vary more in the one or two asset classes favored by the mutual-fund manager as the quality of the securities markets shift from bad to good and back to bad. Again, invest a sum equal to your nut. A good asset allocation fund is an appropriate second investment after the balanced fund; it’s not much different, except you can expect it to be a tad more aggressive. Next: Step 5. Select one conservative stock fund (or a home). Managers of stock funds invest fund money primarily in common stocks but keep aside varying sums of cash in reserve for new investment and redemption of investors’ shares. Some fund managers move heavily into cash when the economy worsens; others remain heavily or fully invested in stocks even then. See the fund’s prospectus for an explanation of its manager’s investment process. Again, invest a sum equal to your nut. Or, if you don’t yet own a home, it’s OK to put the money—a sum equal to your nut—into the down payment of a place of your own rather than into stocks. When you’re ready for the next step: Step 6. Select three broad-based ETFs. Exchange Traded Funds are pooled investment accounts much like traditional mutual funds. The most important difference is that an ETF trades like a stock during the day, with the price fixed at the time of the transaction rather than later in the day (typically at 4:00 p.m. ET). The ability to dump an ETF without delay can be a comfort when the market is in free fall, and it’s one of several reasons why I have come to prefer ETFs over traditional mutual funds. Invest a sum equal to your nut in each of the three broad-based ETFs. Next, when you’re ready and the market is right: 57

A rising trend in the Standard & Poor’s 500 Index, the Dow Jones Industrial Average, and the NASDAQ Composite Index generally indicates upward momentum and a good time to invest in stocks—until a certain oscillator shows the market is way overbought.

If you don’t yet own a home, it’s OK to put a sum equal to your nut into the down payment of a place of your own rather than into stocks.

Step 7. Select up to 16 common stocks or sector ETFs. In each, invest a sum equal to about one-quarter of your nut. In the first six steps, you created enormous diversification of investment. If you wish, continue to diversify—say, by choosing each stock from a different industry. Or load up on gold stocks when gold is rising in price against the dollar; or energy stocks when oil has been trending below $20 a barrel but appears to be early in a retracement to the upside; or a mix of stocks that supports a strategy of your own design. When you follow our Eight Steps process and own 16 stocks and/or sector ETFs, you will have invested a sum equal to your nut times 4. Step 8. Consider one, two, or more alternative investments. Examples include hedge funds, business deals, realty ventures, energy production, commodity indexes, private REITs (real estate investment trusts), bridge loans, private funding deals, and maybe even a larger home of your own (see pp. 51, 77)—or a second home (p. 85). In each venture, invest a sum approximating your nut or your nut times 2, 3, or 4. Summing up the Eight Steps: • p. 59: Savings come first. Before investing in anything, put aside 25% of your annual income requirement, including an appropriate share of taxes. (Let’s call that 25% your nut.) • p. 61: When you’ve saved a second sum equal to your nut, you will have enough cash to make your first investment. But hold off until the Coppock Curve is positive and the market is on an upswing as measured by the advance-decline line. As you save additional increments equal to your nut, you can make additional investments. • p. 63: For your first investment, choose a no-load balanced fund. Invest a sum equal to your nut. • p. 65: Second investment, same sum: a no-load asset allocation fund. • p. 67: Third investment, same sum: a no-load stock fund (or a down payment on a home of your own). • p. 69: Fourth, fifth, and sixth investments: same sum for each of three broad-based index ETFs (exchange traded funds). • p. 71: Seventh investment: Invest a sum equal to one-quarter of your nut in each of 16 stocks or sector ETFs. Example: With a $50,000 nut, invest about $12,500 in each as excellent selections leap off your watch list. • p. 73: Eighth investment: As the cash becomes available, put a sum equal to your nut times 1, 2, 3, or 4 into one stock-market alternative. If you’ve got the cash, do so again, again, and again. • Avoid taking any step that would keep you awake at night. It’s fine to be a saver rather than an investor—but learn, with the help of the Internet (and a reading list), to be a skilled saver. • Redefine your nut as your income requirement changes. • When the Coppock Curve and the advance-decline line are negative, jump from Step 1 directly to Step 8. • If you lose faith in stocks, go from Step 1 directly to Step 8. 58

eight investment steps

1: Put the nut where you can reach it if you must The Internet may open good, new resting places for your cash reserve

How much interest are your savings getting for you? Your local bank, thrift, or credit union probably isn’t paying the best savings rate, and it may not even be the most convenient place to save. Driving there and back may be a comfortable part of your routine, but your cash-management chore could be completed on the Internet sooner than you can get your car out of the driveway. Most money-market mutual funds will help make arrangements for automatic deposits—and provide free checks to simplify your disbursements. Some offer cash through ATM (automatic teller machines). Short-term bond funds and moneymarket mutual funds are among the acceptable alternatives, which also include certificates of deposit, saving accounts, and U.S. Treasury bills. Why not bonds? A laddered bond portfolio can be an excellent device for a retired person’s rollover IRA, but I am unlikely to recommend it to an investor who’s still actively accumulating capital for retirement. Bonds and bond funds share four big risks: income-tax, credit, market price, and reinvestment. The first two of those can be managed easily, but the third and fourth require a compromise. Point is, good investment in bonds is complex, and complexity can be time-consuming. What’s more, the longer the wait till a bond matures, the greater its risks. Your emergency stash must be quickly and simply convertible to greenbacks. Some resources for weighing opportunities for savings: • aaii.com is the mother lode of information and education for do-it-yourself investors. It’s a not-for-profit, consumer-oriented organization with membership benefits that extend far beyond its $49-a-year membership fee. • bankrate.com is a treasure trove of comprehensive information (including explanations) on just about anything to do with interest rates—including Federal Reserve policy. It offers nationwide information on money-market mutual funds, moneymarket bank accounts, savings rates at thrift institutions and credit unions, and more. • better-investing.org takes you to NAIC, the mother of all investment-club organizations. National Association of Investors Corporation publishes Better Investing Magazine, provides useful data online to individual investors, offers a catalog of books on investment, and provides assistance to those who wish to launch or admnister an investment club. 59

Short-term bond funds and money-market mutual funds are among the acceptable alternatives, which also include certificates of deposit, saving accounts, and U.S. Treasury bills.

Selected short-term bond funds to consider Selected short-term bond funds FFTW US Short-Term Portfolio Fifth Third Short Term Bond Instl First American Shrt Trm Bd Y Harbor Short Duration Fund Homestead Short Term Bond Marshall Short-Term Income Inv RSI Retirement Short Term Invest Russell Short-Term Bond SSgA Yield Plus Fund Standish Shrt Trm Asset Res Instl Strong Ultra Short Fund Inv Bernstein Govt Short Duration Bernstein Short Duration Plus Excelsior Shrt-Trm Govt Sec Fd Managers Short Dur Govt Fund Montgomery Sh Dur Govt Bond R Permanent Portfolio Treasury SEI Daily Inc Tr-Sh Dur Gov Bd A Vanguard Short-Term Treasury Inv BBH T/F Sh-Int Fix/Inc Federated Sh Term Muni Instl T. Rowe Price Tax Free Sh-Interm USAA Short Term Bond Fund Vanguard Short-Term Tax-Exempt Inv AVERAGES

Ticker FFSTX KNLMX FLTIX HASDX HOSBX MSINX RSISX RFBSX SSYPX STARX STADX SNGSX SNSDX UMGVX MGSDX MNSGX PRTBX TCSGX VFISX BBTFX FSHIX PRFSX USSTX VWSTX

Objective Corp-Inv Corp-Inv Corp-Inv Corp-Inv Corp-Inv Corp-Inv Corp-Inv Corp-Inv Corp-Inv Corp-Inv Corp-Inv Government Government Government Government Government Government Government Government Muni Natl Muni Natl Muni Natl Muni Natl Muni Natl

Qual'y 0.51 0.76 1.08 1.09 0.97 -0.27 0.19 1.12 0.11 0.22 0.17 0.67 0.63 0.77 0.96 0.52 -0.57 0.88 0.55 -0.34 -0.10 -0.02 -0.02 0.00 0.41

KEY • Ticker: ticker symbol • 2002-1993: total returns for the calendar year indicated • Max and Min: minimum and maximum total returns for the calendar years shown • Avg: average annual return for the calendar years shown • Qual’y: a controversial measure of quality (“alpha”) • Vol’y: a controversial measure of volatility (“risk”), over the last 36 months (“beta”) • Sector: a qualified but generally accepted classification of a company’s common stock.

Vol'y 0.08 0.40 0.45 0.20 0.34 0.45 0.08 0.41 0.02 0.25 0.07 0.40 0.38 0.45 0.20 0.50 0.02 0.40 0.60 0.40 0.32 0.47 0.34 0.17 0.31

Yield 2.95 4.69 4.08 3.46 4.50 4.81 0.00 4.43 1.84 3.26 4.49 2.95 3.68 3.77 4.42 3.80 4.46 3.45 3.90 2.54 3.41 3.82 3.44 2.76 3.54

MIP 100,000 1,000 1 1,000 500 1 500 2,500 1,000 100,000 2,500 25,000 25,000 500 2,000 1,000 1,000 100,000 3,000 5,000 25,000 2,500 3,000 3,000 16875

Max 6.98 10.51 14.77 7.44 10.81 8.84 6.33 9.93 6.69 8.85 7.87 9.93 10.08 10.25 7.50 11.50 5.00 10.83 13.83 7.32 8.08 8.10 8.09 5.90 8.80

Min 1.30 1.03 3.33 2.74 0.08 1.83 1.60 0.81 1.30 2.80 0.20 0.25 0.54 1.07 4.00 1.12 0.50 0.32 0.79 0.28 0.11 0.33 0.81 1.68 1.93

Avg 4.62 5.37 8.46 5.43 5.77 5.06 4.19 5.85 4.82 5.67 5.33 5.21 5.39 5.42 5.25 6.29 3.50 5.68 6.55 4.26 4.12 4.74 4.63 3.87 5.23

2002 1.30 3.60 4.90 3.60 4.50 3.70 1.60 5.00 1.30 2.80 0.20 4.70 4.00 5.20 4.00 4.70 0.50 4.70 6.20 4.20 4.00 4.90 4.00 3.10 3.61

2001 4.80 7.90 7.40 6.00 6.50 6.00 4.00 8.30 3.70 5.70 4.20 7.50 8.40 7.50 7.50 7.40 2.80 7.00 7.40 5.50 5.50 5.80 5.00 4.70 6.10

2000 6.98 8.11 8.31 7.41 7.83 6.73 6.33 7.62 6.37 7.45 6.75 7.15 6.08 7.45 5.00 8.08 5.00 7.90 8.83 4.94 5.08 6.75 6.01 4.91 6.79

1999 4.25 2.45 3.33 3.75 3.16 4.50 4.12 3.02 5.51 4.61 5.26 3.00 3.58 2.31 4.09 2.56 3.70 2.70 1.85 0.76 1.47 0.98 1.66 2.56 3.13

1998 1997 1996 1995 1994 1993 5.58 5.08 5.45 5.70 3.83 3.24 6.12 6.41 4.20 10.51 1.03 3.35 11.84 11.89 11.83 14.77 6.16 4.12 6.36 6.29 6.29 7.44 2.74 4.45 6.37 6.62 5.16 10.81 0.08 6.62 4.79 6.41 4.95 8.84 1.83 2.89 5.03 4.91 4.65 5.44 3.39 2.39 6.08 6.00 4.75 9.93 0.81 6.99 4.83 5.54 5.49 6.69 4.73 4.00 5.25 5.94 5.62 8.85 3.33 7.16 4.75 6.50 6.66 7.50 3.56 7.87 5.57 5.49 3.93 9.93 0.25 4.58 5.83 5.36 4.79 10.08 0.54 5.28 6.29 5.90 3.93 10.25 1.07 4.32 4.75 6.32 6.29 6.12 4.12 4.29 7.37 6.95 5.12 11.50 1.12 8.08 4.11 4.08 4.29 4.91 3.33 2.27 7.08 6.91 4.61 10.83 0.32 4.78 7.36 6.37 4.37 13.83 0.79 8.51 4.58 4.12 3.79 7.12 0.28 7.32 4.83 4.49 4.00 8.08 0.11 3.68 4.95 5.29 4.00 8.10 0.33 6.32 4.95 5.86 4.41 8.09 0.81 5.50 4.33 4.00 3.68 5.90 1.68 3.81 5.79 5.95 5.09 8.80 1.93 5.08

• bondsonline.com provides comprehensive information about debt securities of every kind—Treasury, agency, savings, corporate, municipal, zeros, strips, spreads, defaulted—and also strategies for investing in debt securities. • imoneynet.com provides data on money-market mutual funds, domestic and offshore. • morningstar.com is the mother lode of information about mutual funds (though it covers stocks, too). We did a keyword search there on money market funds and came up with 1,000 short articles about money funds. If you’re a serious do-it-yourself investor, you ought to be a Morningstar subscriber—and probably are. • online.wsj.com/barrons/funds is a good place for up-to-date information on the yields offered by taxable and tax-free moneymarket mutual funds, presented alphabetically by name of fund. So is Barron’s, the Dow Jones financial weekly found every weekend on newsstands almost everywhere. • steelesystems.com is a source of exhaustive data on 14,500 mutual funds, including nearly all money-market funds. It’s been recommended by a favorite of ours, Kiplinger’s Personal Finance Magazine (kiplinger.com), and the numbers are from Standard & Poor’s. • treasurydirect.gov is the U.S. Treasury Department’s window of opportunity to purchase, directly from the government, Treasury bills, notes, and bonds (including the new inflation-protected bonds). • valueline.com is the mother lode of information about stocks (though it covers mutual funds, too). If you’re a serious do-ityourself investor, you probably ought to be a Value Line subscriber—and probably are. • www.quicken.com offers useful information on money-market mutual funds and other options for easy-access, interestpaying cash equivalencies. 60

eight investment steps

2: See if the market is rising Technical analysis relies on charts and tables to guess the direction of investment

Our Coppock Curve attempts to confirm bear-market recoveries A new bull market is confirmed when the line turns up. What you see here is the legendary Coppock Curve, “an uncommonly accurate barometer of the stock market’s emotional state.” Named for its creator, Edwin Sedgwick Chittenden Coppock, and once the principal stock in trade of the Trendex Research Corp., it was discussed in detail in Barron’s of Nov. 22, 1982. We’ve been updating and using it since.

DOW/NASDAQ/S&P 500 Coppock Curve 12/29/61-12/31/02

Index S&P 500 NASDAQ DJIA

944.46 1363.23 8911.43

To turn Up Up Up

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Charts shown are from Balliett Financial Services, Inc. For more about the advance-decline line and oscillators, go to cpcug.org, investopedia.com, marketscreen.com, trade10.com, stockcharts.com. For more about the Coppock Curve, go to equis.com, investopedia.com, investors-routemap.co.uk, paritech.com.

Our oscillator provides a second measure of the stock market’s state of health Phil Balliett’s Oscillator for S&P 500 12/31/86-12/31/02 150 day 200 moving Day average 39% 36% 33% 30% 27% 24% 21% 18% 15% 12% 9% 6% 3% 0% -3% -6% -9% -12% -15% -18% -21% -24% -27% -30% -33% -36% -39%

A B C D E F Key:Key: A:Provisional SellSell B:Caution C:Hold D:Hold E:Caution F:Provisional BuyBuy A:Provisional B:Caution C:Hold D:Hold E:Caution F:Provisional

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Copyright © 2003 Balliett Financial Services, Inc., 631 South Orlando Ave. (100), Winter Park, Fla. 32789-7120 Past performance is no guaranty of future performance. It is but one of the factors an investor must consider when choosing a mutual fund or other investment.

What’s the justification for technical charts? They help to identify meaningful trends. Since1926, stocks have been on the rise about 70% of the time. As Bill O’Neil has said, it’s the other 30% that can kill you. (He’s the entrepreneurial investor who runs Investor’s Business Daily and investors.com, a premier Web site. 61

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The advance-decline line is a quick measure of the stock market’s state of health DJIA 12/31/1999 12/31/99 12/31/2002 DJIA - 12/31/2002

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Also, he’s the author of several straight-to-the-point investment books.) Every serious student of investing adopts or creates a strategy. The record shows that both value and technical strategies have gone in and out of favor. Both work, but inconsistently. I tip my hat to both value and technical analysis; I see no point to investing in a good value stock until there’s evidence of investor interest in it. Each week, my staff screens thousands of stocks for me, to identify those with solid valuations and rising price momentum—stocks that then go on our watch list. When the market environment is negative, we buy none. When it is positive, I look closely at stocks on the watch list that have already risen by 30% or more from the day the market turned for the better. Using Internet resources, we revisit the consistency of each such stock’s price trend, its latest measures of value, including earnings, recent trade volume, and the industry it represents. If all such basic factors still seem attractive, we may buy. We do not take a buy-and-hold posture. After we buy a stock, we look daily at its chart for new signs of weakness, following the litany of sell signals detailed in the archives at investors.com in the section called Investor’s Corner. Like O’Neil and Buffett, we have no interest in owning a stock in a company that’s failing. When the market indexes are overbought and showing a significant reversal of momentum, we look for a reason to sell every security we own. 62

eight investment steps

3: Select one balanced fund You need only one, and you’ve got lots of them to choose from

Selected balanced funds with mild-mannered performance over 10 years and no sales commission Selected balanced funds Adv Inn Cir-Sterling Cap Bal Fd American Century Balanced Inv AmSouth Balanced Trust Columbia Balanced Fund Dodge & Cox Balanced Fund Eclipse Balanced Fund FBP Contrarian Balanced Fund Fidelity Puritan Fund Janus Balanced Fund Mosaic Balanced Fund New Covenant Balanced Growth Thompson Plumb Balanced Vanguard Balanced Index Inv Vanguard STAR Fund Vanguard Wellington Inv AVERAGES

Ticker SPBPX TWBIX AYBLX CBALX DODBX EBALX FBPBX FPURX JABAX BHBFX NCBGX THPBX VBINX VGSTX VWELX

Qual'y 1.89 1.85 4.94 0.96 12.25 6.87 6.16 4.20 0.68 5.44 4.23 13.97 2.06 5.86 6.73 5.21

Vol'y 0.45 0.57 0.34 0.57 0.44 0.32 0.56 0.46 0.40 0.46 0.52 0.68 0.56 0.51 0.45 0.49

Yield 2.43 2.61 2.67 2.92 2.93 2.09 2.34 3.31 2.51 1.57 1.88 1.46 3.43 3.33 3.29 2.58

High 20.67 21.37 23.51 25.07 28.01 23.42 25.67 22.35 31.19 25.48 22.62 23.07 28.64 28.64 32.92 24.70

Low -5.70 -6.70 -4.40 -9.30 0.50 -0.50 -9.40 -5.00 -5.00 -5.70 -6.50 -4.00 -6.40 -6.20 -4.20 -5.21

Avg 6.99 7.14 9.38 8.61 12.72 10.01 9.65 10.34 11.78 9.33 7.20 11.44 9.33 10.13 11.22 9.68

2002 -5.70 -6.70 -4.40 -9.30 0.50 -0.50 -9.40 -5.00 -4.70 -5.70 -6.50 -4.00 -6.40 -6.20 -4.20 -5.21

2001 -5.60 -3.70 4.80 -7.40 10.00 6.90 9.90 -1.00 -5.00 1.10 -3.10 11.00 -3.00 0.50 4.20 1.31

2000 8.52 -2.66 10.38 0.81 15.14 9.64 1.09 7.78 -2.16 10.76 -1.12 10.21 -2.04 10.96 10.40 5.85

Select a traditional balanced fund. The accompanying table lists a bunch of competing possible choices. Each is invested in a mix of stocks (shares of company ownership) and various debt securities (bonds, notes, et al.). Each has no sales commission and no 12b-1 commission. The latter is a payment distributed to the stockbroker, commission-compensated financial planner, or a partnering sales or service organization for its work. At this writing, the funds shown in the table have had: • A volatility rating (called beta) of 0.68 or less for the three years ended Dec. 31, 2002. The market’s beta is 1.00. Beta is one of several measurements that attempt to indicate risk. Others include standard deviation, Sharpe’s ratio, and R-squared. Beta is the best known, but portfolio managers tend to consider all four—and perhaps one or two of their own creation. (For definitions of investment terms, try www.competences.com, glossarist.com, or investopedia.com.) • A positive measure of quality (called alpha), averaging 5.21. It reflects the amount of gain or loss above or below the perceived risk of the investment. The higher the alpha rating, the better. Many funds have a negative alpha; we’ve included none of them in the table. • An average yearly performance of 9.68% over the 10 calendar years ended Dec. 31, 2002. How much to invest? A sum equal to your nut. But consider: Exceptions for risk-averse investors. If you’re among them, you will sleep better at night if you divide your investment capital among balanced funds exclusively. An amount equal to your 63

1999 -0.35 10.08 1.26 12.68 12.05 -0.35 5.30 2.85 23.50 3.18 10.47 8.85 13.60 7.12 4.40 7.64

1998 7.73 16.28 13.58 20.07 6.70 8.00 15.14 16.60 31.19 15.15 10.22 16.82 17.85 12.38 12.06 14.65

1997 18.32 16.92 21.96 18.73 21.19 23.42 20.62 22.35 21.80 25.48 15.41 22.53 22.23 21.14 23.23 21.02

1996 18.26 12.60 8.80 11.77 14.75 12.91 16.32 15.15 15.30 16.46 13.89 23.07 13.94 16.10 16.19 15.03

1995 20.67 21.37 23.51 25.07 28.01 23.00 25.67 21.46 27.32 21.50 22.62 20.03 28.64 28.64 32.92 24.70

1994 -1.92 -0.07 -0.39 0.10 1.98 0.01 1.86 1.78 0.02 1.12 -1.87 1.45 -1.56 -0.20 -0.47 0.12

1993 9.93 7.24 14.34 13.60 16.92 17.05 9.97 21.44 10.56 4.20 12.00 4.45 10.00 10.88 13.50 11.74

KEY • Ticker: ticker symbol • 2002-1993: total returns for the calendar year indicated • Min and Max: minimum and maximum total returns for the calendar years shown • Avg: average annual return for the calendar years shown • Qual’y: a controversial measure of quality (“alpha”) • Vol’y: a controversial measure of volatility (“risk”), over the last 36 months (“beta”).

nut can go into up to 10 balanced funds. Some may wish to supplement them with cautiously chosen stock-market alternatives (Step 8). You become risk-averse when the stock market is scary? It’s OK to shift some, most, or all of your weakening positions in stock funds, stocks, and broad-based ETFs into balanced funds. There are many ways to measure the health of the stock market, but to begin you can consult Phil’s oscillator and/or the McClellan Oscillator and other charts to be found in the Internet sites mentioned in the small type beneath the Coppock Curve chart on p. 61. Tip: a wise, risk-averse investor is also an avid student of the investing process. It’s good to know that CDs, passbook savings, and safety-deposit boxes are neither the safest storehouses of wealth nor the best choices for building it safely. It’s good to know that both inflation and fluctuations in currency values are risks that can severely lessen the dollar’s purchasing power. Anxiety and fear are not enough. People invest for a reason: It’s hard to ride a piggy bank to the land of financial security. Should the risk-averse consider stock-market alternatives? A few alternative investments are designed to be low in risk. Some say real estate can be either a greater or lesser risk than stocks and bonds, but investors have made fortunes in all three. So, I believe in diversifying into them—realty investment going not only into a home of your own but in something more profitable than a public REIT that trades like a stock. I’ll talk a bit more on the subject at Step 8.

64

eight investment steps

4: Select one asset allocation fund That kind is a balanced fund with a tad more oomph (and volatility)

Selected asset allocation funds with mild-mannered performance over 10 years and no sales commission Selected asset allocation funds Vanguard Asset Allocation Inv Fidelity Asset Manager: Growth Preferred Asset Allocation Fund Fidelity Asset Manager Fidelity Asset Manager: Income Permanent Portfolio Fund AVERAGES

Ticker VAAPX FASGX PFAAX FASMX FASIX PRPFX

Qual’y Vol’y Yield 3.43 0.68 2.76 3.72 0.81 3.25 2.29 0.66 1.42 4.54 0.56 4.03 2.35 0.23 3.80 6.04 0.13 1.31 3.73 0.51 2.76

MIP Max Min 3,000 35.46 -11.00 2,500 26.46 -8.90 1,000 32.82 -10.10 2,500 23.28 -6.58 2,500 16.69 -1.36 1,000 15.50 -2.87 2083 23.09 -3.85

Avg 2002 10.89 -11.00 9.53 -8.90 9.49 -10.10 9.34 -4.70 7.24 0.60 6.05 11.00 8.76 -3.85

2001 -5.30 -7.20 -7.50 -3.80 1.30 3.70 -3.13

2000 1999 4.91 5.20 -3.54 13.96 6.54 2.10 2.37 13.58 3.60 5.70 5.87 1.13 3.29 6.95

Asset allocation funds aren’t quite the same as balanced funds. Both investment pools contain stocks, bonds, and cash equivalents (sometimes including Treasury bills and short-term bonds). Balanced funds specify a percentage limitation on each asset class; e.g., 2%-10% “cash” and 40%-60% bonds, with the balance in stocks. Asset allocation funds tend to follow a much less constricted mix, with no requirement to hold any asset class and a larger choice of asset classes. So: An asset allocation manager has an incredible opportunity. All she needs is a way to foretell the future. For a perfect record, she might have dumped stocks on Jan. 14, 2000, when the Dow Jones Industrial Average closed at its all-time high, or on Mar. 10, 2000, when the Nasdaq topped out. Trouble is, no one can know the future. Mere human beings rarely sell at tops and buy at bottoms. The only way I know to identify a bottom is by looking back—and you could say even that is guessing unless you know when to look back. The goal of asset allocation funds is to outperform balanced funds in markets trending upward. Will your asset allocation fund beat your balanced fund? It probably will do so when the stockmarket is in a lengthy uptrend. A good balanced fund could prove to be a better choice when the market is in a downtrend. That possibility raises a related question: Is passive management better than active? Passive usually means investing in index funds in a long-term buy-and-hold strategy. The combination works just fine when securities are generally rising in price. In a mild down market, you ought to dollar cost average—i.e., buy more stocks or fund shares at regular intervals with the same amount of money, so that you steadily acquire more of them until the market takes a significant turn for the better. 65

1998 25.39 18.07 27.05 16.07 10.32 3.45 16.73

1997 27.32 26.46 20.92 22.26 12.41 5.62 19.17

1996 15.73 17.57 15.08 12.73 7.79 1.64 11.76

1995 35.46 19.94 32.82 18.16 16.69 15.48 23.09

1994 -2.31 -7.37 -2.56 -6.58 -1.36 -2.87 -3.84

1993 13.49 26.32 10.58 23.28 15.39 15.50 17.43

KEY • Ticker: ticker symbol • 2002-1993: total returns for the calendar year indicated • Min and Max: minimum and maximum total returns for the calendar years shown • Avg: average annual return for the calendar years shown • Qual’y: a controversial measure of quality (“alpha”) • Vol’y: a controversial measure of volatility (“risk”), over the last 36 months (“beta”).

Some portfolio managers have beaten the S&P 500 for periods of 3, 5, and 10 years, and more. Warren Buffett has done it. So have some other value investors. So have the top-rated selections made by Value Line Investment Survey.

During long stretches of up markets, passive investors do OK. They like to say few active managers—stock pickers—beat the passively held Standard & Poor’s 500 Stock Index. At best, the statement is dubious. A Thornburg study (thornburginvestments.com) reveals that the oft-quoted statement (that 80% of mutual funds underperform the S&P benchmark) is skewed—that the percentage includes the thousands of money-market funds, bond funds, and others that are inappropriate to any such study. Any number of value investors, among others, have routinely outperformed the index—not every year, but across longer periods. Same is true of the top-rated selections made by the research house Value Line Investment Survey (valueline.com). More to the point: Asset allocation just may win out in 2003 or 2004. If you aren’t willing to accept the extra risk of an asset allocation fund, then buy another balanced fund as your own Step 4. One problem: There aren’t many asset allocation funds. Well, there are more of them than our table shows, because I’ve excluded funds with front, back, and 12b-1 sales commissions. Can a 12b-1 commission be shrugged off? Occasionally, Yes. One of my favorite mutual funds is Value Line Asset Allocation. It’s done well in up markets and not so bad in down markets. I can shrug off its 12b-1 charge. But I won’t put its name onto a listing of no-load funds. There’s no such thing as a no-load fund? Some stockbrokers say so, as do some commission-compensated financial planners that sell load funds. A, B, and C mutual-fund shares are load funds, and generally so are funds with a 12b-1 commission. True no-load funds have none of those. Do they carry an administrative charge? Yes, and so do load funds. That’s where every mutual fund covers administrative and management expenses and attempts to make a profit. Do some no-load funds carry a larger administrative charge than others? Some do, and in come cases it’s a lot higher. When shopping, compare.

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eight investment steps

5: Select one common stock fund A mild-mannered selection completes a three-fund core for your portfolio

Selected stock mutual funds with varied performance over 10 fascinating years for investors Selected no-load stock funds Ticker Delaware Pool Intl Eqty DPIEX GMO Intl Small Co III GMISX Oakmark International I OAKIX Mairs & Power Growth MPGFX Clipper Fund CFIMX Hotchkis Wiley Lg Val I HWLIX Parnassus Inc Equity Inc PRBLX USAA Cornerstone Strat USCRX FAM Value FAMVX First Eagle Fund of Am Y FEAFX FMI Common Stock FMIMX Fidelity Value FDVLX Longleaf Partners LLPFX Yacktman Fund YACKX T. Rowe Price New Era PRNEX Vanguard Energy VGENX AmCent Global Gold Inv BGEIX US Global Inv Wld PrecMin UNWPX USAA Precious Metals&Min USAGX Alpine Intl Real Est Y EGLRX Cohen & Steers RealSh CSRSX AXA Rosen US SmCap InstlUSCIX Babson Enterprise II BAETX Pennsylvania Mutual Inv PENNX Perritt Micro Cap Opport PRCGX Royce Premier RYPRX Neuberger Ber Fasciano In NBFSX Delaware Small Cap Val I DEVIX Eclipse Small Cap Value EEQFX ICM Small Company ICSCX Liberty Small Cap Z SMCEX PIMCO NFJ Sm Cap Val InstPSVIX Mutual Discovery Z MDISX AVERAGES

Category Yield MIP Foreign 2.19 1,000,000 Foreign 2.97 1,000,000 Foreign 0.95 1,000 Large Blend 0.90 2,500 Large Value 1.38 5,000 Large Value 1.07 1,000,000 Large Value 2.00 2,000 Large Value 1.25 3,000 Mid-Cap Blend 0.32 2,000 Mid-Cap Blend 0.00 1,000 Mid-Cap Blend 0.00 1,000 Mid-Cap Value 0.77 2,500 Mid-Cap Value 0.38 10,000 Mid-Cap Value 0.83 2,500 Nat Resources 0.96 2,500 Nat Resources 1.46 3,000 Prec Metals 0.39 2,500 Prec Metals 2.61 5,000 Prec Metals 3.60 3,000 Realty 1.60 1,000 Realty 5.49 10,000 Small Blend 0.28 1,000,000 Small Blend 0.00 1,000 Small Blend 0.00 2,000 Small Blend 0.58 1,000 Small Blend 0.00 2,000 Small Growth 0.00 1,000 Small Value 0.00 1,000,000 Small Value 1.15 1,000 Small Value 0.41 5,000,000 Small Value 0.18 1,000,000 Small Value 1.18 5,000,000 World Stock 1.95 5,000,000 1.12

Qual'y Vol'y 2.23 0.63 4.66 0.51 12.64 0.82 15.50 0.57 19.64 0.49 14.76 0.73 15.45 0.74 3.50 0.54 15.76 0.49 6.27 0.51 17.61 0.54 15.00 0.72 16.28 0.61 26.16 0.68 13.31 0.67 20.59 0.64 24.16 0.05 17.11 0.22 29.59 0.23 9.24 0.51 11.21 0.17 10.64 0.52 14.17 0.74 18.23 0.63 30.73 0.81 16.71 0.69 8.55 0.65 16.61 0.61 8.20 0.59 21.42 0.65 15.55 0.51 20.28 0.45 4.85 0.39 15.05 0.55

NAV 11.57 9.82 13.14 49.26 75.73 13.33 21.20 20.76 33.69 20.02 18.36 46.39 22.24 12.33 20.63 23.20 9.13 9.70 10.62 13.81 43.34 9.37 21.68 6.59 14.96 9.39 30.44 25.72 11.49 23.95 12.65 20.00 16.16 21.23

1 mo 3 mo -2.43 5.82 -0.84 5.92 -3.74 8.99 -3.37 7.77 -2.97 8.73 -3.45 10.35 -5.30 15.87 -2.54 5.25 -2.44 3.89 -1.14 3.41 -2.08 5.64 -3.48 9.53 -5.28 6.32 -1.40 13.55 0.48 6.82 2.99 7.86 26.18 11.84 32.09 15.81 20.80 11.40 0.61 4.82 0.97 -0.42 -1.92 2.99 -3.43 4.48 -2.49 6.15 0.79 11.52 -3.83 6.49 -1.77 0.79 -3.05 4.01 -0.91 -0.74 -1.57 6.26 -1.81 3.21 0.09 4.69 -0.83 1.00 0.69 6.67

YTD -9.00 -1.25 -8.46 -8.12 -5.51 -7.51 -3.69 -8.26 -5.33 -7.23 -5.75 -9.25 -8.34 11.41 -6.34 -1.60 73.00 83.42 67.61 6.17 2.79 -5.47 -9.96 -9.22 0.46 -7.75 -8.67 -6.03 -3.30 -6.30 -8.23 3.15 -9.06 2.38

Max Min 29.72 -9.88 54.95 -6.70 53.58 -9.06 47.70 -8.12 45.22 -5.51 34.42 -7.51 31.13 -5.39 23.73 -8.26 39.06 -5.33 36.40 -7.23 29.20 -5.75 27.13 -9.25 28.25 -8.34 30.42 -16.90 24.25 -9.88 36.43 -20.53 81.22 -41.47 89.78 -41.08 67.61 -38.19 51.42 -14.05 38.48 -18.07 38.26 -5.47 33.27 -9.96 24.95 -9.22 34.49 -8.17 19.02 -7.75 31.12 -8.67 33.48 -6.70 33.30 -9.44 33.01 -6.30 31.78 -8.23 35.02 -9.16 35.85 -9.06 25.39 -0.94

Avg 8.08 8.52 11.56 16.40 16.32 10.68 11.54 7.62 10.74 15.09 12.13 11.55 14.70 10.50 9.75 13.17 9.73 9.16 10.67 5.56 11.76 14.48 10.44 10.47 10.01 11.39 10.18 10.51 10.27 13.64 13.24 12.66 14.57 11.43

Late in 2002, I was fired by a doctor and his wife. They had hired us to manage their seven-figure portfolio nearly three years earlier, late in 1999. I know they were angry with me; on the phone with a staffer, the physician called me stupid. I am the chief investment officer, and I had in fact lost some of the couple’s money. Their total loss in nearly three years was 7%, including our service fees. That’s an average of less than 21/2% yearly across the calendar years 2000, 2001, and 2002. In those 36 horrifying months for investment—the worst since 1929-32— the Dow Jones Industrial Average lost 27.45%; the S&P 500 lost 40.12%; and the Nasdaq Composite Index lost 67.18%. My staff and I drew one important lesson from the experience: We’ve got to find a way to make money for our clients even when the stockmarket is collapsing. In the investment world, beating a benchmark is too often good enough. I think most value investors shun that all-toocommon view. So do we, as do some other portfolio managers. The strict value strategists say they pay no attention to the S&P 500 (the most common benchmark among investment pros) or any of the other indexes. We do; we know the rest of the 67

2002 -9.00 -1.25 -8.46 -8.12 -5.51 -7.51 -3.69 -8.26 -5.33 -7.23 -5.75 -9.25 -8.34 11.41 -6.34 -1.60 73.00 83.42 67.61 6.17 2.79 -5.47 -9.96 -9.22 0.46 -7.75 -8.67 -6.03 -3.30 -6.30 -8.23 3.15 -9.06 2.38

2001 -9.88 -6.70 -5.13 6.47 10.26 7.95 9.97 -3.01 15.09 8.25 18.64 12.25 10.34 19.46 -4.35 -2.55 34.09 7.52 30.97 -0.74 5.71 10.73 2.73 18.38 34.49 9.61 4.46 11.61 13.89 19.05 18.90 19.12 1.26 9.96

2000 0.49 2.79 12.50 26.47 37.40 9.17 6.36 2.75 19.21 0.32 19.07 8.10 20.60 13.46 20.37 36.43 -23.95 -38.08 -14.98 2.03 26.63 5.18 16.61 18.35 6.22 17.12 1.70 17.36 -9.44 22.46 17.17 21.65 12.59 10.12

1999 17.41 11.00 39.47 7.17 -2.02 -2.34 22.78 8.13 -4.84 12.09 6.50 8.55 2.18 -16.90 21.22 20.98 -3.18 -12.69 7.17 -2.77 2.69 15.00 6.16 5.96 -8.17 11.49 6.16 -5.36 3.05 -1.07 10.82 -6.40 26.80 6.27

1998 10.01 8.50 -7.00 9.36 19.20 4.32 11.05 2.01 6.19 20.99 -5.04 0.18 14.28 0.64 -9.88 -20.53 -12.18 -15.77 1.09 2.64 -18.07 -4.03 -4.33 4.17 -4.26 6.74 7.19 -4.82 3.40 -0.51 -5.22 -9.16 -1.90 0.28

1997 5.12 -3.54 3.32 28.67 30.44 31.15 20.15 15.64 39.06 29.46 29.20 21.08 28.25 18.28 10.96 14.89 -41.47 -41.08 -38.19 4.20 21.16 30.63 33.27 24.95 22.12 18.41 21.51 33.48 33.30 33.01 31.67 35.02 22.95 17.18

1996 20.35 9.84 28.02 27.76 19.43 17.39 7.09 17.87 11.22 29.34 17.12 16.85 21.02 26.02 24.25 34.00 -2.76 19.52 0.00 4.99 38.48 26.53 27.62 12.84 18.29 18.13 26.54 22.49 29.87 23.01 27.19 27.72 24.93 20.39

1995 1994 13.02 3.59 4.91 4.74 8.32 -9.06 47.70 5.66 45.22 -2.51 34.42 -3.50 31.13 -5.39 18.40 -1.05 19.73 6.83 36.40 -2.60 26.50 0.38 27.13 7.63 27.48 8.96 30.42 8.80 20.76 5.17 25.32 -1.63 9.25 -16.75 15.93 -16.94 4.04 -9.37 1.66 -14.05 11.13 8.31 38.26 5.45 19.87 -7.39 18.72 -0.72 30.69 -5.08 17.81 3.28 31.12 3.68 23.84 -6.70 19.69 -4.74 21.27 3.41 31.78 0.53 25.47 -3.69 28.63 3.62 23.21 -0.94

1993 29.72 54.95 53.58 12.82 11.26 15.76 15.90 23.73 0.21 23.85 14.69 22.94 22.23 -6.58 15.33 26.42 81.22 89.78 58.33 51.42 18.76 22.51 19.80 11.25 5.29 19.02 8.08 19.19 17.02 22.03 7.82 13.74 35.85 25.39

KEY • Ticker: ticker symbol • 2002-1993: total returns for the calendar year indicated • Min and Max: minimum and maximum total returns for the calendar years shown • Avg: average annual return for the calendar years shown • Qual’y: a controversial measure of quality (“alpha”) • Vol’y: a controversial measure of volatility (“risk”), over the last 36 months (“beta”).

Illustrating three mild-mannered mutual funds as a foundation under Eight Steps Three Steps illustrated 1: Short-term bond fund 3: Balanced fund 4: Asset allocation fund AVERAGES

Max 5.00 21.19 12.41 16.54

Min 0.50 0.50 0.60 0.53

Avg 3.50 11.48 5.96 7.82

2002 0.50 0.50 0.60 0.53

2001 2.80 10.00 1.30 4.70

2000 5.00 15.14 3.60 7.91

1999 3.70 12.05 5.70 7.15

1998 4.11 6.70 10.32 7.04

1997 4.08 21.19 12.41 12.56

1996 4.29 14.75 7.79 8.94

1995 4.91 28.01 16.69 16.54

1994 3.33 1.98 -1.36 1.32

1993 2.27 16.92 15.39 11.53

world does. But we’re not the least bit happy when we’re losing money, even if we are beating a benchmark by losing less money than it is. Some of the better no-load stock funds of 2000-2001-2002 are shown in the table on p. 67. All of those listed earned a positive alpha (quality) rating, and, by my measure, they are the top tier of pure no-load stock mutual funds for those three calendar years. (The table on this page illustrates a portfolio that’s been profitable for 10 calendar years in a row.) Will they be great funds to own in 2003 and 2004? To know the answer, we’d need to know all the stuff we cannot know, starting with the issues involving the Mideast, terrorists, North Korea, Iran, Venezuela, Japan, China, and Russia. However: To me, gold funds seem appropriate at this writing. That’s because of the twin threats of U.S. deflation and inflation. The U.S. money supply has been rising sharply, indicating the government has already begun to inflate away U.S. deflation and debt. The classic protection from inflation includes gold stocks, gold bullion, other commodities, and land. Which stock fund to choose? A pure no-load fund, perhaps one that invests in gold-mining stocks or bullion, may seem appropriate. However, if you’d lose sleep owning a stock fund now, or ever, don’t buy one—and skip back to Step 3 or Step 1, or to Step 8.

68

eight investment steps

6: Select three broad-based ETFs Some exchange-traded funds are proxies for broad sections of the stock market

Consider choosing three broad-based indexes—and investing in the ETF proxy for each choice Selected broad-based indexes MSCI Europe Ndtr_D MSCI Japan Ndtr_D Dow Jones Industrial Russell 1000 Russell 3000 Standard & Poor’s 500 Wilshire 5000 Standard & Poor’s Midcap 400 Wil-Target Mid Cap 750 MSCI Hong Kong ID Russell 2000 Standard & Poor’s Smallcap 600 AVERAGES

The proxy iShares S&P Europe 350 Index iShares MSCI Japan Index DIAMONDS Trust, Series 1 iShares Russell 1000 Index iShares Russell 3000 Index SPDRs iShares Dow Jones US Total Market Ind MidCap SPDRs iShares S&P MidCap 400 Index iShares MSCI Hong Kong Index iShares Russell 2000 Index iShares S&P SmallCap 600 Index

Category Europe Stock Japan Stock Large Blend Large Blend Large Blend Large Blend Large Blend Mid-Cap Blend Mid-Cap Blend Pacific/Asia ex-Japan Small Blend Small Blend

Ticker Yield IEV 0.00 EWJ 0.00 DIA 1.65 IWB 0.96 IWV 1.01 SPY 1.55 IYY 0.94 MDY 0.44 IJH 0.87 EWH 0.75 IWM 0.78 IJR 0.58 0.58

Max Min 28.53 -22.03 61.53 -29.40 36.94 -18.38 37.77 -19.17 36.81 -15.36 37.54 -23.38 36.45 -30.27 32.24 -3.59 32.99 -27.89 54.85 -31.00 28.44 -9.65 29.95 -17.42 29.95 -17.42

Avg 2002 6.99 -22.03 -3.35 -22.09 12.47 -18.38 11.33 -19.17 11.26 -15.36 11.16 -23.38 9.31 -30.27 14.12 -2.39 8.76 -27.89 -2.38 -20.85 8.23 -9.65 9.34 -17.42 9.34 -17.42

I like ETFs much more than mutual funds. I will like them still more when there are enough selections to replace traditional mutual funds. ETFs trade during the day, same as stocks; with few exceptions, mutual funds trade at 4 p.m. ET. ETFs do what comparable mutual funds do, with greater convenience and less ongoing expense. Buy through a low-priced discount broker, and transaction costs for ETFs can be minimal. At Step 5, I didn’t say why I hate mutual funds. One reason is that those people can get arrogant and testy when investors take their money out. I can see why a portfolio manager feels inconvenienced when a chunk of money leaves his mutual fund just when he’s fixing to buy another hot stock. I can see why greedy owners want people to put money into their mutual fund and never to take money out. But the money belongs to the investors—and portfolio managers can accommodate hot money. That’s been proved at Rydex (rydexfunds.com). Here are more reasons why I hate traditional mutual funds: • Not enough of them outperform the broad-based indexes (like the S&P 500 and the Dow). • Their performance is reduced by trading costs and operating expenses. • They are tax-inefficient. • Their distributions are taxable to investors. • A fund’s resale value immediately declines by the amount of its distribution. • An annual distribution received is fully taxable to the investor even if the fund was owned for only a few days. • Few fund managers perform even as well as a market-index fund, much less a market-index ETF. • Some do, but identifying them is difficult for an individual investor who has not yet learned how to research funds. 69

2001 -19.90 -29.40 -5.44 -12.45 -11.46 -11.88 -10.89 -0.60 -2.47 -21.20 2.49 6.54 6.54

2000 -8.39 -28.16 -4.85 -7.79 -7.46 -9.10 -10.93 17.49 4.96 -16.98 -3.03 11.79 11.79

1999 15.89 61.53 27.21 20.92 20.89 21.04 23.56 14.72 26.73 54.85 21.26 12.40 12.40

1998 28.53 5.05 18.13 27.02 24.13 28.58 23.43 19.11 3.74 -7.60 -2.55 -1.31 -1.31

1997 23.80 -23.67 24.87 32.84 31.77 33.35 31.29 32.24 24.11 -25.81 22.37 25.58 25.58

1996 21.09 -15.50 28.71 22.45 21.82 22.94 21.20 19.18 17.47 28.95 16.54 21.31 21.31

1995 21.62 0.69 36.94 37.77 36.81 37.54 36.45 30.92 32.99 18.22 28.44 29.95 29.95

1994 2.28 21.44 5.03 0.39 0.17 1.31 -0.07 -3.59 -0.81 -31.00 -1.82 -4.77 -4.77

KEY • Ticker: ticker symbol • 2002-1993: total returns for the calendar year indicated • Min and Max: minimum and maximum total returns for the calendar years shown • Avg: average annual return for the calendar years shown • Qual’y: a controversial measure of quality (“alpha”) • Vol’y: a controversial measure of volatility (“risk”), over the last 36 months (“beta”) • Category: a qualified but generally accepted classification of a single-industry index • ETF proxy for this index: the ETF security intended to perform much the same as the index indicated

I can see why his greedy bosses want people to put money into their mutual fund but never to take money out. But the money belongs to the investor—and there are ways to accommodate hot money.

• Even the best fund managers suffer periods of underperformance. • They are required to report their investment holdings only twice yearly. • The day after they report, the holdings can change substantially. • Since you can’t be sure what a fund owns, it’s difficult to analyze its holdings. • After you invest, the fund company may be acquired by new owners who may change something about it (or everything about it). Not quite all mutual funds are that way. The most notable exceptions I know are in Rydex (rydexfunds.com). The group has a rapidly growing stable of no-load funds (including 17 sector funds, and climbing). Nearly all permit unrestricted redemptions—in one day, out the next, no complaint. The head guy, Skip Viragh, saw the need for skilled portfolio managers who are motivated to deal with rapid flows of capital in and out, so he recruited that kind. Fidelity Select, with 42 sector portfolios, is designed to tolerate moderately hot money, to a point—but it requires a sales commission, and Rydex doesn’t. In time, we’ll see a much better choice among ETFs. Except for bond, balanced, and asset-allocation funds, the selection among ETFs isn’t so bad even now. The table on p. 69 is unusual in that it shows the performance of certain market indexes that have an ETF proxy. In most cases, the proxy is relatively new, but the index it attempts to mimic has been around for 10 years or more.

70

eight investment steps

7: Select up to 16 common stocks or sector ETFs In a rising market, that many can rack up decent gains

In a dark market like that of 2000-2003, who remains invested in stocks? Mostly, these do: • Institutional portfolio managers. Many are required by their charter to be fully invested in stocks even when the market is plunging. Examples include managers of aggressive stock mutual funds and of some pension funds, foundation funds, trust funds, and insurance-company subaccounts and reserve funds. • Loyal customers of stock brokers. Investors who are still listening to the advice of their brokers to hang on to stocks that were high fliers in the December 1994 to March 2000 bull market in the expectation that those, like the South, will rise again. They are the ones I feel sorry for; as Investor’s Business Daily’s Bill O’Neil, among others, has often pointed out, the leaders of the last bull market seldom tend to be among the leaders of the next bull market. If the very idea of owning stocks scares you, don’t buy them. If that’s your attitude, you are a saver, not an investor. So, don’t venture beyond Step 1 or Step 3 unless you’re comfortable jumping from either to Step 8. If you can tolerate the risks and anxieties of owning stocks, invest 25% of your nut in each, to a maximum of 16. Optionally, choose a sector ETF rather than a stock. Here are some reasons not to invest in individual stocks: • They’re even harder to analyze than stock mutual funds (Step 5). • Before buying a stock, you need to know what can go wrong or right with the company and its products or services. • That’s often a difficult, expensive, mind-bending task for a dedicated pro with a competent research staff and lots of electronic firepower. For an individual investor with no staff and limited technical resources, it may be more so. • Over time, companies, products, and services change. The homework is a never-ending burden. • The more stocks you own, or would own, the greater the research. • Nearly all the analysis involves looking at the past, but an investor hopes for good results in the future—so, at best, your decisions will be educated guesses. • There’s no end to forces that can change the future—more than you and I can ever know. The stockmarket reflects the opinions and emotions of millions of people all over the planet. 71

The leaders of the last bull market seldom tend to be among the leaders of the next bull market.

This was our 2/10/03 watch list; the market was in decline, so we owned no stock at that time 2/10/03 BFS Watch List Nissan Motor ADR First Va. Banks MAF Bancorp New York Community UCBH Hldgs Inc Petro-Canada Covance Inc. Pharmac. Product Affil Computer Svcs ‘A’ ITT Educational Smucker (J.M.) NVR Inc. FTI Consulting Inc Rollins Inc. IDEXX Labs. Owens & Minor Varian Medical Sys. Chico’s FAS Coach Inc. RARE Hospitality Reebok Int’l SCANA Corp. UniSource Energy AVERAGES

Ticker NSANY FVB MAFB NYB UCBH PCZ CVD PPDI ACS ESI SJM NVR FCN ROL IDXX OMI VAR CHS COH RARE RBK SCG UNS

Sector Autos Bank Bank Bank Bank Enrgy Drug Drug DvrsfdTech Edu Food Homebldr Indstrial Indstrial MedSply MedSply MedSply Retail Retail Rstrnt Shoe UtilEast UtilWest

Qua’ly 40.82 29.72 36.03 69.38 44.03 53.56 134.81 62.93 111.02 136.22 210.35 39.17 54.84 46.44 52.06 207.21 64.22 104.92 7.83 26.86 76.62

Vol’y 0.69 0.34 0.37 0.09 0.37 0.59 0.65 0.80 0.91 0.77 -0.38 0.29 0.06 0.36 0.43 2.43 0.56 0.75 0.24 0.73 0.55

Recent 16.88 19.70 19.99 17.70 26.30 20.20 35.75 39.36 36.66 78.29 24.82 21.49 23.20 54.13 18.22 23.51 16.84 16.56 32.31 19.70 38.99 20.46 17.05 27.74

YTD 0.65 8.65 1.56 2.05 0.35 7.82 1.63 0.31 -8.09 17.20 0.78 2.76 1.25 18.15 1.50 -0.97 3.95 -1.85 -0.91 2.50 2.79 -0.74 -5.49 2.43

Max 44.50 65.97 54.08 -2.10 129.35 80.74 111.16 309.88 74.88 143.21 15.20 157.16 564.38 37.80 180.01 115.54 122.55 246.30 68.91 99.61 247.53 31.43 68.99 78.69

Min -30.07 -6.83 -19.77 -2.10 -6.61 -40.76 -62.87 -60.50 -11.55 -54.59 15.20 0.13 -73.00 -13.21 -55.73 -41.98 4.89 -14.86 35.58 -52.32 -48.37 -8.67 -25.52 1.38

Avg 4.30 17.58 24.57 -2.10 50.09 20.68 11.84 46.22 37.03 35.09 15.20 72.56 108.65 4.70 26.52 11.95 57.36 73.44 48.67 29.79 21.21 15.07 5.84 31.80

2002 44.50 13.41 17.26 -2.10 49.82 28.25 8.33 -9.41 -0.78 27.75 15.20 60.05 83.61 28.47 16.80 -9.60 39.21 42.90 68.91 22.54 10.94 16.37 -2.24 24.79

2001 0.11 9.39 5.01

2000 37.17 10.78 37.04

1999 37.00 -5.75 -19.77

1998 -26.74 -6.83 13.58

1997 -30.07 65.97 54.08

1996 -21.56 18.58 40.75

1995 -6.05 35.12 48.61

22.68 -1.68 111.16 30.05 74.88 67.59

129.35 80.74 -3.33 309.88 27.36 38.09

55.19 38.94 -62.87 -60.50 2.22 -54.59

-6.61 -40.76 46.54 95.53 71.02 -49.10

33.53 -5.36 -39.11 -11.55 -3.51

23.60 -11.58 -2.88 58.67 111.29

2.78

65.05 564.38 0.78 29.59 5.43 4.89 185.27 35.58 1.02 -3.07 -2.73 -1.28 57.34

157.16 103.78 37.80 37.18 115.54 122.55 10.96 41.53 50.98 247.53 -8.67 68.99 78.69

0.13 48.15 -13.21 -40.07 -41.98 62.80 60.96

118.00 -73.00 -11.39 68.82 10.22

68.27 28.21 4.28 -55.73 43.52

30.00 5.41 -7.11 -24.43 -18.26

-2.05 180.01 -9.26

246.30

58.82

-2.86

-14.86

54.58 -44.95 28.37 -17.13 1.38

55.56 -48.37 18.64 -25.52 23.99

-52.32 -14.31 31.43 4.32 10.03

6.34 49.72 7.40 11.24 15.24

99.61 -27.82 29.78 8.33 42.91

74.42 143.21 81.82

KEY: • Ticker: symbol • Sector: industry • Qual’y: quality (alpha) • Vol’y: volatility risk (beta) • Recent: 10/9/02-2/7/03 (market close) • YTD: 2003 through market close of 2/7 • Max, Min, Avg: maximum, minimum, average total returns during the calendar years indicated • 2002-1995: total return for each calendar year indicated.

Rather than stocks, consider choosing three sector indexes—and investing in the ETF proxy for each choice Selected sector indexes Dow Jones Large Growth Pacific Stock Exchange Tech 100 Russell 1000 Growth Standard & Poor’s 100 Wil-Target Large Co Growth Barra Large Cap Value Dow Jones Large Value Russell 1000 Value Barra MidCap Growth Russell Midcap Growth Barra MidCap Value Russell Midcap Value Barra SmallCap Growth Dow Jones Small Growth Russell 2000 Growth Barra SmallCap Value Dow Jones Small Value Russell 2000 Value Wilshire REIT Dow Jones Utility AVERAGES

The proxy streetTRACKS DJ US Large Cap Growth NASDAQ 100 Trust Shares iShares Russell 1000 Growth Index iShares S&P 100 Index iShares S&P 500/BARRA Growth Index iShares S&P 500/BARRA Value Index streetTRACKS DJ US Large Cap Value iShares Russell 1000 Value Index iShares S&P MidCap 400/BARRA Growth iShares Russell Midcap Growth Index iShares S&P MidCap 400/BARRA Value iShares Russell Midcap Value Index iShares S&P SmallCap 600/BARRA Growth streetTRACKS DJ US Small Cap Growth iShares Russell 2000 Growth Index iShares S&P SmallCap 600/BARRA Value streetTRACKS DJ US Small Cap Value iShares Russell 2000 Value Index streetTRACKS Wilshire REIT Fund iShares Dow Jones US Utilities

Category Large Growth Large Growth Large Growth Large Growth Large Growth Large Value Large Value Large Value Mid-Cap Growth Mid-Cap Growth Mid-Cap Value Mid-Cap Value Small Growth Small Growth Small Growth Small Value Small Value Small Value Real Estate Utilities

Ticker Yield Max Min ELG 0.35 45.78 -32.40 QQQ 0.00 116.40 -16.22 IWF 0.46 38.70 -22.42 OEF 1.31 40.04 -14.47 IVW 0.91 42.21 -17.19 IVE 1.62 37.00 -19.94 ELV 2.62 40.49 -21.55 IWD 1.37 38.35 -27.40 IJK 0.19 34.86 -33.33 IWP 0.04 51.30 -20.48 IJJ 1.31 34.39 -22.58 IWS 1.33 34.93 -38.89 IJT 0.18 29.07 -15.52 DSG 0.00 61.48 -14.91 IWO 0.17 43.09 -22.43 IJS 0.86 36.46 -20.86 DSV 2.46 32.60 -15.01 IWN 1.31 31.69 -20.63 RWR 5.91 37.04 -17.00 IDU 3.00 50.76 -31.58 1.27 32.74 -19.06

Avg 2002 11.51 -21.65 26.26 -11.42 12.48 -10.11 13.71 -14.47 14.57 -14.53 10.02 -19.94 10.21 -21.55 10.01 -27.40 11.16 -33.33 9.85 -20.48 11.85 -22.58 8.34 -38.89 6.79 -15.52 10.78 -10.28 5.65 -14.63 11.09 -20.86 10.29 -15.01 9.51 -20.63 11.00 3.60 6.06 -31.58 11.06 -19.06

2001 -25.46 -15.59 -20.42 -13.79 -16.39 -11.71 -6.11 -5.59 -7.97 -20.16 7.15 2.34 -1.19 -8.50 -9.23 13.10 12.79 14.02 12.36 -26.27 -6.33

2000 1999 -32.40 36.38 -16.22 116.40 -22.42 33.16 -12.55 32.78 -17.19 35.53 6.09 12.72 10.34 1.35 7.01 7.36 9.14 28.73 -11.75 51.30 27.84 2.32 19.19 -0.10 0.57 19.57 -14.91 61.48 -22.43 43.09 20.88 3.05 23.98 -5.06 22.81 -1.48 31.04 -2.57 50.76 -6.02 3.99 23.50

1998 45.78 54.60 38.70 33.21 42.21 14.67 15.40 15.64 34.86 17.87 4.67 5.09 2.29 6.44 1.23 -5.06 -6.51 -6.43 -17.00 18.88 15.83

1997 34.15 19.97 30.48 30.01 33.69 29.99 33.04 35.18 30.27 22.54 34.39 34.36 15.67 21.27 12.95 36.46 32.60 31.69 19.67 23.00 28.07

1996 26.06 20.03 23.12 25.53 26.93 21.99 19.20 21.57 18.41 17.48 19.40 20.26 16.09 19.26 11.26 26.10 27.89 21.37 37.04 9.10 21.40

1995 38.77 47.71 37.19 40.04 37.88 37.00 40.49 38.35 27.30 33.98 34.04 34.93 29.07 23.05 31.04 30.69 23.29 25.75 12.24 31.98 32.74

1994 1.95 20.87 2.66 2.62 2.97 -0.63 -0.30 -1.99 -6.98 -2.16 -0.57 -2.13 -5.47 -0.82 -2.43 -4.52 -1.37 -1.55 2.66 -15.29 -0.62

In my shop, we upgrade our watch list daily. So, it evolves along with the quality of the market, always identifying potential winners that may or may not live up to expectations. The chart at the top of this page is not a shopping list of stocks. It’s an illustration of outdated information—a list that was valid at the close of Feb. 10, 2003, presented here only to show what a watch list might look like.

72

eight investment steps

8: Consider conservative alternative investments We like consistent hedge funds and direct investment in attractive ventures

Consider alternatives to stocks, mutual funds, and ETFs. They are investments, so they are not free of risks. However, some stock market alternatives are intended to inflict none of the volatility of common stocks and stock mutual funds. Some hold out the potential, though not the promise, of steady profits with never a year of loss. Some carry the potential of double-digit returns on investment, and some are available with no sales commission. Some are successfully risk-averse, and others are aggressive and thus risky by definition. In my opinion, viable alternative selections may include producing oilfields within the U.S., specific commercial real-estate projects, private REITs (privately offered real estate investment trusts), and one or more hedge funds that show consistent profitability. For many investors, those alternatives are sufficient. They are available to those with deep pockets who want nothing more to do with the stock market. The choices may be widened to include special-situation financing, equipment leasing, conservative commodity indexing, and venture capital. Most hedge funds are designed to be reliable. A common goal of some hedge-fund managers is to minimize chances of a year of investment loss. Hedging against risk is the reason hedge funds exist. Some seek consistent above-average returns. They’re typically private partnerships, structured either as an LP (limited partnership) or LLC (limited liability company). Unless stated otherwise, the liability of an investor in private equity ventures is the amount invested. Participants in any one program usually number fewer than 100. Minimum participation is often one to three million dollars, but some requirements are substantially less. Despite hedge funds’ reputation for risky strategies, the record, since the first such fund appeared in 1949, shows a majority with reliable returns. Why aren’t the conservative ventures better known? Federal law prevents hedge funds from advertising. They’re not even allowed to distribute details of their offerings to persons other than qualified or accredited investors (millionaires or multimillionaires). The few that made headlines did so because they were controversial. At this writing, the Congress is debating what to do, if anything, to change the regulatory oversight for hedge funds, and there’s no clear picture of what may result. Even so, new rules may appear as soon as summer 2003. 73

In my opinion, viable alternative selections may include producing oilfields within the U.S., specific commercial real-estate projects, private REITs (privately offered real estate investment trusts), and one or more hedge funds that show consistent profitability.

The obstacle least-often stated: fearful lawyers and accountants. They know Americans live in a litigious society, and few have any wish or reason to bless a venture that’s not their own.

What obstacles stand in the way of individual investment? The one most likely to be mentioned, especially in the case of hedge funds, is the reluctance of owners and managers to reveal details of their investment process and selections. The obstacle least-often stated: fearful lawyers and accountants. They know Americans live in a litigious society, and few have any wish or reason to bless a venture that’s not their own. Hand a PPM (private placement memorandum) to your lawyer or accountant, and his quick response is likely to be something like this: There’s no way I can bless this investment. Meaning: I don’t want you to sue me if the deal goes bad. So, you’re pretty much on your own. Yet, people of means somehow do venture into the world of hedge funds, private equity, private REITs, real-estate projects, start-up venture capital, and other alternatives. How much to invest? If investing in a venture would cause you to lose sleep, don’t invest. If you’re still willing to invest after studying the offering memorandum, consider venturing a sum equal to your nut. If your pockets are deep, experience and success will eventually give you the confidence to invest more. I’d suggest investing only money you could lose with a shrug. Some sites to visit for more information: • aima.org takes you to The Alternative Investment Management Association, Ltd. • calpers.ca.gov takes you to an unexpected resource on alternative investing. • hedgeco.net is an informational resource with free registration for qualified and accredited investors. • hedgefund-index.com offers free registration via a phone call. That’s got to be less complicated than dealing with an online interactive form. • hedgefund.net is another free site, though entry requires completion of a registration procedure. • standardandpoors.com takes you to indices for hedge funds, arbitrage, managed futures, and more. • venturecapitaljournal.net takes you to articles on venture capital. Registration requires qualification. To obtain a full range of data on alternative investments, you will be asked to identify yourself, under penalty of fraud, as a qualified or accredited investor. If you don’t yet qualify, you can obtain general information but little or no comparative data or other restricted information. By law, hedge funds can share details only with qualified and accredited investors, but that requirement is under review and thus may be softened later in 2003 or in 2004. We’ll see.

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Chapter 5

The case for real estate There’s a lot to learn, but the wealth-building potential is awesome

Gene Balliett

M

ake no mistake, real estate is not a lazy man’s invest

ment. Success in the real-estate marketplace requires extensive study to master the necessary strategies,

followed by time-consuming spadework to avoid overpaying for properties and financing. The effort is likely to be rewarded as the nation’s economy enters a period of recovery from the economic malaise and the longest bear market for stocks since the 1930s. Here are three reasons to anticipate a window of opportunity in realty before the Federal Reserve Board turns its attention from battling deflation: • Expect the housing supply to tighten as unemployment goes away. • Expect low mortgage interest rates to continue for a time. • Expect banks and thrifts to compete aggressively to provide mortgages to an expanding pool of buyers. Buying a rental house is only a first step. Your property will need to be maintained and managed, either by you personally or by an outsider who will siphon off some of the profits in exchange for services. Additionally, you will face treacherous tax traps and liability concerns unique to real estate. Worse, real estate poses liquidity problems that would give stock-market investors nightmares. Don’t expect to cash out of a rental house or apartment building quickly. Unloading such property, unlike stocks, ETFs, bonds, and mutual funds, may take months, even years. So, why bother with real estate? Well, there are several strong arguments for making it one of the cornerstones of a sound financial plan. In addition to offering a noncorrelated asset to a stock-heavy investment portfolio, real property can serve as an important hedge against inflation, a first-rate tax shelter, and a way to leverage a relatively modest investment into wealth. In fact: You could make real-estate investing your next career. Do it right, and you may never again need to work for other people. Federal legislation passed in 1997 opened the possibility of riding an economic recovery by trading homes every two years. The profits thus gained are tax-free when the simple tests are 75

Don’t expect to cash out of a rental house or apartment building quickly. Unloading such property, unlike stocks, ETFs, bonds, and mutual funds, may take months, even years.

met. The opportunity figures to begin early in the economic recovery and to continue until the next recession takes hold.

Federal legislation passed in 1997 opened the possibility of riding an economic recovery by trading homes every two years. The profits thus gained are tax-free when the simple tests are met. The opportunity figures to begin early in the economic recovery and to continue until the next recession takes hold.

In this chapter, we cover the following issues: • Consider your home an investment. You can turn it into a wealth-building machine • Home Buying 101: Get a good deal. There’s more to buying right than answering a classified ad. • Get top dollar when you sell. Chances are, you can easily discover how much your place will fetch. • Get comfortable with creative financing. You can actually borrow your way to financial security. • Let your second home pay for itself. Understanding the tax rules can pay off big. • Rentals: stock-market alternative. As a landlord, you can create a tax-blessed money machine. • Sleep easily as a savvy investor in raw land. Those who know what they’re doing needn’t live with stock-market anxieties. • A reverse mortgage: It’s mo’ money. It can stretch retirement cash, but for the mindless it can be a financial disaster.

70 Billion years BC

They won’t pay it if we don’t dun them. So, we’ll add the interest to the loan balance, and both the interest and the loan will grow bigger, year over year!

Ah

Ah

Ooh

O oh

Ah CH & GB 2000

O H O

Ooh

If they invest well, why not permit an option to withdraw some cash values?

OK, but let’s apply a surrender charge, so that we keep most of the distribution for ourselves! Let’s call the product variable universal life. Even the salespeople won’t understand it.

Ah Ah

h

Ah

Ooh

Hey, even better, let’s let them invest the cash values. When someone invests badly, we’ll raise the premium. When someone invests well, we’ll lower the premium— but at death the extra cash values will be ours to keep!

76

Ooh

O oh

O OH h

The right to borrow some of their cash values at interest.

O OH h

Here we are again, still inventing life insurance. Our best idea is to add What extra cash values to term value do the insurance and call it customers get? whole life. The coverage is the same, guys, but I think we can charge 10 to 20 times the price of a term policy.

In time, the loan will become as big as the policy’s remaining cash values. So, we’ll keep the cash as payment for the loan—and the policy will lapse worthless when the customer has grown They’ll never old! pay off the loan!

real estate

Consider your home an investment You can turn it into a wealth-building machine

For millions of Americans, the family home is the number one asset. A study by the National Realtors Association found that American homeowners have an average of $50,000 in unrealized capital gains in their homes. In part, that’s due to the steady appreciation in the nation’s residential real-estate market. Data from the Department of Housing and Urban Development indicate that the value of the average U.S. home has increased 162% in the 20 years since 1980. In the five years through 2001, residential property values shot up 34.8%. In 2000 alone, there was an 8.6% jump in average home values. The tax advantages alone make home ownership worthwhile. Even if residential real-estate values fail to increase over the next five years, you’re likely to be money ahead by buying rather than renting your home. In part, that’s because of the last great tax shelter still available to most Americans: the home mortgage interest deduction. For top-bracket taxpayers and their families in, say, a $400,000 home with an 80% mortgage, that tax deduction can be worth $750 a month. No such tax break is available to renters. Lower-income families reap proportional benefits. For an individual in the bottom tax bracket, the after-tax cost of an $80,000, 30-year loan at 7% is under $450 per month—considerably less than the cost of renting a comparable property in most parts of the country. Now the tax benefits of home ownership are sweeter than they once were. In the past, the tax laws allowed homeowners a once-in-a-lifetime opportunity to sell their primary residences, pocket the appreciation, and avoid a hefty capital gains tax on the sale. As an alternative, the tax code permitted home sellers to defer tax on the gain by immediately reinvesting in another primary residence. As a result: Downsizing was once discouraged by U.S. tax laws. Many empty-nest couples, widows, widowers, and seniors entering retirement found themselves effectively blocked by the tax code from selling a big, expensive house into a smaller, less-costly place. Under those rules, they had to choose between reinvesting all of their gain from their old home into the new one or turning over much of it to the tax collector. That problem went away with the passage of a new Federal tax law: 77

The tax law passed in ‘97 significantly sweetened the home-ownership tax shelter by eliminating the requirement that the gain from the sale of one home be reinvested in another—and by allowing such tax-free transactions as often as every two years.

Now you can sell your principal residence again and again, with no capital gains tax. The tax law passed in ‘97 significantly sweetened the home-ownership tax shelter by eliminating the requirement that the gain from the sale of one home be reinvested in another—and by allowing such tax-free transactions as often as every two years.

If you’re willing and able to move every two years, you may never need to work again. Start by picking an area like California, New York, Massachusetts, or parts of Florida where property values are rising faster than the national average.

There are a few strings attached. The dollar ceiling for the exclusion is $250,000 for single taxpayers, $500,000 for joint filers. Also, the rules do not apply to vacation homes or rental properties—only to a taxpayer’s principal residence. For a house to qualify, you must actually live in it for at least two of the past five years. The result: a risk-free, rapid-fire formula for building wealth through real estate. If you’re willing and able to move every two years, you may never need to work again. Start by picking an area like California, New York, Massachusetts, or parts of Florida where property values are rising faster than the national average. Before moving there: Sell your existing home and capture the tax-exempt gain. Use the money to buy two new residences in the rapidly appreciating area. Rent one out and live in the other. After two years, sell your residence, pull out up to $250,000 in tax-free appreciation ($500,000 for couples), buy another property, and move into it or the other house you still own. After two more years, you can sell it and repeat the process. By repeating it again and again, you can pocket as much as $250,000 (or $500,000) in tax-free gains every 24 months. For more information, try: • www.homestore.com offers an online home-value appreciation calculator to help estimate changes in property values by zip code. • www.realestateinvesting.com. This online resource offers information on “no money down” home-purchase arrangements and other creative real estate investing strategies. • How to Get Started in Real Estate Investing, by Robert Irwin, McGraw-Hill Trade, 2002, $14.95. • www.realestate.university.com is an online “college” that offers pay-per-view courses in real-estate investment strategies. • Investing in Real Estate (Third Edition), by Andrew McLean (Author), Gary W. Eldred (Author), Andrew James McLean, John Wiley & Sons, 2001, $19.95.

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real estate

Home Buying 101: Find a good deal There’s a lot more to buying right than answering a classified ad

Start by putting your financial house in order. Lenders offer the best interest rates and mortgage terms to borrowers with the strongest credit ratings. You can’t fudge your credit history; lenders will check out the financial information you include on your mortgage application. Reduce your debt-to-income ratio. Pay off or pay down any credit-card obligations or other high-interest loans. Exception: an auto loan with fewer than 9 payments remaining ; chances are, any such obligation will be excluded from the calculation of your debt. Hold off on large purchases that may affect your debt-to-income ratio. Also, avoid changing employers or occupations until you’ve nailed down your financing; lenders tend to look less favorably at applicants who have been at their job for less than two years. Get pre-approved financing. Qualifying for a mortgage and getting even preliminary approval for a home loan can take several weeks. Don’t wait until you’ve found the right house to go through this process; you could lose it to a buyer who is preapproved. If you’re changing houses, consider selling first. Most home purchases are contingent on the sale of the buyer’s existing residence—a situation that injects uncertainty into the transaction. The house technically remains on the market until the contingency is removed, so it’s not unusual for a second buyer to snatch the property by making a noncontingent offer. A smarter option may be to place your existing home on the market before shopping for a new one. Negotiate a flexible, 90- or 120-day closing date with your buyer, then seek out your new home. As a non-contingent buyer you should be able to move more quickly, and you may negotiate a better price. Narrow your property search. Narrow your focus to specific neighborhoods. Establish criteria for your search—e.g., distance from work, price range, school quality, and any other considerations important to you. Don’t even look at individual properties until you reach that point. Contract with a buyer’s agent to represent your interests. Most residential property is sold through a listing agent under a multiple listing arrangement that provides maximum exposure 79

Most residential property is sold through a listing agent under a multiple listing arrangement that provides maximum exposure for the house. The sales commission is paid by the seller, so the listing agent’s allegiance is to the seller. So, it makes sense for a prospective home purchaser to enlist the services of a buyer’s agent.

It’s wise to place a contingency in your offer allowing you to void the transaction if a professional home inspector uncovers substantial defects that the seller is unwilling to correct. The cost of such an inspection may be $300 to $400, but the peace of mind that comes with it could be priceless.

for the house. The sales commission is paid by the seller, so the listing agent’s allegiance is to the seller. So, it makes sense for a prospective home purchaser to enlist the services of a buyer’s agent. In addition to advising you on home values and negotiating on your behalf with the seller, your agent can sift through current listings for you to help narrow your search for a new home. The cost of such services to a buyer: zero. The buyer’s agent is compensated with a share of the sales commission that otherwise would go 100% to the listing agent. Insist on a pre-sale home inspection for your own peace of mind. Hidden defects or structural problems in many older homes (and some new ones) can leave a homebuyer facing unexpected and significant repair costs. The 2000 HouseMaster Resale Home Deficiencies Study found that two in five of resale houses have at least one major defect that could cost anywhere from a few hundred dollars to as much as $15,000 to repair. It’s wise to place a contingency in your offer allowing you to void the transaction if a professional home inspector uncovers substantial defects that the seller is unwilling to correct. The cost of such an inspection may be $300 to $400, but the peace of mind that comes with it could be priceless. Don’t be afraid to offer full price for the right property. A buyer should never be reluctant to offer less than the listing price for any property—in fact, the asking price is often just the starting point for negotiations. But some of the best deals in real estate are sold at the full listing price—often within days of coming on the market. If you are knowledgeable about the property values in your target area and are convinced that the home you want is a true bargain, don’t pass it up solely because the seller refuses to dicker. For more information, try these resources: • www.FSBOnet.com is one of the growing number of sites that offer listings of real estate properties “For Sale By Owner.” • www.househunt.com is a subscription service offering home listings throughout the country, plus links to real-estate agents. • www.hudbox.com offers articles and other resources to assist buyers purchase properties at foreclosure sales. • www.realtor.com is the official Web site of the National Association of Realtors, your launch pad for scanning the Multiple Listing Service descriptions of tens of thousands of homes on the market across the U.S. • How to Buy a Home Without Getting Hammered, by Virginia Galloway, David M. Weekley, David Weekley; $24.95.

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real estate

Get top dollar when you sell Chances are, you can easily discover how much your place will fetch

Start by learning the current value of your property. What you paid for your home 10 years ago may have little resemblance to the true market value of your home today. Same goes for your Uncle Bennie’s opinion of what your place is worth now or what the house down the street sold for last October. After posting only modest gains during the early ‘nineties, residential real-estate values have soared in many parts of the country. Sellers who failed to do their homework sold for considerably less than market value. Tap knowledgeable resources to set the best selling price. Any realtor should be able to provide a list of comparables—the sales price of properties comparable to yours that have changed hands in your neighborhood in the past six months or so. An experienced certified home appraiser—preferably one referred to you by your bank—may provide a more detailed (and more objective) indication of your home’s value (for a fee of perhaps $300 to $400). Also, you can do your own research. Publicly available property records on file at county seats across the country (and in many cases over the Internet) track the selling prices of realestate holdings block by block. Unless your property is located in one of the five nondisclosure states (at this writing, Kansas, New Mexico, Texas, Utah, and Wyoming), a little digging should yield all you need to know about current property values. Be wary of overpricing your property. Grossly overpriced properties are one of the more frustrating time-wasters in real estate. If your asking price is 30% or more above market value, prospects for selling your home are slim to none. Many Realtors may be unwilling even to list such overpriced property. If it does get listed, the agents who show it are likely to do so only to convince prospective buyers that more reasonably priced properties are a bargain. Improve sales prospects by enhancing your home’s curb appeal. Every day, without bothering to go inside, potential buyers reject thousands of houses that have little appeal from the street. Give your house a fighting chance by sodding bare spots in the lawn, repairing cracks in the driveway, planting new shrubbery, and otherwise upgrading the outside of the property. Don’t let neglected maintenance be a sale stopper. Pulling house hunters inside for a look is only the first step. Stains on 81

If your asking price is 30% or more above market value, prospects for selling your home are slim to none. Many Realtors may be unwilling even to list such overpriced property. If it does get listed, the agents who show it are likely to do so only to convince prospective buyers that more reasonably priced properties are a bargain.

the ceilings, drains that run slowly, and walls that show signs of pipe leaks are all red flags to buyers. You may have lived with relatively minor defects for so long that you don’t even notice them. To buyers, signs of neglected maintenance can be the kiss of death.

You can lose a sale if a potential buyer doesn’t like your choice of decor, appliances, or fixtures. The better strategy is often to reduce the asking price so that the buyer can choose how to remodel an older kitchen or bathroom. In a buyer’s market, however, it’s often a good idea to spring for new carpeting, a fresh coat of paint, upgraded windows and doors, and more-attractive lighting fixtures.

Be selective when making other improvements. While all necessary repairs and maintenance should be performed in order to get the best price for your home, other improvements may be a mistake. In a seller’s market, leave most home improvements to the buyer. You can lose a sale if a potential buyer doesn’t like your choice of decor, appliances, or fixtures. The better strategy is often to reduce the asking price so that the buyer can choose how to remodel an older kitchen or bathroom. In a buyer’s market, however, it’s often a good idea to spring for new carpeting, a fresh coat of paint, upgraded windows and doors, and more-attractive lighting fixtures. Draw in buyers for your home by offering owner financing. If you’re in a position to offer financing to potential buyers, you’re likely to improve the marketability of your house. Better yet, you may also reap major tax advantages by deferring a capital gain from the property’s sale. Although current law allows for a $250,000 capital-gains tax exclusion on the sale of a primary residence ($500,000 for couples), any gain above that amount may be subject to a 29% tax. A seller who finances the excess can defer the tax until the gain is realized—while pocketing the interest paid on the loan. For more information, try: • www.priceahomeonline.com offers links to local real-estate agents who will provide a market valuation of your home. • forsalebyowner.com is a site for home owners who want to sell their homes without paying real-estate commissions. • 50 Simple Steps You Can Take to Sell Your Home Faster and for More Money in Any Market, by Ilyce R. Glink; 2003; $14.00. • FOR SALE BY OWNER: FSBO, by Richard A. Uffelman, 1998, $34.44.

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real estate

Get comfortable with creative financing You can actually borrow your way to financial security

Consider: A good mortgage can be an asset rather than a liability. Even if you can afford to pay cash for your new home, it may not be wise to do so, especially when mortgage interest rates are comparatively low. If you have other outstanding debts, a home mortgage is usually a no-brainer; interest rates on a home loan are invariably several points below the best APR (annual percentage rate) available under other forms of financing. Replacing a 9% car loan, an 11% business loan, or (gasp) 19% credit-card financing charges with a 7% home mortgage can put your family hundreds of dollars ahead each month. Consider a 15-year rather than a 30-year mortgage. If you are expecting to stay put in your new home for 8 to10 years or more and can meet a slightly higher monthly payment, you’ll be money ahead by arranging for the 15-year term; for those, lenders trim interest rates by a half point or so. On a 7% fixed rate, $300,000 home loan, the principal and interest payment will be $1,996 monthly over 30 years, and you will pay $418,526 in interest. The same amount financed for 15 years at 6.5% costs $2,613 monthly, with only $170,399 in interest charges and a saving of $248,127. After-tax savings will be a bit less because your interest deductions will be lower, but you will still be money ahead. Use an ARM (adjustable rate mortgage) to ratchet interest rates lower. Rather than the 7% you might pay for a 30-year fixed mortgage, you should be able to nail an ARM at about 5.5%. For our hypothetical $300,000 home loan, the ARM would thus yield savings of nearly $300 per month compared to a 7% 30-year mortgage. Refinance your existing mortgage to cash in on lower interest rates. Forget that old rule of thumb that says you shouldn’t refinance a home mortgage unless you can slice your interest rate by a full 2%. Take advantage of an online mortgage interest calculator available on the Internet at Web sites such as www.Realtor.com. To decide whether refinancing make sense for you, calculate your monthly payment under the new rate, subtract that from your current mortgage payment, and divide the savings into your closing costs on the new loan. The result is the number of months needed to reach the refinancing breakeven point. If you intend to keep your home longer, refinancing makes sense. 83

To decide whether refinancing make sense for you, calculate your monthly payment under the new rate, subtract that from your current mortgage payment, and divide the savings into your closing costs on the new loan. The result is the number of months needed to reach the refinancing breakeven point. If you intend to keep your home longer, refinancing makes sense.

Consider: A home equity line of credit may be better than refinancing. If your objective in refinancing is to cash in on some of the capital tied up in your house rather than to reduce monthly payments, consider arranging an equity line of credit rather than a new loan. As with a regular mortgage, the interest payments are tax deductible. But equity lines are more flexible than with standard mortgages, because interest is paid only on the amount drawn.

Insist on the right to pay off the loan early in order to sell the property or to refinance if interest rates fall sufficiently. Lenders in some states impose stiff penalties for allowing a mortgagee to pay off early, but the penalties have been outlawed elsewhere.

Beware of pre-payment penalties. Insist on the right to pay off the loan early in order to sell the property or to refinance if interest rates fall sufficiently. Lenders in some states impose stiff penalties for allowing a mortgagee to pay off early, but the penalties have been outlawed elsewhere. Sidestep points and PMI costs—if that’s the best alternative. If your aim is to reduce the initial out-of-pocket costs associated with your real estate purchase, shop for zero-point loans with a slightly higher interest rate. Typically, PMI (private mortgage insurance) is not required if not more than 80% of the value of the property is financed. As an alternative to PMI payments, consider an 80% first mortgage coupled with a second mortgage. Monthly payments may be higher, but the excess will go to build equity in your home. For more information: • www.lease2purchase.com presents information and advice on creative lease-to-purchase real-estate sales arrangements. • www.lenderscompete.com gives you a way to apply for a home mortgage online to lenders that may bid for your business. • www.mortgage101.com offers a series of online calculators to help determine whether to refinance, buy a new home, or rent an apartment. • wwwfanniemae.com is the site of the Congressionally-chartered national mortgage company. It offers a variety of resources to help homebuyers find and qualify for affordable financing. • Real Estate Finance and Investments (11th Ed.), by William B. Brueggeman, Jeffrey D. Fisher, McGraw-Hill/Irwin, 2002, $119.30.

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real estate

Let your second home pay for itself There are tax rules to follow, but understanding them can pay off big

Get this: A second home doesn’t have to be an expensive luxury. In fact, it could turn out to be a shrewd investment. Under the current tax rules, property owners can earmark their vacation homes for personal use at least two weeks each year, offer it for rent the rest of the time, and still claim all the tax benefits that are available for rental property. Regardless of how many weeks your place is rented, you can tax-deduct it as a rental property and depreciate the buildings and furnishings, thus offsetting the rental income and incurring a paper loss that may be used to reduce your taxable income from other sources. You may be able to use your vacation place for a month each year and still claim a tax loss. Two weeks of personal use is the minimum under the tax code; the maximum is 10% of the total number of days that the unit is rented during the year at full market value. So, if your place is in a year ‘round resort area and you are fortunate enough to rent it for 11 months (330 days) each year, you and your family could vacation there for over a month (33 days) and still claim enough depreciation to generate a valuable tax loss. There are tax benefits even if you rent your second home only occasionally. If you and other family members want to use the place for periods longer than the 14-day/10% threshold, you won’t be allowed to score a tax loss. But you will be able to tax deduct a pro-rata share of the expense of the unit (including mortgage interest, taxes, maintenance, and depreciation)—often enough to offset all of the rental income that you receive. Use the Internet to rent your second home directly to vacationers. You may be able to reduce those property management expenses significantly by handling the rentals yourself via the Internet. Rather than spend hundreds or thousands of dollars on newspaper advertising to find renters for your property, $100 or so to an online vacation-home booking service will give your place exposure to literally millions of rental prospects throughout the world. Web sites such as www.cyberrentals.com, www.idealvacationrentals.com, or www.10Kvacationrentals.com offer thousands of listings arranged by state and country. You will still have to schedule and book the rentals yourself, but you won’t have to deal with round-the-clock phone inquiries from prospects. Simply leave your telephone number off the 85

If your place is in a year ‘round resort area and you are fortunate enough to rent it for 11 months (330 days) each year, you and your family could vacation there for over a month (33 days) and still claim enough depreciation to generate a valuable tax loss.

Internet ad, and handle all communication with renters via email and postage.

Rather than spend hundreds or thousands of dollars on newspaper advertising to find renters for your property, $100 or so to an online vacation-home booking service will give your place exposure to literally millions of rental prospects.

Use your vacation home to travel the world. Home exchange programs are a great way to expand the value of your vacation property by swapping it with other property owners in different parts of the country, or around the world. If you can’t rent your beach house in Nags Head or your fishing lodge in Michigan for a week or two during the season, the services will help you trade those weeks for a similar period at a fashionable apartment in Paris, a condo on the Las Vegas strip, or maybe a farmhouse in Australia. For a membership fee of $50 a year or less, you can list your vacation property for a year with such house swapping services as HomeEchange.Com, Vacation Homes Unlimited, or the Seniors Home Exchange. The catch: a home swap counts as personal use of your vacation home for tax purposes. For the ultimate tax break, turn a vacation home into your principal residence for a tax-free rollover. While second homes, rental properties, other real estate holdings that you don’t use as your principal residence do not qualify for the capital gains tax exclusion described earlier, there’s no reason why you can’t convert your vacation home into your main residence and double dip. Sell your principal residence, pocket the taxfree capital gain up to $250,000 ($500,000 for joint filers), and move to your vacation home. After living there two years (or any 24 months in a five-year period), you can declare the vacation home your primary residence, sell it, and pocket another $250,000 to $500,000 tax-free gain. For more information, try these resources: • www.cyberrentals.com is one of the best, in our opinion, of the growing number of online listing sites for vacation rental properties. • www.escapehomes.com is a guide to vacation properties for sale or rent in resort areas throughout the world. • www.holi-swaps.com is a membership site with listings for the owners of 10,000 vacation homes and condos in 67 countries seeking to exchange with others. • Buying Your Vacation Home for Fun & Profit, by Ruth Rejnis, Claire Walter (Contributor), Dearborn Trade Publishing, 1996, $19.95. • The Second Home Handbook: Everything You Need to Know When You Buy, Build, Rent, or Own a Second Home, by Beatrice O. Freeman, Random House, 1987, $7.39.

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Rentals: a stock-market alternative Become a landlord, and you can create a tax-blessed money machine

Consider the comparative benefits of rental properties. Doesn’t work this way when you invest in common stocks, but this is exactly how it works for investment in the realty rental market: • Depreciate your shares (while they gain in value) to create a considerable paper loss that lowers your tax liability on other income. • When it comes time to cash in, capture a substantial profit on your investment. • Avoid all tax on the gain by plowing it back into other realty. Consider: Rental real estate may be the only retirement program you need. Suppose you were able to accumulate seven modest rental properties, each worth $80,000. Let’s say you make a 25% down payment on each, a total investment of $140,000, and finance them for 25 years. Real-estate values increased nearly 9% nationwide last year, but let’s be conservative and assume an average annual appreciation rate of 4%. After 25 years, your investment in rentals will have increased in value to $1,492,868, your tenants will have paid off your mortgage for you, and you will be enjoying a net annual rental income of nearly $75,000 without ever touching the principal. In addition, there’s tax-free income from refinancing. I’ll get to it in a minute. Be bullish about rental real estate: demographics are in your favor. The prime market for rentals is the young adult crowd, the age 18-to-34 age group. It will show a significant increase during the coming decade. While home ownership is sure to increase, the demand for rental housing will climb even faster. By 2020, 7,000,000 more rental units will be needed to meet the new demand. Your best return is likely to come from a fixer upper. For hands-on investors, the shortest path to profitability is to find a somewhat run down, poorly managed property, buy it for a price that’s 20% or more below market, and turn it around with better management and cosmetic improvements—routine maintenance, a fresh coat of paint, and landscaping. Avoid houses or apartment buildings in need of costly structural repairs; a new furnace, roof, or septic system could eat up your potential profits. Cosmetic improvements should justify a rent increase and in time a sale of the property for a tidy capitalgain. Avoid 87

Avoid houses or apartment buildings in need of costly structural repairs; a new furnace, roof, or septic system could eat up your potential profits.

tax on the capital gain with the help of a key section of federal tax law:

Office buildings and other commercial rental properties offer most of the same tax and economic benefits available from residential real estate, plus a few special advantages of their own. Businesses are often willing to sign a long-term lease, thus reducing your risks. When a business makes improvements, they become your property at the end of the lease.

Avoid the capital-gains tax by making a Section 1031 exchange. Typically, an owner arranges to sell the place first, then turns over the proceeds to an intermediary who holds the money in escrow until it’s time to settle on new property. You can swap a single-family rental house for an apartment building or virtually any other investment realty as long as it’s not your primary residence. You can replace one home with several new ones. You must identify the replacement property within 45 days of selling the old property and take title within 180 days. You must apply 100% of the proceeds from the old property to the new one. But after settlement, you’re free to refinance the new place. Don’t overlook the potential of investment in commercial real estate. Office buildings and other commercial rental properties offer most of the same tax and economic benefits available from residential real estate, plus a few special advantages of their own. Businesses are often willing to sign a long-term lease, thus reducing your risks. When a business makes improvements, they become your property at the end of the lease. You won’t pay income tax on them. Use scheduled refinancing to lock in a tax-free income for life. Since rental properties don’t qualify for the juicy $250,000/ $500,000 capital gains tax exclusion available on the sale of a principle residence, don’t sell. Instead, refinance. Example: a duplex worth $200,000 increasing in value by 5% annually, to $255,000 in five years. Refinance. After closing costs, you should be able to pull out $50,000 tax-free. Five such properties would give you an annual tax-free $50,000 for the rest of your life. For more information, try these resources: • www.landlordportal.com is a resource for property management professionals and would-be landlords. • www.rent.com is a site where landlords can list rental homes and properties. • www.vacancynet.com carries listings for rental houses, apartments, and mobile homes in 54,000 communities. • The Landlord’s Handbook: A Complete Guide to Managing Small Residential Properties, by Daniel Goodwin, Richard Rusdorf (Contributor), Dearborn Trade Publishing, 1997, $29.95. • Managing Rental Properties for Maximum Profit: Save Time and Money With Greg Perry’s Foolproof System, by Greg M. Perry, Prima Publishing, 2000, $24.95.

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real estate

Investors in raw land sleep easily Those who know what they’re doing sleep well for good reason

Raw land can be a sunny investment in any economic climate. When residential real-estate prices rise sharply, much of that appreciation comes as a result of rising land values rather than the rising value of structures. When the economy turns chilly, land tends to hold its value—without the burden of expenses associated with rental properties in rough times. The appeal of unimproved land: They aren’t making much more of it. When the building lots in a subdivision begin to sell out, prices start to rise. When all the waterfront properties on your part of the beach are snapped up, the value of vacant land one block back from water’s edge figures to rise. Not much drives down the value of raw land. Investors in land tend to sleep easier than those who own rental properties. Like those who invest in developed properties, landowners strengthen their financial position by adding to their portfolios. But at the end of the day, they are the more likely to enjoy peace of mind. Unlike the owners of rental real estate, they figure to be hassled less about property management, their maintenance costs are near zero, and the taxes on their unimproved properties average about one-tenth those on developed lots. What’s more, investors in vacant land save on insurance costs, and by definition they face no tenant relations issues. On the other hand, they had better: Be aware of the downside to land investment. Some of the drawbacks are obvious. Unless you are leasing out the mineral, timber, or other rights to your acreage, your vacant land generates no rental income. Since you can’t depreciate unimproved land, the tax benefits are not as sweet as for other real-estate investments. What’s worse: For the unwary, there are plenty of not-so-obvious pitfalls. Some land is cheap because it cannot be built on. Some parcels have access problems; some may actually be land-locked, providing the owner no legal right of access from any direction. Still others may have environmental or zoning issues certain to affect the future resale values; of those, some may have welldisguised environmental defects. Caveat emptor. Watch out for the land scam vultures. You’ve probably heard stories of investors who bought property in Florida during the 89

Some land is cheap because it cannot be built on. Some parcels have access problems; some may actually be land-locked, providing the owner no legal right of access from any direction. Still others may have environmental or zoning issues certain to affect the future resale values; of those, some may have welldisguised environmental defects. Caveat emptor.

An oceanfront building lot overlooking the Pacific that might cost $300,000 in California can still be snapped up in Nicaragua for under $20,000. A 100-acre summer retreat in Nova Scotia is offered at this writing for less than $50,000 U.S. In uncertain times, such properties may begin to appeal to wealthy, would-be U.S. expatriates.

1920s for $100 an acre, only to discover that it was under water. Today, Federal Trade Commission investigators continue to receive reports of land scams despite provisions of the 1968 Interstate Land Sales Full Disclosure Act. It requires developers of 100 or more unimproved lots to register their subdivision with Federal authorities and to provide investors with detailed disclosures before any sale occurs. Before buying, FTC advises prospective investors to check out area property values with local real-estate professionals and the county recorder or tax-assessment offices. Consider hedging your investment portfolio with foreign land. Some of the best bargains in real estate today are a bit farther afield. An oceanfront building lot overlooking the Pacific that might cost $300,000 in California can still be snapped up in Nicaragua for under $20,000. A 100-acre summer retreat in Nova Scotia is offered at this writing for less than $50,000 U.S. In uncertain times, such properties may begin to appeal to wealthy, would-be U.S. expatriates. Consider, too: Owners of small businesses can turn a land investment into a wealth-transfer device. If you own your own business, consider purchasing a plot of land and leasing it back to your corporation. The company may then improve your land with an office building or a home that’s rented out to produce income. For that matter, the business could even rent the house back to you. At the end of the lease, the improvements made by the corporation on your property will revert to you without cost or income-tax liability. Then, you may choose to live there, rent it, or sell it. What’s more, you can make the strategy far more taxefficient by acquiring the vacant property through a family trust rather than in your own name. For more information: • www.landdevelopmenttoday.com is an online ‘zine that covers the land development arena. • www.moonestates.com is a far-out site that offers raw land for sale on the Moon, Mars and Venus. The perfect gift for that special someone who already has everything on Earth? • www.usalandsale.com offers listings for land available for purchase throughout the U.S. • How To Buy Land At Tax Sales, by Lin Stone, James D. Criswell (Illustrator), Pattie Edson (Illustrator), Jim Criswell, Truman Publishing, 1998, $29.95. • How to Buy Land Cheap, by Edward Preston, Breakout Productions, 1998, $14.95.

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real estate

Reverse mortgage: It’s mo’ money It could stretch your cash, but it could be a financial disaster

A reverse mortgage can pay you to live in your own home. It’s a loan that can be structured so that you needn’t pay it back for as long as you live there. In one form, a lender makes monthly payments to you. In another, you take a lump sum, a lifelong annuity, or an equity line of credit that you dip into as needed. It’s not a free lunch, of course. The money will have to be repaid with interest when you die, sell your home, or permanently move out of it. But no matter how much you draw out, you will never owe more than the market value of your home when the loan is repaid. The deal is not for everyone. To be eligible, you must be at least 62 years of age, and all owners of the home must apply for the loan. The property must be your primary residence, and usually it must be a single-family home. An existing mortgage must either be paid off before taking a reverse mortgage or paid off with some of the proceeds from the reverse mortgage. The risks are on the scary side. While you may anticipate living in your home for the rest of your life, you may eventually require nursing home care and be unable to live in your home for at least six months each year. If you can’t, the lender will probably have a right to recall the loan, so you could lose your home. The same is true if you declare bankruptcy or decide to rent the house to others. As an investment, a reverse mortgage is not a good thing. Most of the advantages of owning real estate—including its power to reduce taxes, serve as a hedge against inflation, and build wealth that can be passed on to heirs—are wiped out by a reverse mortgage. Also, because you’d continue to own your home, you’d still be responsible for property taxes, insurance, maintenance, and repairs. What’s more, the accumulated income from the proceeds of a reverse mortgage could destroy your eligibility for Medicaid, SSI payments, and other public benefits. Here’s one alternative: Sell the place. A homeowner who is desperate for extra income might be money ahead by selling the house, investing the proceeds to generate income, and moving to lower-cost digs. The reverse-mortgage alternative 91

While you may anticipate living in your home for the rest of your life, you may eventually require nursing home care and be unable to live in your home for at least six months each year. If you can’t, the lender will probably have a right to recall the loan, so you could lose your home. The same is true if you declare bankruptcy or decide to rent the house to others.

might be worth considering if you believe you will outlive your retirement savings, are determined to remain in your home as long as you live, and are not concerned about leaving an estate.

The reverse-mortgage alternative might be worth considering if you believe you will outlive your retirement savings, are determined to remain in your home as long as you live, and are not concerned about leaving an estate.

Lowest-cost reverse mortgages are usually available from state or local governments. Trouble is, they typically require that the proceeds be used for specific purposes (such as paying for taxes or household repairs). Private reverse mortgage programs offered by banks, S&Ls, and private mortgage companies vary greatly in cost and in payoff. The largest cash advances from a private lender tend to come via a federally insured Home Equity Conversion Mortgage. HECM reverse mortgages tend to be less costly than others. AARP has developed useful “Model Specifications for Comparing Reverse Mortgages”; access it online at www.AARP.org. Is a reverse mortgage worth it? Crunch the numbers. Let’s say Dr. Example is a 62-year-old retiree with no spouse and a home on the East Coast worth $300,000. An HECM reverse mortgage at the interest rates available on Nov. 26, 2001, would offer him a monthly loan advance of $653 for as long as he remains at home—even for another 40 years. One alternative: He could claim a lump sum advance of $105,543. Another: He could take that same amount in the form of a home equity credit line that grows by 4.4% each year that it remains unused. If he were 72 rather than 62, he could choose between an income of $875 per month or a lump sum of $130,323. If he were 82, he’d choose between $1,271 monthly or a lump sum of $155,590. For more information, try these resources: • www.hud.gov takes you to the U.S. Department of Housing and Urban Development, which cautions seniors to be wary of scam artists that charge thousands of dollars for information (on reverse mortgages) that is free from HUD. • www.reversemortgage.org gives you the site of the National Reverse Mortgage Association. It offers an online consumer’s guide for evaluating reverse mortgages from the lender’s perspective. • www.seniorresource.com includes a section on housing choices for seniors that compares reverse-mortgage arrangements with other options. • Reverse Mortgages for Beginners: A Consumer Guide to Every Homeowner’s Retirement Nest Egg, by Ken Scholen, Nchec Press, 1998, $14.95. • Reverse Mortgages: A Lawyer’s Guide to Housing and Income Alternatives, by David A. Bridewell (Editor), Charles Nauts (Editor), American Bar Association, 1997, $79.95.

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Chapter 6

Collectors: know your toys You’ve got to do more than devote many years admiring the stuff

Ken Rankin

T

he seascape by that little-known artist that you bought

10 years ago for $700 might be worth $70,000 today. That autographed Truman Capote first edition that you

picked up at a book-signing event in the 1960s could go for the down payment for your daughter’s first house. And that ‘56 Tbird you have lovingly maintained in mint condition since college just might pay for your granddaughter’s college education. An investment in fine art, vintage wines, rare antiques, or classic motor cars can be a way to diversify an investment portfolio that’s top-heavy with stocks, bonds, and real estate. You get to enjoy your treasures while they’re appreciating. You’ll never hang your Sun Microsystems stock certificates on the parlor wall or display the deed to your rental duplex under glass. But the prize Remington sculpture you stole at auction will be a centerpiece in your home. And that ball signed by Mickey, Roger, Yogi, and the rest of the ‘56 Yankees is a treasure you will show at your office to every visitor. Even if it doesn’t appreciate significantly in value, your investment will have paid off with years of enjoyable ownership. Speculators in art or collectibles solely for profit tend to lose their shirts. Without a passion for sports collectibles, antiques, or any of the others, an investor probably won’t devote the time and energy needed to gain the expertise and insight that must go into successful acquisitions.

Follow the 15% rule to protect your financial security. Don’t even think about dabbling in notoriously illiquid investments such as fine art or collectibles unless your existing portfolio covers all the liquidity you need. At the most, your collection should account for no more than 10% to 15% of your total financial portfolio. Before you invest, find out what you’re getting. You will find some direction in the following pages: • Invest in art and live with beauty. Success in collecting art requires unusual expertise. • Antiques: Living with the past. Serious collectors may do better than investors in common stocks. 93

That ball signed by Mickey, Roger, Yogi, and the rest of the ‘56 Yankees is a treasure you will show at your office to every visitor. Even if it doesn’t appreciate significantly in value, your investment will have paid off with years of enjoyable ownership.

At the most, your collection should account for no more than 10% to 15% of your total financial portfolio.

• Rare wines are liquid assets. Dabblers need not apply; collecting wine requires more than taste. • Rare books: read all about them. Even a recent title may command many times its retail price. • Jewelry and gems: sentimental value. You’re not likely to make money on them, but you could spend less. • Classic cars: the road to riches? Here’s still another niche that requires lots of expertise. • Sports memorabilia: not child’s play. It’s a fragile marketplace, but some items have fetched big prices • Where to buy, sell, or trade collectibles. Learning about the marketplaces is a good first step for a novice.

70 Billion years BC

Who cares!

You can bet they’re sitting around the campfire, yapping. What else?

Probably us. More likely, me.

They’d just get lost.

They’re inventing life insurance.

CH & GB 2000

What are the men doing today?

You’d think they would rather be here in the woods, helping us gather and hunt.

What’s the big topic of discussion these days?

94

Somehow, we’ve got to find a way to make them useful.

collectibles

Invest in art, live with beauty Success in collecting art requires unusual expertise

An investment-grade art collection can be an enjoyable part of your life. There is a steep learning curve associated with developing the expertise needed to invest successfully in fine art, but you’re likely to find the learning process is laced with its own rewards. Along the way you will meet legions of interesting and creative people who are eager to share with you their passion for collecting and investing in fine art. This is one market where patience isn’t just a virtue. It’s a requirement. Even under the best of circumstances, fine art is a notoriously illiquid investment. If you’ll need cash in three years to pay Junior’s college bills, pass up the Picasso and put your money in CDs, money funds, or high alpha, low beta mutual funds from the Prime List we update monthly. One path to success: Find a lesser-known artist, and buy early. You’re a generation or so too late to begin collecting Wyeth or Grandma Moses on a shoestring. And you’re centuries behind the curve for Rembrandt, Van Gogh, and Monet. A less cashintensive strategy is to seek out promising but undiscovered artists while their work is still affordable. Look for an artist who is represented by an agent. Such work has a chance of getting exposure. Positive reviews by art critics are a plus; so is a good track record of sales. Also, find out where the artist’s work has appeared; look for a steady progression toward more prestigious showings. If you discover an artist by noticing her work in movies or in magazines, you’re too late; she’s no longer an unknown. You can stretch your budget by concentrating on photographs, prints, or lithographs. Another way to economize is to focus on smaller pieces. An eight-foot long seascape or a two-ton bronze sculpture may be a dramatic addition to your collection, but you will pay dearly for the shipping, storage, and maintenance. Don’t forget insurance. Beware of the downside: Art values are unpredictable. It’s not unusual for a novice speculator to lose his shirt by grossly overpaying for a painting or sculpture. Transaction costs drain profits from even successful investments. Although auction houses offer collectors an opportunity to buy and sell art directly, this is by no means a cost-free option. At Sotheby’s, the best-know auction house for fine art, auctioneers impose a 95

Find out where the artist’s work has appeared; look for a steady progression toward more prestigious showings.

buyer’s premium of at least 10% on the most expensive items and a whopping 20% on articles that sell for less than $15,000.

You may have to contend with dealers who lack clear title to the pieces they are selling. That’s a problem that could haunt you years later when you attempt to sell the item.

Watch out for scams. The marketplace for fine art is far less regulated than those for securities and real estate. Be on the lookout for such practices as insider bidding at auctions to drive up sale prices, inexpensive posters passed off as original prints, and garden-variety art forgeries or faked signatures. Also, you may have to contend with dealers who lack clear title to the pieces they are selling. That’s a problem that could haunt you years later when you attempt to sell the item. Here’s where to learn more about investing in fine art: • fine-art.com provides a searchable database of more than $109 million in fine art, including over 36,000 paintings, prints, photographs, and sculptures. The site hosts dozens of Internet discussion forums on specific art categories and issues. Also, it provides an online marketplace to sell art, with listings from thousands of collectors, dealers, and artists. • artamerica.com takes you to an online marketplace for investment-grade art, including direct offerings by collectors and artists as well as listings by dealers and galleries. Includes links to artists’ sites. • fineartinvestments.org gives you a brokerage house for fine art and antiques. It provides written appraisals. • Hislop’s Official International Price Guide to Fine Art, by Duncan Hislop, House of Collectibles, 2002, $20. • tfaoi.com offers resources for collectors of fine art, including links to major museums, galleries, art clubs and societies, and appraisal services.

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collectibles

Antiques: living with the past Serious collectors may do better than investors in common stocks

Develop expertise. You’ve got to distinguish the treasure from the trash. Serious collectors realize that they must narrow their focus to a specific area. From antique furniture, they move, say, to antique oak furniture, then to American colonial oak furniture—or even to American colonial oak furniture for children’s rooms. Remember the first three rules of antique investing: condition, condition, condition. Top-quality pieces in excellent condition tend to be the ones that show the strongest appreciation. With medium-quality items, you may be fortunate to see values rise enough to cover inflation. If you can’t afford topquality pieces, consider shifting to another area of specialization. Example: fine condition 19th-century grandfather clocks can command prices of $10,000 to $50,000 each. Beyond your range? Consider collecting mantle clocks, which tend to fetch $2,000 or less. Check your attic. You may already own the centerpiece of an antique collection. Most antique collections begin with a single piece—often a family heirloom passed on from previous generations. On its own, that vase your great grandmother brought with her from Europe may not command big money in the antique market. But for you and your family, the history of the object may render it a priceless treasure. What better way to begin a collection? Learn how to avoid online scams. The Internet has increased the market for antiques, but it has also spawned a disturbing upsurge in fraudulent practices by sellers. Outright fakes and green-from-the-factory reproductions are widely offered online as genuine antiques, often accompanied by forged “certificates of authenticity,” bogus appraisals, or other phony documentation. Because online sales are typically anonymous transactions offering no opportunity for pre-purchase inspections of items, even seasoned experts have found themselves taken in by cyberswindlers. Your best hope is to buy from established, reputable dealers who specialize in the category you’re collecting. Equip yourself. Because the condition of an antique can be such a powerful determinant of its value, make sure you have the equipment necessary to evaluate potential purchases. A halogen lamp will help you spot imperfections in the finish or subtle 97

The Internet has increased the market for antiques, but it has also spawned a disturbing upsurge in fraudulent practices by sellers.

Antiques are not immune to economic downturns, but AFI suggests the value of good items is likely to rebound more rapidly after recessions than other investments.

differences in wood color that may suggest furniture has been patched. Light can also indicate whether the back of a painting has been relined—a restoration technique that can significantly reduce the value of a piece. Ultraviolet lights are useful for exposing efforts to retouch ceramics and paintings. A magnifying glass or jeweler’s loupe can help you to read patent dates on furniture hinges or hallmarks on silver platters. Other items include a tape measure, a screwdriver, a Troy weight scale, and a telescopic mirror (from an auto parts store) to view the inaccessible underside of an antique. Do your homework. The value of antique furniture has increased at a pace that rivals or exceeds both stocks and real estate. The Antique Collectors Club’s Antique Furniture Index— a 34-year old measurement of market prices for 1,000 individual pieces—reached a record 3,575 at the end of 2001, up from 100 in 1968. Over that 33-year period, the index produced an average annual appreciation of 11.2%. Antiques are not immune to economic downturns, but AFI suggests the value of good items is likely to rebound more rapidly after recessions than other investments. Learn more about antique investing: • Field Guide to American Antique Furniture: A Unique Visual System for Identifying the Style of Virtually Any Piece of American Antique Furniture, by Joseph Butler, Ray Skibinski (Contributor), Rountable Press, $22. • antique-acc.com takes you to the Antique Collectors Club and to its annual Antique Furniture Index as well as Antique Collector magazine. • curioscape.com offers Internet links to online dealers and other sources for a wide range of antique categories. • kovels.com provides a free online price guide to antiques and collectibles. Also, it offers Kovels On Antiques and Collectibles, a national newsletter for antique investors by Ralph and Terry Kovel. • Schroeder’s Antiques Price Guide, 20th Ed., by Sharon and Bob Huxford, Collectors Books, $14.95.

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collectibles

Rare wines are liquid assets Dabblers need not apply; collecting wine requires more than taste

Unlike real estate, vintage wine actually improves over time. Every bottle consumed or broken figures to make the remaining supply that much dearer. Imagine what would happen to the stock price of a blue-chip public company that routinely bought back 10% of its outstanding shares each year and never issued new ones! There may never be a better time to start a wine collection. Great vintages, such as Bordeaux from 1998, 1996, and 1995, can still be purchased at wine shops at pre-collector retail prices. So can California Cabernet Sauvignon-based wines from 1997 and earlier years. Other classic vintages from the 1990s are available at commercial wine auctions held regularly in New York and London and at smaller sales in Chicago, Los Angeles, and San Francisco. Most wine is made for quick sale and will not appreciate. Only a handful of selected wines are made to age well and to have the market demand to qualify as investments. Among that group, not many vintages make for good investments. The end result: Decisions are easier for knowledgeable collectors, and the risks are greater for the uninformed. Some turn a tidy profit from their wine investment. In 2001, Colgin Cabernet Sauvignon Napa Valley Herb Lamb Vineyard 1994 was selling for $50 a bottle. One year later it was going at auction for over $16,000 a case. Not long ago some wine connoisseurs thought $100 a bottle was pricey for Dalla Valle Maya 1991. Early in 2002, it was selling for 10 times as much. In his analysis of Bordeaux prices over 22 years, Robin Duthy, author of The Successful Investor, found that a $10,000 investment in selected vintages in 1975 had climbed to $225,000 by 1996—a 2,150% increase, or 15% per year compounded. That rate of return outpaced stocks, bonds, and real estate. Face up to the drawbacks of investing in wine. You need a wine cellar or some other physical space with a constant temperature of 55 degrees to 60 degrees. At this writing, commercial auctions of private citizens’ wine are legal in only these four states: New York, Illinois, California, and Missouri. The auction houses take 25% to 30% of the selling price. Also, you will pay taxes, shipping, and insurance charges, and you can expect to wait two to four months before seeing any proceeds 99

Only a handful of selected wines are made to age well and to have the market demand to qualify as investments. Among that group, not many vintages make for good investments.

from the sale. If your wine doesn’t sell, you may be hit with a handling charge by the auctioneer.

The auction houses take 25% to 30% of the selling price. Also, you will pay taxes, shipping, and insurance charges, and you can expect to wait two to four months before seeing any proceeds from the sale.

To be successful, a wine collector must be quick on the trigger. Many vintages are hard to find. Where they are available, prices may vary dramatically, either up or down. It’s not unusual for a case of vintage Chateau Decru Beaucaillou to sell for $1,500 at a New York auction in June and to bring only $900 in California the following month. Shoot for balance in your wine portfolio. As with a successful stock portfolio, it is often wise to include a mix of blue chip vintages and emerging wines or regions in your collection in order to achieve diversification. And if you’re the type to dabble in high tech stocks or IPOs, you might want to add some of the new California cult wines to add a dash of spice to your collection. Your best bet may be wines with an international appeal, especially the classic Bordeaux vintages. Check out these resources for investing in liquid assets: • internationalwineclubs.com takes you to the International Wine Clubs Association, a league of 35 direct-selling mail order wine merchants in 16 countries. • winespectator.com takes you to Wine Spectator (1-800-3953364), the most widely read magazine for wine collectors and investors. • New Sotheby’s Wine Encyclopedia: A Comprehensive Reference Guide to the Wines of the World (revised and updated) by Tom Stevenson, DK Publishing, 2001, $50. • The Wine Advocate is a bimonthly guide to fine wine published by wine expert Robert M. Parker, Jr. • Morrell Company Fine Wine Auctions, 665 Eleventh Avenue, New York10019 (1-212 307-4200), is a leading national auctioneer of fine wines.

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collectibles

Rare books: read all about them Even a recent title may command many times its retail price

The vast majority of books never show any appreciation. And novices who speculate in the rare book market solely to score a quick profit are the ones least likely to succeed. Even so, here’s something any avid buyer of books needs to know: You may already be a successful collector. That page-turner you bought for $18.95 last year just might be worth $500, $1,000, or even more today. A first edition of Stephen King’s The Shining was bringing in $500 to $600 not long ago. A clean copy of John Grisham’s A Time to Kill can easily fetch $2,000. And the first American printing of Harry Potter and the Sorcerer’s Stone is a steal at $3,500. Collect books, don’t just accumulate them. An assembly of unrelated books may represent the beginnings of a fine reading library, but it’s not a collection. Successful collectors focus their efforts on acquiring a series of works that are related to one another. A single first edition of Arthur Conan Doyle’s Hound of the Baskervilles may bring in several hundred dollars at auction, but a complete collection of the adventures of Sherlock Holmes and Dr. Watson could be worth tens of thousands. Choose a book-collecting strategy that works for you. The simplest and least time-consuming approach is to focus on a single author whose writings you enjoy. In addition to the first editions of works by that writer, plan to acquire any available biographies or critical reviews. Other strategies include building a collection based on genre (e.g. science fiction, cookbooks, romance novels), subject matter (politics, architecture, Civil War battles) or the most significant works in a field or historic period (various sports, British monarchs, scientific advances). While collectors normally limit their purchases to first editions, some buck that trend by seeking out copies of all the various editions of a single great book. Learn what makes a book valuable. To the dismay of traditionalists, contemporary books by trendy authors often command higher prices than classics. Three factors determine value in today’s rare book market: demand, condition, and scarcity. The most desirable books are in as new condition. First editions are scarce. Most publishers (with the notable exception of Random House) identify the edition of a book on 101

Successful collectors focus their efforts on acquiring a series of works that are related to one another.

the copyright page with a row of numbers. If the single character “1” or “A” appears at the beginning or end of the row, the book is a first printing. To reduce the guesswork, many collectors carry a reference such as Bill McBride’s Pocket Guide to the Identification of First Editions.

To the dismay of traditionalists, contemporary books by trendy authors often command higher prices than classics.

Without the dust jacket, a book may not be collectible. For books printed since 1900, the absence of the original dust jacket can reduce the market value of an otherwise collectible volume by anywhere from 50% to 90%. More recent works published during the past 50 years—even first editions in fine condition—tend to be of no interest to collectors if the dust jacket is missing. Find a bibliography to serve as a blueprint for your collection. A bibliography can provide the direction and literary insight essential for a successful book collection. Descriptive bibliographies provide information needed to distinguish between various editions of a work. The following resources may be useful in launching a rare book collection: • bibliofind.com is Amazon.com’s online marketplace for rare and used books. The site boasts “millions of hard-to-find titles,” many of them out of print. • alibris.com takes you to another Internet supplier of hard-tofind books. Provides articles on book-collecting topics and listings for signed first editions. • The Care of Fine Publishing by Jane Greenfield, The Lyon Press, 1998, $19.95. A how-to guide for protecting literary assets. • Collected Books: The Guide to Values by Ahearn, Allen & Patricia Ahearn, G. P. Putnam’s Sons, N.Y. (1991), $18.70. One of several price guides. • rarebooks.org takes you to the International Book Collectors Association, a society of bibliophiles. It offers advice on acquiring, maintaining, and protecting collections of fine books.

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collectibles

Jewelry, gems: sentimental value You’re not likely to make money on them, but you could spend less

Sad but true, investing in jewelry is an oxymoron. With few exceptions, the resale value of jewelry is no more than the sum total of its metal content and other component parts. Diamonds may be forever, but their value is unstable. During the late 1970s and early ‘80s, diamonds were commonly selling at up to four times 2002 prices, so that a $50,000 stone that looked like such a promising long-term investment 20 or so years ago might fetch $15,000 today. Best defense: Learn before buying. Go for the gold, but first learn the lingo. Pure gold is 24 karat, and it’s too soft for use in jewelry. Most gold jewelry is 18K (18 parts gold mixed with 6 parts base metal, or 75% gold); 14K (58% gold); or 10K (42%). Look for both the karat quality mark and the trademark (name, symbol or initials) of the company that stands behind that mark. Higher-karat gold is softer, more yellow in color, and more costly. “Solid gold” may be made from any karat gold as long as the inside of the piece is not hollow. Jewelry that is “gold plated,” “gold filled,” or made with a “gold overlay” is base metal with a thin layer of gold that will wash or wear away. Don’t rule out other precious metals. The better pieces are stamped to indicate both the precious metal content and the manufacturer. Pieces marked “platinum” (often abbreviated “Plat.” or “Pt.’) must be at least 95% pure platinum. Jewelry composed of between 850 and 950 parts per thousand of pure platinum may be marked to indicate the amount (e.g. “900 Plat.”). Jewelry made of silver or “sterling silver” must contain 92.5% pure silver, and is sometimes stamped “925” or “sterling.” Beware of items marked “nickel silver” or “German silver”; these have no silver content at all. Know that most diamonds are color-graded “D” (better quality) through “O” (lower grade). They are ranked for clarity from “flawless” (no surface or internal imperfections visible under 10 power magnification) down through “I-3” (pretty much the bottom of the barrel for jewelry-grade diamonds). Grading scales for color and clarity are not uniform. The most popular shape (and arguably most valuable) is round. Some diamonds are treated to improve clarity, a process that may significantly affect value. “Fracture filling” conceals cracks in diamonds by filling them with a foreign substance that may be only a temporary fix. Laser drilling lessens the scarcity (and value) of a stone. 103

Beware of items marked “nickel silver” or “German silver”; these have no silver content at all.

Beware of lab-created gemstones—e.g., moissanite stones require special instruments to identify. Don’t view diamonds against a black background (black alters your perception of color). Ask for a “gemological certificate” providing a grading of the stone by a reputable independent lab (GIA, AGS, and EGL are the three most widely respected labs).

Don’t view diamonds against a black background (black alters your perception of color). Ask for a “gemological certificate” providing a grading of the stone by a reputable independent lab (GIA, AGS, and EGL are the three most widely respected labs).

Pearls are wonders of nature—occasionally. A pearl’s iridescence comes from its coating or “nacre.” Pearls cultivated for short periods exhibit a thin nacre which may wear off after exposure to hairspray or perfume, reducing the luster of the pearl (and its importance). Here’s where to learn more about jewelry and gems: • Jewelry & Gems: The Buying Guide—How to Buy Diamonds, Pearls, Colored Gemstones, Gold & Jewelry With Confidence and Knowledge” (5th Edition), by Antoinette Matlins and A.C. Bonanno, Gemstone Press, 2001, $24.95. • jewelers.org takes you to Jewelers of America, Inc., 52 Vanderbilt Ave. (19th Floor), New York 10017 (1-800 223-0673), the national association of retail jewelers. Requires members to abide by a Code of Ethics. • nydex.com takes you to the New York Diamond Exchange (1212 840-0965). It offers diamonds “at dealer prices, plus commission.” • ftc.gov takes you to the Federal Trade Commission, a regulatory body that publishes a consumer guide, CRC-240, Buying Gold and Gemstone Jewelry: The Heart of the Matter. • The Jewelers Vigilance Committee, 25 West 45th St. (Suite 400), New York 10036-4902 (1-212 997-2002). It’s a nonprofit organization formed to advance ethical practices in the jewelry industry. The committee operates an Alternative Dispute Resolution Service to assist consumers and businesses in resolving disputes about jewelry.

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Classic cars: the road to riches? Here’s still another niche that requires lots of expertise

They’re investments you might drive to the bank. A cherry ‘57 Chevy ragtop that originally sold for $2,500 may well command $75,000 in the 2003 market, and Roadrunners, Baracudas, and other Plymouth muscle cars from the early ‘70s were bringing $30,000 to $90,000 not long ago at auctions. Are you ready for the costs of classic car collecting? Your dreamboat on wheels could turn into a nightmare of costly maintenance, insurance, and regulatory rigmarole. On top of that, you may have to pay as much as 18% on a loan for a classic and antique auto. What’s more, your stable of vintage Mustangs or ‘vettes will require extensive and expensive accommodations. Your best strategy: buy an already restored vehicle. Most of the money lost on classic cars stems from the steep cost of restoring an old clunker to showroom condition. If you can’t do the work yourself, paying professionals to do it for you will probably turn out to be prohibitively expensive. It’s not unusual for a frame-off restoration to cost $20,000 to $40,000, or more, and it may take a year or more to complete. For the same money or less, some diligent shopping is likely to turn up your dream car in ready-for-prime-time condition. Remember: Not all old cars are collectible. A dentist we know in Maryland picked up his personal dreamboat—a classic 1969 Pontiac LeMans convertible that he bought from a patient for $3,000. Then, he spent another $30,000 having it restored to mint. But when some of his stocks went sour, he learned there was no market for his beautiful car. It sold at wholesale for $5,000 because it was not a collectible. If he had put his money into a ‘69 Pontiac GTO—virtually the same car as the LeMans, but with a bigger engine—collectors would have lined up for it. The lesson: Focus on cars that are in demand. Check out classic car shows, auctions, vintage car magazines, and automobile collectors clubs. BuyClassicCars.com identified the “most desired” classic cars in America in 2002 as the ‘67 Ford Mustang Shelby GT500, ‘67 Jaguar XKE roadster, ‘67-’69 Chevy Camaro coupes, ‘65’74 Porche 911s, ‘70 Chevy Chevelle SS coupe, and ‘55-’59 Cadillac convertibles. Take an expert to help you shop for a vintage car. The value of an individual vehicle can vary greatly depending on relatively 105

Your dreamboat on wheels could turn into a nightmare of costly maintenance, insurance, and regulatory rigmarole.

small differences in condition or restoration techniques. A $50,000 Corvette may lose 20% of its value if the engine and transmission numbers don’t match. The use of putty or fiberglass to patch rust spots could destroy the value of an otherwise beautiful MG. If you don’t know about such matters, take an expert in car restoration with you to inspect the vehicle.

The value of an individual vehicle can vary greatly depending on relatively small differences in condition or restoration techniques. A $50,000 Corvette may lose 20% of its value if the engine and transmission numbers don’t match.

But don’t rule out buying classic cars from a distance. Never buy an antique automobile sight unseen. But when you finally locate that triple white ‘55 Crown Victoria like the one you had in college, don’t pass it up just because it’s 2,000 miles away in Montana. For less than $400, you can contract with a nationwide vehicle inspection service to screen and road test virtually any car in the continental U.S. or Canada. Within 72-hours, Hartford-based Automobile Inspections, LLC, will inspect, testdrive, and provide a complete condition report on any car within 25 miles of one of its 275 offices throughout North America. Here’s where to learn more: • antiquecars.com is an online marketplace for vintage vehicles with listings for classic automobiles, trucks, and motorcycles. • buyclassiccars.com offers auto transportation, shipping services, and links to classic and antique car clubs in all 50 states. • collectorcartraderonline.com is an Internet listing service boasting over 125,000 vintage-car listings plus links to financing, warranties, and other resources. • hagerty.com takes you to a specialist in insuring classic and antique automobiles. • automobileinspections.com takes you to a nationwide vehicle inspection service specializing in collector cars. • Ultimate Collector Car Price Guide 2003, by Cars & Parts Magazine, about $20, at amazon.com and other bookstores.

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Sports memories: not child’s play It’s a fragile marketplace, but some items have fetched big prices

If you think sports stuff is kid stuff, think again. The market for sports collectibles has exploded from a quaint hobby in the 1950s and 60s into a $20 billion business where fortunes can be made or lost at the crack of a bat. A garden variety Ty Cobb bat used between 1916 and 1920 sold at auction early in 2002 for $55,739, while Ted Williams’ game-used jersey from 1957 went for $71,141. Popularity is one factor in resale value. The 70th home-run ball by affable Mark McGuire fetched $2.7 million. Gregarious Sammy Sosa’s 66th home run ball from 1998 sold for $150,000. But the 70th by surly Barry Bonds went for a mere $52,500. Scarcity and condition can play important roles. When Cal Ripkin, Jr., retired in 2001, baseballs signed by the former Orioles shortstop jumped more than 50% to $150+. When the Yankee Clipper, Joltin’ Joe DiMaggo, passed on in 1999, the value of his autographed balls doubled to more than $250 each. The trunks worn by Muhammad Ali during his first fight with Smokin’ Joe Frazier sold for $86,474. A rare 1954 Hank Aaron trading card drew $100,000, and an even scarcer Honus Wagner card from the early 20th century went for a whopping $1.26 million. Be wary of cards in less than excellent condition. Cards are graded on a scale of 1 to 10, and any score less than 8 (near flawless) can render a card worthless. Target one corner of the sports world. A collection tightly focused on a niche has been invariably more valuable than an assortment of random pieces. Examples include NFL football jerseys and authenticated items from the Negro baseball league, the Los Angeles Lakers, and Arnold Palmer. Autographed sports items appear to be heating up. Same is true for snowboarding memorabilia. And there’s a surprisingly strong market for funky, 1960s-style bobble-head dolls featuring the likes of Joe Namath and tennis legend Billie Jean King ($200 to $300 each). However, the baseball card market has cooled considerably after peaking in the 1980s. The risk of frauds and fakes is still high. Forged autographs and bogus artifacts have always plagued the market for sports collectibles, and the problem has intensified with the increase 107

Cards are graded on a scale of 1 to 10, and any score less than 8 (near flawless) can render a card worthless.

in sports memorabilia sales over the Internet. Researchers at the sports collecting newsletter Sweet Spot studied 100 baseballs that were offered for sale on eBay, each purporting to be signed by Babe Ruth. The verdict: only 15 of the balls were authentic.

Forged autographs and bogus artifacts have always plagued the market for sports collectibles, and the problem has intensified with the increase in sports memorabilia sales over the Internet.

Technology is making it tougher for scam artists. New hightech certificates of authenticity are cutting down the opportunity for fraudulent practices in the collectibles market by using matching holograms on the item and the C.O.A. Other authentication assurance companies such as the Upper Deck Company and PSA/DNA have further reduced the risk by assigning witnesses to signing sessions by participating athletes. Learn more about sports memorabilia: • becket.com takes you to an Internet price-guide service showing current values for trading cards and other sports memorabilia. • psadna.com gives you a company that authenticates vintage autographs of sports and political figures for a fee. It offers online samples of real autographs for comparison purposes. • azww.com/mall takes you to an online shopping mall of Internet dealers and Web sites that specialize in sports autographs and other collectibles. • sweetspotnews.com is an online newsletter for collectors and investors in sports memorabilia. • collectorcafe.com links to a variety of online sources for sports memorabilia and collectibles, including specialty sites for Olympic items, baseball cards, boxing memorabilia, and 19th-century sports collectibles. • iTradeCards.com is an Internet sports collector-card trading community offering members an opportunity to list, trade, and auction cards online with no fee. • upperdeck.com is a sports memorabilia and trading-card marketer that provides autograph authentication.

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Where to buy or sell collectibles Learning about the marketplaces is a good first step for a novice

The best items can often be found at the top auction houses. The finest art, the most valuable antiques, the rarest books, and many of the most intriguing and pricey collectibles are not sold privately or by dealers but rather at high-profile auctions. Christies and Sotheby’s have long hosted the top-dollar auctions, though their reputations were tarnished last year by charges of price fixing. Both are venerable London-based institutions, with a string of international branches including New York and (for Christies) Los Angeles. Second-tier auction houses also attract bidders. Those would include such respectable but less stodgy companies as Guernsey’s, in New York, and Butterfields and Butterfields, in San Francisco. The first brought in the astonishing price for Mark McGuire’s 70th home run ball as well as eye-popping dollars for Jerry Garcia’s Grateful Dead guitars. Butterfields and Butterfields is a reputable, 135-year old auction house; in 1999, it was acquired by Internet upstart eBay. Be aware that you will pay coming and going at auction. Whether you are selling a Dickens first edition, Grandma’s emerald necklace, or Dorothy’s ruby slippers, an auction house will hit you with a consignment fee in a range of 2% to 15% of your proceeds. You may also incur shipping and handling fees that could mount up fast if you’re selling, say, a vintage Dusenberg. On the other end of the transaction, successful bidders are typically hit with a buyer’s premium of at least 10% and sometimes 15% of the hammer price. The consolation: Even under a worst-case scenario, auction transaction costs won’t come close to the 50% or 100% markup typical of retail sales of collectibles. Don’t overlook the Internet marketplace. But do tread carefully if you buy, sell, or swap items online. Since online buyers are unable to inspect items first hand prior to purchase, it’s not surprising that frauds, fakes, and forgeries abound on Internet sites. eBay is the 800-pound gorilla of Internet auction sites. This one Web site offers an astonishing number of items on sale at any given time, including listings for millions of collectibles from kitschy Pez dispensers to vintage Corvette convertibles. During a single day last month, eBay had active auctions going for 109

An auction house will hit you with a consignment fee in a range of 2% to 15% of your proceeds. You may also incur shipping and handling fees that could mount up fast if you’re selling, say, a vintage Dusenberg. On the other end of the transaction, successful bidders are typically hit with a buyer’s premium of at least 10% and sometimes 15% of the hammer price.

118,683 pieces of fine art, 130,674 antiques, 16,328 first edition books, and 152,327 pieces of sports memorabilia. While it is the world’s largest Internet auction site, eBay is not the only online auctioneer. Yahoo, Amazon.com, uBid, Abidon, and dozens of others have joined the party, as have Sotheby’s, Christies, and other big traditional auction houses with online subsidiaries.

An auction house will hit you with a consignment fee in a range of 2% to 15% of your proceeds. You may also incur shipping and handling fees that could mount up fast if you’re selling, say, a vintage Dusenberg. On the other end of the transaction, successful bidders are typically hit with a buyer’s premium of at least 10% and sometimes 15% of the hammer price.

Your best marketplace may be fellow collectors. Ultimately, experienced collectors manage to cut out the middleman altogether and deal with one another. As you become more deeply involved in your pastime, you will have an opportunity to meet and compare war stories with others who share your passion. You will see the same faces again and again at car shows, art exhibits, or wine tastings. Make an effort to get to know and learn from such people. Eventually, some may become trusted resources who will supply missing pieces to your collection at fair prices and buy surplus items from you without the hassle of dealing with strangers. Here are some more resources that may broaden your understanding of your market: • www.collectoronline.com offers a directory of more than 1,100 collectors clubs, with links to such diverse groups as the Antique Automobile Club of America and the International Society of Antique Scale Collectors. • winebid.com, 175 Tower Road, Napa, Calif. 94558 (1-888 6388968). It’s the granddaddy of online wine auctioneers. • wwar.com takes you to World Wide Art Resources and its extensive listing of art galleries throughout the world—and to information on upcoming exhibits. • Christies, 20 Rockefeller Plaza, New York 10020 (1-212 6362000), and 360 North Camden Drive, Beverly Hills 90210 (310 385-2600). Those are the U.S. branches of the legendary London auction house. • Sotheby’s, 1334 York Avenue (at 72nd St.), New York 10021. That’s where you will find the North American salesroom for main London rival of Christies.

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Chapter 7

Planning to wed? OK, let’s get practical Few marry knowing a thing about money; if that’s you, trouble ahead

Dee Balliett

T

oo many newlyweds start life together blissfully unaware of the sacrifices they will need to make in order to hold

their marriage together, to ensure a financially secure lifestyle, and, just maybe, to create a legacy that helps to define their purpose in life. Rent overwhelms romance. Going into marriage, few couples realize that financial pressures are likely to crowd the stampeding hormones out of their relationship. In fact, the inability to establish financial objectives or to achieve them can destroy a marriage. I’d like to help you and your family to avoid that heartbreak. It is as common as dirt, and that’s the first harsh fact you two need to face. There’s more to marital life than fun, passion, and good intentions. You must meet your day-to-day need for food, shelter, health care, clothing, and basic transportation, not to mention such other real-life considerations as insurance premiums, debt service, and investing. That’s right: Investing is a necessity. Lotteries and gambling casinos make someone rich every week, but that someone will never be you. Odds are better that you will be killed or maimed by a donkey. The odds on your achieving significant financial security together are no better than 1 in 10, and yet your chances of becoming multimillionaires in the next 30 or 40 years are nearly 100% if you invest nothing more over that time than the money you gain from not smoking, not doing illegal substances, and avoiding excessive alcohol and other empty calories. Your chance of gaining financial comfort increases with knowledge. One example: Wealth is measured by the capital accumulated, not by the money spent. Another: Dual IRAs are not the fastest way to build wealth, but they may be the surest and easiest. A third: Investing in monthly increments tends to be more effective than investing the total sum once yearly. Another: Noload mutual funds tend to outperform load funds. Still another: ETFs (exchange traded funds) can outperform no-load funds. There’s a lot more to learn. Here’s what we cover in the next eight pages: 111

Lotteries and gambling casinos make someone rich every week, but that someone will never be you. Odds are better that you will be killed or maimed by a donkey.

• Pay off debts before tying the knot. Nothing sinks a marriage faster than a load of owed. • Money management for newlyweds. Decide up front what’s his, hers, and ours. • Register online for wedding gifts. The Net can help you begin marital life with the stuff you need. • Avoid these wedding rip-offs. What to watch out for long before you say I do. • Put a lid on wedding costs. Cut expenses without crimping your style. • Watch out for ‘the marriage penalty.’ It’s a nasty tax surprise for many newlyweds. • Learn the financial ropes. Money management can help a marriage succeed. • Your quest for financial security. You needn’t gamble to build your family’s financial safety net.

70 Billion years BC

Hard to say. I’m only 60. Maybe I will see it if I live long enough.

You’re right. No wonder they loaf around the cave all day while we’re out hunting and gathering. Maybe we should stop doing everything for them.

CH & GB 2000

Do you think men will ever be useful? I could use one every now and again!

Think we could teach them to hunt and gather? We can’t even teach them to collect firewood!

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They know so little, what do they find to talk about?

They tell each other why it’s better to sit around the cave while we do the hunting and gathering!

newlyweds

Pay off debts before tying the knot Nothing sinks a marriage faster than a load of owed

Make financial sacrifices now to strengthen your marriage later. A successful transition from single to married life is tough enough under the best of circumstances, so don’t put added strain on your marriage by starting off deep in the red. Make a meaningful effort to pay off (or at least pay down) the debts you and your spouse-to-be have accumulated. The sacrifices you make now may include working overtime, taking on a second job, and placing yourselves on a pre-marital budget, but they will pay dividends later—possibly by saving your marriage or keeping you out of bankruptcy proceedings. Don’t add to your debt burden with an extravagant wedding. Or an overly expensive honeymoon. Money spent on them could be enough, if invested, to create the financial security the two of you will need to rely on when your earning years are behind you. For a rough idea of the implication of the alternative of long-term investment growth (at 11%), estimate the wedding’s cost and multiply by 26.71 for a forecast of potential investment growth over the next 30 years, 79.83 for the next 40 years, or 238.64 for the next 50. Examples: $10,000 invested rather than spent could grow to $267,100 in 30 years, $798,300 in 40, $2,386,400 in 50. And that’s for each pot of $10,000 invested. Wedding tabs in a range of $25,000 to $50,000 are not commonplace today, but neither are they rare. We’re not telling you to give up the fantasy of a dream wedding. We are asking you to understand clearly the long-term financial implications—for yourselves, yes, but also for the bride’s parents if they’re paying for the big wedding. Start now by paying down your worst debts. In most cases that means credit-card debt, which saddles consumers with double-digit interest charges. Next, settle up on other secured and unsecured debts, starting with those requiring the highest interest charges. Student loans or other long-term debts with low or subsidized interest rates should be the last ones to pay. Use debt consolidation strategies to reduce the burden. A good debt-consolidation plan can reduce monthly higher interest debt by refinancing, obtaining an equity line of credit, or negotiating with lenders for lower interest and longer payments. Realize your spouse’s financial problems will haunt you both. Any joint accounts, including bank and brokerage accounts, auto 113

We’re not telling you to give up the fantasy of a dream wedding. We are asking you to understand clearly the long-term financial implications.

loans, credit cards, and home mortgages, will show up on each spouse’s credit reports. In community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), debts incurred during a marriage are considered joint debts, even when spouses maintain separate credit.

A pre-nup may be worth considering if either marriage partner has business holdings that may turn sour.

A pre-nuptial agreement may shelter one spouse from the debts of the other. Typically, such agreements protect the assets either partner brings to the marriage. Also, they can shield one spouse from the other’s financial baggage. A pre-nup may be worth considering if either marriage partner has business holdings that may turn sour, dependent children from a previous marriage, or a financial obligation to provide care for elderly parents. If you’re facing disaster, bankruptcy may be the only way out. Filing for personal bankruptcy is an admittedly horrible way to start a marriage, but desperate circumstances may demand drastic solutions. Be aware, however, that the Federal government has been under pressure to tighten up the rules governing personal bankruptcy filings, so look carefully before you leap. More help on reducing pre-marital debt: • kiplinger.com is operated by the editors of the widely circulated personal finance newsletter. The site offers basic general advice on family debt reduction and budget balancing. • Credit Card & Debt Management: A Step-By-Step How-To Guide for Organizing Debt & Saving Money on Interest Payments, by Scott Bilker, Press One Publishers, March 1996, $19.95. • How to Get Out of Debt, Stay Out of Debt and Live Prosperously, by Jerrold Mundis, March 1990, Bantam Books, $7.50. • Richer or Poorer: The Money Book for Couples, by Ruth L. Hayden, Health Communications, September 1999, $12.95.

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Money management for newlyweds Decide up front what’s his, what’s hers, and what’s ours

Don’t let money matters strain your marriage. All the surveys of newlyweds indicate that the most frequent cause of disagreements during the first year of marriage is money. Much of the discord involves disagreement in the management of the couple’s finances. The disharmony puts stress on the marital relationship at the very time that the bonds should be strengthening. What to do? Before you wed, discuss your financial situation openly. Don’t wait until the honeymoon to break the news that your job is in jeopardy, that you have committed to support an elderly grandmother, and that you’ve just gone through your second bankruptcy. Share all the details of your financial situation early in game. Full Monte disclosures before the wedding tend to promote mutual trust and to prevent financial misunderstandings during the marriage. But if, instead, the truth about your financial plight causes your spouse-to-be to rethink marriage plans, it’s better to discover how fragile the relationship is before rather than after the wedding. Start by deciding whether to merge your finances. A generation ago, most newlyweds combined their checking and savings into a family account. With most couples not tying the knot until their late 20s or 30s, today’s newlyweds tend to be more financially independent then their parents were. Many bring investment portfolios, real-estate holdings, and business interests to the marriage, so their financial affairs tend to be more complicated. Many two-income couples now begin marriage by keeping their personal checking accounts separate but opening a third account—a joint account—to cover the household expenses they intend to share. Elect a Chief Financial Officer for your household. One spouse (not both) should take responsibility for paying the household bills, making sure deposits are made, and handling other routine financial chores. For many couples, this election is a nobrainer: The spouse who can balance a checkbook gets the job. Expect the best from your marriage, but plan for the worst. Part of the responsibility you assume when you get married is assuring that your spouse is not left financially vulnerable in the event of your untimely death. That could mean changing the beneficiaries on your life insurance policies and retirement 115

Share all the details of your financial situation early in game.

plans and making sure no savings or brokerage account will ever pass through probate.

Many two-income couples now begin marriage by keeping their personal checking accounts separate but opening a third account—a joint account— to cover the household expenses they intend to share.

Joint ownership is not always a good idea. Liability issues vary by the state and the situation, and they can change. My lawyer tells me an account listed as “John or Jane Doe” automatically becomes the property of the surviving spouse, but “John and Jane Doe” can make the account balance subject to seizure by other heirs of the deceased spouse. Don’t commingle personal credit. It’s fine for a married couple to have a joint charge account, but it is important for both spouses to maintain credit separately. Newly widowed or divorced individuals who fail to follow that advice may discover that they must rebuild their credit from square one. Bring your household finance management into the 21st century. A simple, inexpensive personal finance management software program (we like quicken.com) can let you organize household finances efficiently, establish a family budget, and automate your billpaying. Many online services are available now to speed billpaying (also, we like paytrust.com), and many banks now offer banking-billpaying by phone. Additionally, many employers offer to pay employees and contractors via direct electronic deposits into their checking accounts. Also consider lowtech solutions, such as carbon-backed checks that eliminate the risk of forgetting to record checks when they are written. Here’s where newlyweds can find help sorting out finances: • wedding.weddingchannel.com gives tips for newlyweds on finances and more. • marriage.about.com/cs/newlyweds/ offers practical tips on family financial matters facing newlyweds. Includes a financial to-do list for married couples and an agenda of financial issues for couples to discuss at least annually. • Money Matters for Newlyweds, by Larry Burkett, October 2002, Thomas Nelson, $13.95. Basic financial do’s and don’ts for the freshly married.

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Register online for wedding gifts The Net can help you begin marital life with the stuff you need

Join the 21st Century by registering for wedding gifts online. Internet gift registries allow guests to shop for wedding presents, make purchases, and have them shipped to the bride by making a few mouse-clicks. Thousands of major retailers, from Nieman-Marcus to Tiffany and from Target to Home Depot, allow newlyweds-to-be to set up gift registries online as well as in their stores. The couple selects the specific items they want from each merchant, and each item purchased by guests is promptly deleted from the wish list. Convenience is just one of the benefits of Internet wedding registries. Your guests will appreciate being able to shop from home to find the perfect gift for your wedding, but they’ll love the fact that many online purchases will be free of state sales taxes. As online wedding registries become more user-friendly, some are offering new services and features, such as a partial payment option that allows your guests to chip in for part of the cost of an expensive gift. Simplify gift shopping even more by using a universal registry site. Rather than listing all the gift registries selected by the bride, some couples now direct their wedding guests to a master site (e.g., OrganizedRegistry.Com), which provides online links to the various registries. The universal sites create a Web page for each couple, allowing shoppers to browse through the newlyweds’ wish list, shop for wanted items at specific registries, or find better deals on the Internet. Create a ‘travel registry’ to make your dream honeymoon affordable. A growing number of online gift registries are now offering couples the opportunity to pass up china and silverware in favor of a snorkling excursion in Aruba, a day’s car rental in Maui, or a contribution toward the air fare for their honeymoon. For a flat $125 registration fee, Giftpile allows couples to list all of their honeymoon expenses (e.g. air fare, car rental, hotel charges, excursions, and activities) and enables guests to make online credit-card contributions of $15 and up to offset the various costs. TheBigDay.Com, a competing online honeymoon registry, offers free registration but imposes a 9% fee on all payments made. Yes, you can register for a down payment on your first home. Couples who need a house more than a $200 gravy boat should 117

Couples who need a house more than a $200 gravy boat should check out one of the “bridal down payment registry” programs being offered now by banks and other lending institutions.

Several online registries, such as CharityGift.Com and Felicite.Com, make it easy for brides to encourage charitable donations in lieu of wedding presents.

check out one of the “bridal down payment registry” programs being offered now by banks and other lending institutions. Newlyweds who register collect interest on wedding gifts deposited in their accounts but also may qualify for a reduction in closing costs if the new home is financed by the sponsoring bank. Although a Federal down-payment bridal registry program set up by the Department of Housing and Urban Development during the 1990s has been suspended, individual banks across the country continue to sponsor variations of the accounts. Register for charitable contributions in lieu of gifts. Well-heeled newlyweds who don’t need or want another set of salad bowls are giving their guests the option of making a donation to a favorite charity or cause in place of a traditional wedding gift. Several online registries, such as CharityGift.Com and Felicite.Com, make it easy for brides to encourage charitable donations in lieu of wedding presents. Other sites, such as IGive.Com, will contribute up to 12% of the price of purchased items to a charity chosen by the bride and groom. Here are some valuable resources: • giftpile.com is an online wedding gift registry site that allows brides to register for such nontraditional items as contributions to the honeymoon fund. • organizedregistry.com is a master site for Internet gift registries. It enables brides to provide guests with links to all of her other gift registries, both online and off. • weddingchannel.com is another site that lets couples consolidate bridal registries. • findgift.com offers a searchable database of wedding gifts for couples to use when assembling their own online bridal registry. • SunTrust Bank, 1-800 634-7928, offers “Bridal Registry Accounts” at branches throughout the Eastern U.S., enabling friends and family to donate to a couple’s housing fund.

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Avoid these wedding rip-offs What to watch out for long before you say I do

Beware of wedding industry practices that can drain your budget dry. At this writing, the cost of a wedding today averages nearly $20,000. In some parts of the country where elaborate nuptials are the norm, expenses can easily run $40,000 to $50,000 or even more. As steep as the costs are, they may climb even higher if you fall victim to one of the many rip-off practices common within the wedding industry. Here’s what to watch out for: • Hidden charges, service fees, and gratuities. It’s not unheard of for caterers, florists, limo services, or the operators of reception facilities to offer a low-ball price but to make up for the discount with additional fees or mandatory gratuities for service personnel that can add 10%, 20%, or more to your costs. Read the fine print and take such charges into account when reviewing bids. • Bait-and-switch vendors. Watch out for photography studios that promote professional work but farm out their wedding assignments to amateur stringers. Some wedding bands employ a similar racket, using other musicians to record tracks on their demo videos. • Wedding gown ‘preservation’ rip-offs. Unscrupulous cleaning services have charged brides $250 to “clean and preserve” their expensive wedding gowns. For their money, some brides got an empty storage box. • Outrageous catering and reception hall charges. Some hotels and other facilities charge $2 to $5 per guest, simply for slicing the wedding cake. Others make stiff extra charges for ice, clean up fees following the wedding, or fruit punch (at $35 a gallon) served at the reception. • Wedding industry kickback schemes. It’s not unusual for hotels or wedding reception facilities to maintain a preferred list of caterers. If yours isn’t on the list, he may have to buy a license (at your expense) to serve in the facility. Similarly, wedding planners often supplement the $2,000 to $3,000 fees they charge clients by accepting kickbacks from vendors they refer. • Florists who can smell money a block away. Some have admitted adjusting their charges based on the make of car the 119

It’s not unheard of for caterers, florists, limo services, or the operators of reception facilities to offer a low-ball price but to make up for the discount with additional fees or mandatory gratuities.

bride drives to their shop. (Leave the SL in the garage). Others who suspect a big-budget affair is in the works recommend more costly out-of-season flowers or exotic blooms flown in from Hawaii at a stiff mark-up.

Some hotels and other facilities charge $2 to $5 per guest, simply for slicing the wedding cake.

• Caterers without health permits. You should get at least three bids on each major cost element of the wedding, but the lowest bidder is not always a bargain. Hiring a caterer who lacks the required permits or licensing to serve food in your area may be an expensive and unhealthy mistake. • Photographers who “rent” your wedding pictures to you. After shelling out thousands of dollars to hire a wedding photographer, some brides and grooms learn that the negatives are not part of the deal. After the first batch, each additional print is extra—sometimes as much as $40 for a simple 8 by10 reprint. Take common-sense precautions to avoid wedding industry bad apples. Research the reputation of your vendors with your local Better Business Bureau or Office of Consumer Affairs. Ask for a client reference list, and call to verify that others have been satisfied with the company’s service. Check for the required health permits and licenses. Get in writing all prices, products, dates, name brands, and policies regarding deposits and cancellations. Read through the fine print for hidden fees, service charges, and other unpleasant surprises. Pay with credit cards whenever possible, and keep all receipts in case a refund, return, or adjustment is required. Find help avoiding unconscionable wedding practices: • How to Avoid the Scams and Ripoffs of Planning Your Wedding, by Thomas Riccardo, Brenda Becker (Editor), January, 1994, Club Wed Publications, $9.95. • Weddings For Dummies, by Marcy Blum, Laura Fisher Kaiser, 1997, John Wiley & Sons, $21.99. Includes advice on avoiding overcharges and other wedding industry scams. • Fireman’s Fund Insurance Companies, 777 San Marin Dr., Novato, Calif. 94998; 1-800 227-1700. This carrier insures weddings. Premiums start at $195.

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Put a lid on wedding costs Cut expenses without crimping your style

Don’t start your marriage in debt because of an over-expensive wedding. In 2002, 70% of newlyweds foot the bill for some or all of the cost of their weddings. Couples are waiting later in life to tie the knot, and parents are often tapped out after paying steep college costs. Choosing a wedding that leaves you deep in red ink is a bad way to launch a marriage. There are good ways to reduce wedding costs without looking like pikers. Begin by setting a realistic budget for your wedding. Meet with both sets of parents early in the game to determine how much they are willing and able to pony up for the wedding costs. Next, factor in your own resources, plus the amount you will be able to save toward expenses before the wedding. Then draw up a workable budget, and stick to it—without borrowing. Timing is everything. Saturday is the most expensive day to get married, and brides who insist on a 7 p.m. reception following the ceremony pay dearly for that time slot. Cut costs by letting the forces of supply and demand work for you. Schedule your reception for a Friday evening or as a Sunday brunch, and you may trim costs by 10%, 20%, or more. Then, too, facilities hosting weddings tend to offer discounts of up to 40% for Monday-through-Thursday receptions, and so do photographers and limo services. A luncheon reception can save 30% off the price of a dinner reception. Trim costs where it doesn’t show. Do you really need a $900 wedding cake? How about the wedding gown? Switching from top quality satin to a lower grade of the same fabric can cut the cost of the dress in half. Couples on a budget should decide what’s important to them, and concentrate on economizing elsewhere. Slice expenses by renting rather than buying. Rather than spend a king’s ransom on floral decorations, rent flowering plants and greenery from a local nursery at a fraction of the price. Those $150 to $200 bridesmaid gowns can often be rented at half-price. Vendors like Attractions Bridal and Formal Wear (1-808 326-1113) rent both bridesmaid dresses and wedding gowns. Sign up ‘sponsors’ to pick up part of the tab. Tacky, perhaps, but true: Couples with the right business contacts (or the right 121

Facilities hosting weddings tend to offer discounts of up to 40% for Monday-throughThursday receptions, and so do photographers and limo services.

Rent flowering plants and greenery from a local nursery at a fraction of the price.

guest list for their wedding) may be able to line up corporate sponsors. While this strategy may require more chutzpah than you can muster, others have cut the cost of their weddings significantly through sponsorship arrangements. Erica Armour and Nathaniel Hughes found sponsors to provide nearly $15,000 worth of supplies and services, and the contributors were acknowledged on the back of the wedding invitations and on table cards at the reception. “Natasha,” another recent bride whose sponsored wedding was chronicled in the New York Times, allowed her sponsors to sell products during the reception and advertise on her personal Web site. Here’s where not to cut corners. You’ll be sorry if you try to economize on wedding invitations by using second-rate printing or substandard stock. The same goes for photography and videography. Many would also put reception entertainment in the untouchable category. A disc jockey may cost half, but a good, live band may be worth full price. For more tips on holding down wedding costs, check these resources: • theknot.com offers comparative prices and information on maybe everything. Includes directories of wedding suppliers and discussion groups where engaged couples can share information and advice with others. • smartmoney.com/divorce offers suggestions for trimming wedding expenses in ways that your guests won’t notice. • Bridal Bargains, by Alan & Denise Fields, Windsor Peak Press, $14.98. The authors present many strategies for holding down wedding costs. • www.beautiful-boquets.com rentals offers silk designer wedding flowers, including bridal bouquets, bridesmaid bouquets, corsages, and boutonnieres at up to 70% off the cost of buying live flowers. Dial 1-321 5387. • The Budget Wedding Sourcebook, by Madeline Barillo, Contemporary Books, March 2001, $17.95. More help holding down the expenses.

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Watch out for ‘the marriage penalty’ It’s a nasty tax surprise for many newlyweds

Your tax bite may be bigger after the wedding. Joint-filing married couples still benefit from lower income-tax rates than single filers, but the reduction isn’t enough to offset the progressive nature of the U.S. income tax. When two incomes are combined, newlyweds who had been taxed at 15% as singles often find that their marginal tax rate has ballooned to 27%, 30%, or higher when they file jointly. Over 21 million U.S. couples find themselves on the short end of the marriage penalty. The 2003 Tax Act lessens the marriage penalty a tad but doesn’t make it disappear. (For detail, go to www.irs.cov.) If both earn $50,000, each now pays more in taxes. As joint filers, a two-income married couple reaches the 27% tax bracket for the 2002 tax year when their combined taxable income totals $46,700. Had they remained single, they could earn as much as $55,900 ($27,950 each) without moving out of the lower 15% bracket. The standard deduction for joint filers is only 1.67 times larger than deduction allowed for unmarried singles. Social Security and Medicare taxes add to the marriage penalty. In addition to a bigger income tax liability, two-income marrieds are often forced pay more for Social Security and Medicare than similarly situated singles. For 2002, the combined rate is 7.65% on the first $84,900 of earnings, plus 1.45% on the excess. And if one spouse is self-employed, the tab for Social Security and Medicare jumps to 15.3% and 2.9% for the balance over $84,900. Also, you lose valuable tax breaks after marriage. Joint filers tend to lose eligibility for valuable tax benefits when their incomes are combined. Example: two individuals each earning $100,000 lose ground when they marry because their combined adjusted gross income prevents them from taking full advantage of the income-tax breaks they were eligible for as singles. In 2002, the new $600 per child tax credit loses its punch after $110,000; the opportunity to open a Roth IRA or an Education IRA begins to disappear when family income passes $150,000; the value of itemized deductions begins to phase out after $137,300; and the $3,000 personal exemptions begin to vanish when family AGI (adjusted gross income) rises to $206,000. Don’t count on ‘marriage tax’ relief. Eliminating the “marriage penalty” was a key objective of the sweeping tax relief act passed 123

Eliminating the “marriage penalty” was a key objective of the sweeping tax relief act passed by Congress in 2001, but it’s way too soon for newlyweds to celebrate.

by Congress in 2001, but it’s way too soon for newlyweds to celebrate. That law gradually increases the 15% tax bracket for married couples until it is twice that of singles. Also, the standard deduction for joint filers rises from $7,600 to $9,100. But both changes aren’t scheduled under present law to begin to take effect until 2005, and it will take another four years to phase in all the relief.

Tax considerations along with other factors such as the soaring cost of childcare may leave some couples money ahead with one income rather than two.

A surefire solution: one breadwinner per family. Tax considerations along with other factors such as the soaring cost of childcare may leave some couples money ahead with one income rather than two. A two-income couple earning a combined $140,000 in a high tax state such as New York could save $21,000 in Federal and state taxes by getting by on a single income of $80,000. If they have children, they become eligible for up to $600 per child in Federal child credits because family income dropped below the $110,000 threshold. That’s peanuts, though, compared to the reduced cost of child care (an average of $4,000 to $13,000 annually per child) if one parent stays home with the kids. Add in another $500 monthly savings in the costs of transportation, wardrobe, and meals away from home, and the case for one spouse not working grows stronger. Learn more more about the tax penalty and how to mitigate it: • smartmoney.com includes an online marriage penalty calculator to help estimate the tax consequences of joint filing. • savewealth.com also offers information and general advice on tax issues facing families. • heritage.org takes you to an advocacy group that supports legislation to reduce the marriage penalty and lower taxes for families. • You Can Afford to Stay Home With Your Kids: A Step-By-Step Guide for Converting Your Family from Two Incomes to One, by Malia McCawley Wyckoff and Mary Snyder, Career Press, June 1999, $14.99. • Taxes, Benefits & Family Life: The Seven Deadly Traps, by Hermione Parker, Cornet Books, January 1995.

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Learn the financial ropes Money management can help a marriage succeed

Don’t let financial illiteracy threaten the security of your marriage. Too many newlyweds start married life with good jobs, a strong educational background, a promising future— and not a clue about how to handle their personal finances. That’s no laughing matter. Financial mistakes made early in a marriage can easily limit a couple’s options for the rest of their lives. Our Internet site (BalliettFS.com) offers massive assistance, including links that take you to scads of other good, useful sites. Start by following our earlier advice on getting rid of debt. If you owe $11,000 on a credit card that charges 18% interest and make the minimum $275 payment each month, it will take you over 32 years to pay off your debt. You will pay $16,115.29 in interest charges in that time. Hike your monthly payments to $500, and you’ll pay off your credit card debt in just 27 months and save over $13,000 in interest charges. Comparison-shop competing credit card issuers (bankrate.com). Also, pay your bills on time, don’t bounce checks, and don’t get overextended. Once debts are under control, start building a rainy-day fund. It’s hard to save when you’re just starting out, but some find it easier to put money aside for emergencies before paying other bills and expenses. Your goal should be to set away enough readily available cash to cover your household expenses for three to six months—in a high-yield savings account, a money market account, or a money market mutual fund. Create a spending plan that will help you achieve your goals. It’s the roadmap you’ll need to keep on the right track and eventually arrive at long-term goals such as a down payment on a house, a secure retirement, or college for the kids. Start by listing all of your fixed monthly expenses, including the rent or mortgage payment, car loan, groceries, utilities, entertainment, taxes, and savings. Total the outgo, compare it with your combined income, and the surplus is available for additional outgo. If you see a deficit rather than a surplus, you’ve got to trim expenses, increase income, or do both. The trimming will be easier with that detailed list of expenditures in front of you. Spend wisely to live well. The listed price on most big-ticket items such as cars and houses is negotiable—don’t pay sticker price. Comparison-shop for smaller line items. Use the Internet 125

Start by listing all of your fixed monthly expenses, including the rent or mortgage payment, car loan, groceries, utilities, entertainment, taxes, and savings.

to hold your living costs down. Airlines, hotels, and other segments of the travel industry typically reserve their deepest discounts for online purchasers, and other products and services may also be available at cheaper prices on the Internet. Use shopping “bots” such as C-net or MySimon to find the lowest prices on the merchandise.

Resist pressure from your buddy, the insurance agent, and shun any life insurance accompanied by cash values.

Above all, don’t overpay for insurance. Resist pressure from your buddy, the insurance agent, and shun any life insurance accompanied by cash values. Term insurance provides pure protection. Whole life insurance and other cash-value policies combine term insurance with cash values, and they have severe, complicated problems that require several page to unravel. For the same outlay, you can buy a 20-year level-premium term policy with a much higher death benefit and still have enough left over to cover disability insurance coverage. Shop aggressively for term life policies and other forms of insurance— especially automobile and homeowner’s coverage. The money you save may be all the after-tax cash you will ever need to invest to achieve financial security. Those are merely highlights. Here’s where to find more help: • money.msn.com offers information and general advice on a broad range of personal-finance issues. • www.moneymangement.org takes you to free credit counseling and money management advice by nonprofit Money Management International, 1-800-899-9347. • worldwidelearn.com is an online directory of college courses in personal finances offered over the Internet. • Personal Finance for Dummies, by Eric Tyson, John Wiley & Sons, March 15, 2000, $21.99. • Bonnie’s Household Budget Book: The Essential Guide for Getting Control of Your Money, by Bonnie Runyan McCullough, St. Martin’s Press, August 2001, $12.95.

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Set your course for financial security You needn’t gamble to build your family’s safety net

Start with IRAs. For 2003, the contribution limit is $6,000 for couples and $3,000 for singles under age 50—and, for those 50 to 70, $7,000 for couples and $3,500 for singles. The limits are scheduled to rise steadily through 2008, when they will reach $10,000 for couples and $5,000 for singles under age 50. For those 50 to 70, the limits are $12,000 for couples and $6,000 for seniors—for traditional Individual Retirement Accounts. For Roth, the maximum contributions are the same, but those with earned income past age 701/2 may make after-tax contributions for tax-free reinvestment of interest, dividends, and capital gains. That’s right: The tax situation is better than IRA critics know. For IRAs that meet certain tests, those yearly contributions in a range of $3,000 to $12,000 are tax-deductible. With any IRA, capital gains can be realized tax-free simply by selling the appreciated asset. That feature can avoid heavy losses when the stock market begins to plummet as in 2000. What’s more: Roth IRAs offer this tax bonanza: The money can come out free of Federal income taxes, with no need to start withdrawals at age 701/2 or any other age. Roth capital can continue to accumulate tax-free and untouched for as long as you wish, raising the wealth potential to dynastic proportions. IRA wealth-building potential is mind-boggling. An18-year-old investing for a steady 11% can become an IRA millionaire by age 50. If eventually married to a kindred spirit, same age, their two IRAs could exceed $4 million by age 62. Or, starting older with no savings, with each age 50 in 2002, again using the 11% assumption, a couple could build more than $700,000 in their IRAs by age 70. Also: Consider the potential of profit-sharing and pension plans. At this writing, the upper limit on an individual’s contributions to a profit-sharing plan is now $40,000. A 40-year-old owner of a successful business or professional practice can launch a plan in 2002 and have a reasonable chance of watching the portfolio grow (at 11%) to $8,800,000 by age 70. Add two IRAs: now, $9,500,000. If the spouse, too, qualifies for a $40,000 yearly contribution, the total projects to $18,000,000. Nice careers! Yes, there are complex rules to follow and expenses, too. The total annual administration fee may run from about $750 to 127

An18-year-old investing for a steady 11% can become an IRA millionaire by age 50. If eventually married to a kindred spirit, same age, their two IRAs could exceed $4 million by age 62.

Given the pot at the end of the rainbow, pension expenses have always seemed to me to be reasonable if not absurdly low.

$1,250 for a group of six or fewer employees (including the boss). The fees will be higher for a larger group; they include the annual reports for participants and the IRS Form 5500. Given the pot at the end of the rainbow, pension expenses have always seemed to me to be reasonable if not absurdly low. The bigger problem we’ve seen in real life involves a substantially larger outlay for retirement-plan services provided by lawyers and accountants whose everyday activity does not extend to retirement-plan administration. Your home is the cornerstone of your family’s financial security. Most financially secure couples took their first step toward financial independence the day they stopped paying rent and began accumulating equity in their first home. Over the past 10 years, residential real estate prices have increased nationally by 4.3% annually, driving the value of a typical home purchased for $200,000 in 1992 to more than $305,000 in 2002. Since 2000 and through July 2002, the typical $250,000 house gained resale value of $1,784 a month. There’s a great deal more to be said about building wealth. One good place to look for it is our own Internet site (BalliettFS.com).Also, check these resources: • fool.com offers investment advice and strategies from the Motley Fool crowd. Includes details on tax-sheltered retirement plans, general advice on stock market investing, and model portfolios. • homestore.com is an omnibus real-estate site offering listings of new and used homes, the latest mortgage rate quotes, and reports on housing price appreciation for cities across the country. • getrichslow.com offers general advice on tax-deferred retirement accounts, building wealth through investments, and cashflow management. • Becoming an Investor: Building Wealth by Investing in Stocks, Bonds, and Mutual Funds, by Peter I. Hupalo, HCM Publishing, January 2002, $23.95. • Creating Your Own Retirement Plan: A Guide to Keoghs & IRAs for the Self-Employed (2nd Edition), by Twila Slesnick, John C. Suttle, and Amy Delpo; Nolo Press, February 2002, $29.99.

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Chapter 8

Face the troublesome family issues Not nearly enough young people are fully prepared for marriage and parenting

Dee Balliett

A

sk 10 old people, “If you had your life to live over, what

would you change?” The responses will differ, but you’re likely to hear evidence of the burden of youth: decision

making without benefit of the wisdom that grows from experience. That’s not to say all old people are wise; a young fool is perhaps more likely to grow into an old fool than a sage. While we all make mistakes, not all of us recognize them, or admit them. Even fewer of us learn from them. But of course you and I and a few other choice friends are growing wiser because we habitually recognize, admit, and learn from our mistakes—and are becoming more sage—almost daily.

The blunders we’ve all made in family relationships are surely the most deeply regretted. Maybe you and your other half were masters of interpersonal relationships by the time you tied the knot. But my husband and I regret that we, at 22 and 23, had so little insight into marriage—and, at 24 and 25, so little preparation for parenting. Yes, we read Spock and the lesser how-to books on dealing with baby, and I had taken a child development course. Then, over time, real life taught us that Introduction to Parenting 101 was insufficient. Later, in our late 40s, we came to regret that we had lacked the wisdom we might have passed along to our two children when they were very young. As the old saying goes, Too soon old, too late smart. We now have grandchildren who are barely old enough to contemplate wedlock and/or parenting. They’re nearly the age when Gene and I became engaged. We are just beginning to dare believe we may have an occasional experience-induced thought and mistake-tempered idea to pass to our two grandchildren. Yes, they’re the very same two whose images as wee tykes have served as the logo for our business; whose images have kept the two of us anchored into real life as we’ve grown closer to each other and nearer to sagedom. You will find some of those noodlings in the pages that follow, and you’re invited to jot your own ideas in the margins: • Marriage: Learn to play it right. Don’t burden your relationship with an impossible dream. • Parenting may be the toughest job. Approach it as you did your career: Study, study, study. 129

Over time, real life taught us that Introduction to Parenting 101 was insufficient.

Later, in our late 40s, we came to regret that we had lacked the wisdom we might have passed along to our two children when they were very young. As the old saying goes, Too soon old, too late smart.

• Vacations: Make them quality time. The opportunities for such family events won’t last forever. • Plan your family’s finances. Building wealth takes a long time, and often some assistance. • Enrich your life. It may be the only one you’re going to get. • Keep learning your whole life long. Knowledge is the key to success. • Make a commitment to extend your life. That’s a gift to those who love you. • Don’t give up on your marriage too soon. The very idea of divorce may be part of the problem.

70 Billion years BC I wish one of them Imagine, men would think of trying to something for us to invent life wear beside animal insurance skins. In summer, mink is way too hot! before they even invent money!

Or even snacks, beer, and football!

They are good It’s lucky we for only one women came up thing, and I with food, fire, don’t mean and living in automotive caves. Without maintenance. us, men would starve to death or freeze.

We ought to demand equal rights!

CH & GB 2000

If men come up with useful ideas, I won’t care that they don’t help us hunt and gather.

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To do what? To loaf around the cave all day?

We own half the cave and all the food. We can do whatever we wish!

family issues

Marriage: Learn to play it right Don’t burden your relationship with an impossible dream

There are plenty of good reasons to get married. Marriage cements the bond between two people in love. It clears the path for starting a family of your own. It eliminates the scores of minor social, regulatory, and financial inconveniences that afflict unmarried couples. And here’s the frosting on the cake: Married people live longer, enjoy better health, and are more financially secure than their single counterparts. Just don’t get married for the wrong reasons. According to most marital counselors, people who marry for money, or to have sex, or to relieve feelings of loneliness, are grist for the divorce mills. The same is true for those who get married to become independent from their parents or to deal with an unplanned pregnancy. If you marry someone you don’t love for any of those reasons, you saddle the relationship with an almost insurmountable burden. Don’t burden your relationship with an impossible dream. Make sure your goals are compatible. You and your spouseto-be may like to read the same books, dine at the same restaurants, and share other interests. But while you two may be personally compatible with one another, your goals for the marriage and your future lives may be incompatible. Don’t wait until it’s too late in your relationship to discover that your prospective marriage partner wants lots of children (but you don’t), longs for city life (you’re a country mouse), or is unwilling to make the short-term sacrifices you feel are necessary to ensure your family’s long-term financial security. By the same token: While differences in religion, race, or culture are surmountable barriers to marital success, they do present challenges that should be discussed in advance. Consider: Marriage isn’t only for the young. Second marriages and marriages undertaken later in life present special opportunities and challenges. Couples who marry at an older age often enter the marital relationship with more realistic expectations and with a heightened sense of commitment that comes with maturity. The same is often true for those who have been married; the lessons learned during one failed marriage may help second timers succeed in the next one. But September brides (and grooms) may also bring baggage with them to the marital relationship. That may include emotional wounds from a previous marriage or more complex family responsibilities and rela 131

Don’t wait until it’s too late in your relationship to discover that your prospective marriage partner wants lots of children (but you don’t), longs for city life (you’re a country mouse), or is unwilling to make the short-term sacrifices you feel are necessary to ensure your family’s long-term financial security.

tionships that must be assimilated into the new relationship. Finances may also be considerably more complicated for those who marry later in life. If one or both partners enter the marriage with significant family wealth or financial responsibilities, a prenuptial agreement should be considered.

Finances may also be considerably more complicated for those who marry later in life. If one or both partners enter the marriage with significant family wealth or financial responsibilities, a prenuptial agreement should be considered.

Before leaping into parenthood, learn from the experts. You will find a treasure-trove of information and general advice on parenting at childandfamily.info. It features lists of recommended Internet sites, by category, updated yearly. Before leaping into marriage, learn from the experts. You wouldn’t launch a new business without doing plenty of research. Don’t walk down the aisle without doing at least as much basic homework. Here are a few places to start, all in libraries or bookstores: • The Rules for Marriage: Time-Tested Secrets for Making Your Marriage Work, by Ellen Fein and Sherrie Schneider; Warner Books, $16.95. • Partners in Pleasure: Sharing Success, Creating Joy, Fulfilling Dreams—Together, by Paul Pearsall, Ph.D., and Betty Jenkins, Hunter House, $14.95. • Married Lust: The 10 Secrets of Long-Lasting Desire, by Pamela Lister and Lesley Jane Seymour, Hearst Books, $23. • Communication Miracles for Couples: Easy and Effective Tools to Create More Love and Less Conflict, by Jonathan Robinson, Conari Press, $10.95. • Passionate Marriage: Love, Sex, and Intimacy in Emotionally Committed Relationships, by David Schnarch, Henry Holt, $16. • Surrendering to Marriage: Husbands, Wives, and Other Imperfections, by Iris Krasnow; Talk Miramax Books, $22.95.

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Face it: parenting may be the toughest job Approach it as you did your career: Study, study, study

There’s no shortage of free advice about parenting, and most of it is overpriced. When it comes to raising children, everybody has an opinion-and probably expects you to embrace it. If you seek advice about raising your children, you will have no trouble finding it. Your real challenge will be to identify the few kernels of wisdom in the cornfield of parenting advice available from family, friends, books, magazines, television, and the Internet. I don’t pretend to have all the answers, but my suggestions may help you start off in the right direction. Approach parenting as you did your career: Study, study, study Learn what’s normal for your kids and what isn’t. Behavior that’s blueberry pie normal for a toddler in his Terrible Two stage could be a sign of serious problems for a four-year-old. The same is true for growth, development, learning, and health conditions. If you know what’s par for children the age of yours, you will have a big head start over less knowledgeable parents. You will be a better parent because you will be less likely to cry wolf over inconsequential matters and more likely to respond appropriately to bona fide problems. Establish a workable parent-child relationship. Your role is not to be your child’s best friend. It’s something much more important than that. You are your child’s sponsor in this world: teacher, mentor, champion, and, when necessary, disciplinarian. It’s important that your children know that you love them and that your love is unconditional. But it’s also important that you establish standards and that they understand your expectations for them. Your standards should not be so high that your children frequently fail to attain them. But when they do miss the mark, there should be consequences. Prepare your children for the world they will be living in, not the one you grew up in. The world today is a much different place than it was 50, 40, or even 30 years ago. The technological changes are the least of it. People interact differently than they did a generation or two ago. The mores of our society have been altered, sensitivities have shifted, and behavioral expectations have changed in subtle (and not so subtle) ways. We may not like all of those changes, but they create the landscape upon which your children will walk. Let’s not make their journey more difficult by saddling them with the prejudices of the past. 133

You are your child’s sponsor in this world: teacher, mentor, champion, and, when necessary, disciplinarian. It’s important that your children know that you love them and that your love is unconditional. But it’s also important that you establish standards and that they understand your expectations for them.

People interact differently than they did a generation or two ago. The mores of our society have been altered, sensitivities have shifted, and behavioral expectations have changed in subtle (and not so subtle) ways. We may not like all of those changes, but they create the landscape upon which your children will walk. Let’s not make their journey more difficult by saddling them with the prejudices of the past.

Watch out for the serious health threats facing your children. When you were growing up, your parents probably nursed you through measles, mumps, chicken pox, and various other common disorders. Since then, many of these minor childhood diseases (and several major ones, including polio) have been brought under control by advances in medicine. But that doesn’t mean today’s children face fewer health risks than those of the last generation. On the contrary. Today’s children and teenagers face grave dangers from depression, anorexia, substance abuse, and other emotional and behavioral disorders that have grown to epidemic proportion among our young. By all means, continue to treat the coughs, colds, and sniffles of childhood, but be alert to the much darker problems that threaten the health and lives of today’s children. Find resources to help strengthen your parenting skills. Here’s a good, short list of suggested reading: • Parenting With Love and Logic: Teaching Children Responsibility, by Jim Fay (Contributor), Foster W. Cline, M.D., Navpress, $19.00. • Perfect Parenting: The Dictionary of 1,000 Parenting Tips, by Elizabeth Pantley and William Sears, MD, Contemporary Books, $14.95. • How to Talk So Kids Will Listen & Listen So Kids Will Talk, by Adele Faber, Elaine Mazlish, and Kimberly Ann Coe (Illustrator), Avon Books, $13.00. • Parents Magazine’s The Best Advice I Ever Got: 1,023 Fast Fixes, Simple Solutions, and Wise Ideas for Raising Kids by the editors of Parents Magazine, Sally Lee (Editor) and Rob Reiner, Rodale Press, $29.95. • Refuse to Raise a Brat: Straightforward Advice on Parenting in an Age of Overindulgence, by Marilu Henner and Ruth Velikovsky, Ph.D, Regan Books, $13.00.

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Vacations: make them quality time The opportunities for such family events won’t last forever

Make your next family vacation one they will never forget. The opportunities for such family events won’t last forever. Time is at a premium, and not just for parents. Children are busier than ever, too, and it’s not unusual for a family to go days at a stretch without once sitting down for a meal together. One great way to reconnect with your family is to get away from the everyday routine and go on vacation together. Here are a few ideas to start the juices flowing: Disney: It’s a no-brainer’ for family fun. A few days with Mickey and his friends are at or near the top of everyone’s list of best family vacations. Unless geography is the determining factor, opt for Disney World here in Orlando over the original Disneyland in California. Disney’s Florida park is bigger, it features more attractions, and it offers a wider choice of family accommodations. Those include in-the-park hotels, nearby rental condos, and both budget-priced and upscale hotels not far from the main gate. As an added bonus, Orlando is home base to an assortment of other theme parks, including Universal Studios and Sea World. Check out America’s national parks and the great outdoors. A road trip with children can be a challenging experience for any parent, but the look on their faces when they first lay eyes on the Grand Canyon should make it all worthwhile. In a recent survey of the readers of Family Fun magazine to determine the nation’s favorite family vacation destinations, the top 10 included Yellowstone National Park in Wyoming, Acadia National Park in Maine, and California’s Yosemite National Park. A word of caution, though: If you’re hoping to arrange lodging or a campsite in these or any of the nation’s popular national parks, book ‘way early. Prime accommodations are often snapped up a full year in advance. A dude ranch could be just the place. Family farms, guest ranches, and dude ranches are becoming increasingly popular vacation destinations, particularly for city slicker families with kids who have never milked a cow or roped a maverick. Since meals, lodging, and most activities are included in the rates at such places, a family of four can stay a full week at many guest farms for under $2,000. With guest farms or ranches now operating in all 50 states and becoming increasingly popular in Europe, you have a choice of close by or exotic locations. 135

Disney’s Florida park is bigger, it features more attractions, and it offers a wider choice of family accommodations. Those include in-the-park hotels, nearby rental condos, and both budget-priced and upscale hotels not far from the main gate. As an added bonus, Orlando is home base to an assortment of other theme parks, including Universal Studios and Sea World.

In a recent survey of the readers of Family Fun magazine to determine the nation’s favorite family vacation destinations, the top 10 included Yellowstone National Park in Wyoming, Acadia National Park in Maine, and California’s Yosemite National Park.

Take to the seas on a family cruise. A few days, a week, or even longer on a luxurious cruise ship may be an exciting and cost-effective option for a family vacation. Week-long cruises are widely available for a little as $700 or $800 per person (plus air fare), and rates are typically half that for minor children sharing a stateroom with their parents. Considering that the package includes all meals, lodging, transportation between ports, and onboard entertainment, a cruise can be a real bargain. Make history with your family in the nation’s capital. Taking children on a family vacation in a major city can be a challenge, but one destination that’s worth the effort is Washington, D.C. Where else can a 12-year old meet a Congressman, check out a space capsule, and picnic across the street from the Oval Office, all in one morning? History-enriched guided tours are available at the Capitol, White House, and Supreme Court, and hopon tram tours can whisk your family around to all of the city’s major monuments and memorials in one day. Other must-see attractions include the Smithsonian’s Museum of Natural History and the Air and Space Museum. It’s a place that’s guaranteed to have something that will fascinate everyone in your family. Tap into the experts to plan your own family adventure. Here’s some suggested reading: • Super Family Vacations: Resort & Adventure Guide, by Martha Shirk and Nancy Klepper, Harperperennial Library, $18. • Fodor’s Where Should We Take the Kids?, by Fodor’s Travel Staff, Fodor’s Travel Publications, $18. • The Unofficial Guide to Walt Disney World 2001, by Bob Sehlinger, Hungry Minds, Inc. $16.99. • Tropical Family Vacations: In the Caribbean, Hawaii, South Florida and Mexico, by Candyce H. Stayen, Prima Publishing, $16.00. • Dude Ranches, Vacation Guest Ranches: A How to Find or Locate Reference & Planning Guide, by Lamplight Press Staff, Prosperity & Profit Unlimited, $25.95. • Fodor’s Around Washington, D.C. With Kids: 68 Great Things to Do Together, by Kathryn McKay, Fodor Travel Publications, $10.00.

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Plan your family’s finances Building wealth takes a long time, and often some assistance

Wealth is measured not by money spent but by capital accumulated. Most young people spend every dollar they earn, and more. We often see credit-card debt equal to age times 100, 200, or 300. By the way: That could easily be the debt you marry. Takes a long time to accumulate enough money to live on. Few inherit wealth; most need to create their own. You may need to provide financial support to your parents, or your spouse’s, when they are old and infirmed. You may need to help support your children. On the other hand, they may need to support you—if they can. Over time, cash saved and invested may grow into the capital you will need. Most millionaires built their wealth by investing a dollar at a time all their lives, starting the process when very young. Building it that way is easier than it ever was, thanks to tax laws that give us IRAs (Individual Retirement Accounts); 401(k) and other tax-efficient retirement plans; and taxfavored college savings plans. But there’s also bad news: History tells us inflation will cut the value of your dollars by half every 17 years. Since 1945, through 2000, inflation has averaged 4.2%, and there’s no good reason to believe a few years of 1%-3% inflation won’t be followed by a few years in excess of 5%-7%. To beat inflation, you’ve must know how to invest. You will need to do your homework. You will find all the study materials you’ll need, and more, in the library and on the Internet. Our own three-level investment course for clients includes the titles of a few good books. (Start with “Stocks for the Long Run,” by Jeremy Siegel.) Then, we suggest courses that can make a good student an excellent theorist. Once our clients master the more important strategies, we test their knowledge. When we think they’re ready, we move them from theory to practical application by working alongside us for two weeks in our offices as unpaid interns. To find money to invest, work to control your spending. Lunch out can easily cost twice as much as brown-bagging it; dinner out, 2-10 times as much as preparing your own. (Carry-in is not the same as preparing your own.) The car you want can easily cost three or more times the car you need. A good two-year old 137

The Millionaire Next Door probably discovered reading and radio long ago and probably controls both weight and health by running or walking daily in the park, not on a health-club treadmill, and by shunning nicotine and other abusive substances.

car may cost half the price it fetched when new. Do you want or need DVD, cable, a killer sound system? The Millionaire Next Door probably discovered reading and radio long ago and probably controls both weight and health by running or walking daily in the park, not on a health-club treadmill, and by shunning nicotine and other abusive substances.

To provide, say, a granddaughter with enough seed capital to secure old-age financial security, the grandparents can put the maximum contribution into her IRA until she is able to make the contributions herself.

Plan ahead: Raising a child born in 2001 to age 17 may cost $200,000-$300,000. That averages out to about $11,800+ yearly, to be adjusted for inflation. Raising a family is serious stuff. But your parents did it, and you can, too. Plan ahead: Each year of college may cost a year’s salary. Multiply this year’s total for tuition, fees, room, and board by 7 and again by 8. That’s the range of about how many dollars will be needed for the total of all four years of college when your fetus is ready to enroll for the first year. If your parents or grandparents offer help, accept it. And count your blessings. Here’s how to guess the amount of gift required to cover four years’ college for your unborn child: Multiply by 1.2 the cost of just one year’s present cost. Example: 1.2 x $18,000 = $21,600. That much gifted cash needs to be invested well without delay, targeted for an 11% average annual return in Royce Gift Shares or another college savings plan. Also consider: To provide, say, a granddaughter with enough seed capital to secure old-age financial security, the grandparents can put the maximum contribution into her IRA until she is able to make the contributions herself. In 2008, the yearly IRA contribution will rise to $5,000. That sum invested in each of 10 consecutive years at 11%-as from age 20 to 30-would grow to $1,900,000 by age 60 and to $5,400,000 by age 70.

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Enrich your life It may be the only one you’re going to get

Create a hedge against a mid-life crisis. It may be the best gift you’ll ever give your family. Consider this: many of us spend our entire lives building businesses or careers with a singleminded dedication that makes us successful doctors, lawyers, or captains of industry. Then something happens that changes our lives. Perhaps it’s the death of a loved one, a divorce, a business failure, or a serious illness. Or maybe it’s not catastrophic at all; the event that changes our lives can be something as commonplace and predictable as retirement. Too many of our friends and clients have settled into a wellearned retirement only to discover a sense of emptiness. They had all their eggs in one basket; their lives revolved around their practices or businesses. Without work, they were no longer fulfilled—and they didn’t suffer alone. Their mid-life crises caused pain for their families, as well. Here’s how you can avoid that trap by building that hedge: • Get a life (or at least get a hobby). For the truly fortunate among us, what we do for a living is something we love. Our work is both emotionally and financially rewarding. But if work is all you have, you’re only living half a life. It’s important to develop outside interests, and the time to do it is before you discover that you need them. Why not sharpen your appreciation of art? Or music? Literature? Poetry? How about sports? Look around you and you’ll find butchers who live for the opera, accountants who can recite The Rime of the Ancient Mariner, janitors who collect impressionist art, and cardiologists who bleed Dodger blue. And they’re all richer people because of it. • Broaden your horizons by going back to school. Think back to your college or high school days. I’ll bet there was a subject or area of study that really fired up your imagination and made you want to learn more. Maybe it was history, archeology, or astronomy. Over time, you moved on to other pursuits and perhaps forgot all about what once tickled your fancy. Why not rekindle the interests that you once found so fascinating. There isn’t a city, town, or hamlet in the country that isn’t within minutes of a university or college that can help you do just that. And if the class scheduling doesn’t work for you, there are courses on the Internet where you can learn about oceanography or study architecture in your bathrobe at 3 a.m. • Develop new skills to help you over the mid-life hump. Not everybody can be a pitcher for the Cardinals, a runway fashion model, or an astronaut. But even those of us on the dark side of 139

Look around you and you’ll find butchers who live for the opera, accountants who can recite The Ancient Mariner, janitors who collect impressionist art, and cardiologists who bleed Dodger blue. And they’re all richer people because of it.

I can’t tell you how many busy, successful people we know who came to recognize the importance of spending time with their loved ones— when it was too late. Their children had grown up, and their spouses had grown apart by developing other interests.

40 can develop new skills and talents that add richness and a real sense of achievement to our lives It’s not unusual for people in their 50s or 60s to get a pilot’s license or to gain recognition as a gourmet chef. Golf and tennis are sports that can be enjoyed (and improved on) well into our golden years. And there are people in their 70s today who have sharpened their skills to the point that they qualify as grand masters at chess or champions of poker or bridge. • Travel the world in search of yourself. Chance are, you have a favorite vacation spot. Could be a cottage on the lake, a condo at the beach, or a cabin in the mountains. You go back year after year because it’s as comfortable as an old shoe. Maybe too comfortable. There’s a whole world out there to see and learn from. Instead of two weeks in a beach chair, you could be exploring the glory that was Greece or the grandeur that was Rome. More importantly, though, you will be exposing yourself to other cultures, different lifestyles, and new points of view. Perhaps you’ll come home with fresh solutions to old problems. Or maybe you’ll return with a better appreciation of your own back yard. You won’t come back unchanged. • Spend more time with your family. I can’t tell you how many busy, successful people we know who came to recognize the importance of spending time with their loved ones—when it was too late. Their children had grown up, and their spouses had grown apart by developing other interests. Sometimes, by making a concerted effort, they are able to reestablish relationships and rekindle the family ties that had been neglected over the years. But they never recover the time that was lost. That’s gone forever. Don’t let that happen to you.

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Keep learning your whole life long Knowledge is the key to success

Education alone won’t make your family successful. But ignorance may ensure failure. The extent to which we enjoy successful, rewarding lives depends on a variety of factors, including our own hard work and the support we receive from family and friends. Prospects for success are also affected by talent and intelligence. Those are factors over which we have little control, but we can control one of the more important variables in this equation: our education. The right education will help us make better use of the tools we do have. It will open new opportunities to live richer and more fulfilling lives. It can help prepare a breadwinner for a satisfying, well-paid career that will provide the family with a lifetime of financial security. In contrast, the lack of an education can be an anchor that holds a breadwinner back and drags the family down. Too many people fail to realize their full potential solely because they lack a solid education. Try not to allow any member of your family to fall into that trap. Get the best education you can afford-for yourself and your children. Considered strictly as a business proposition, a college education can deliver a spectacular return on investment. Over the course of a working life, a graduate of a four-year college or university can expect to earn over a million dollars more than a person with no college degree. The earning curve increases for students who continue their education beyond the bachelor’s degree level, particularly those who go on to professional schools. Explore strategies to hold down the cost of education. The cost of tuition, room, and board at a top Ivy League university is now well over $30,000 a year—double what it was a decade ago and four times the cost in 1980. It’s not just the pricey private schools that are posting such increases. The College Board Annual Survey of Colleges found that the cost of completing a four-year program at a public university now averages more than $52,000. Absorbing the costs is a major challenge for hundreds of thousands of American families each year. Here are some tips for keeping your family’s education budget in balance: • Start saving for college sooner rather than later. If the College Board is on target in projecting a 7% average annual rise in tuition expenses for the coming years, an education that 141

The earning curve increases for students who continue their education beyond the bachelor’s degree level, particularly those who go on to professional schools.

Fewer than half the students attending public universities and less than one-fourth of those at private colleges have to pay the full tuition charge.

costs $20,000 a year in 2001 will balloon to more than $75,000 a year in 2019. If you average 12% annually and wait until your child is nine before you start saving for college, you’ll have to come up with $1,614 every month in order to cover educational costs. But if you start saving as soon as your baby is born, your monthly college investment drops to a more manageable $500 a month spread over 18 years. • Tap into a state-sponsored college savings plan. A growing number of states (including New York, New Jersey, Delaware, Rhode Island, and a dozen others) now offer parents special tuition savings programs that effectively allow them to buy tomorrow’s education at today’s prices. Under Virginia’s plan, for example, once you sign up for the program and make your agreed upon monthly payments on schedule, you are guaranteed to have enough in the account to cover your child’s tuition at college time. Other states offer plans that cover room and board as well as tuition, and some allow the funds to be used for out-of-state schools. • Get your share of educational assistance funding. Fewer than half the students attending public universities and less than one-fourth of those at private colleges have to pay the full tuition charge. Schools are increasingly offering financial aid linked to merit rather than need—a shift that opens new opportunities for middle and upper income families to reduce college costs. A growing number of scholarships are available on a merit basis, while Federal and state governments are providing over $60 billion annually in educational assistance through student loans, grants, work-study programs, and Lifetime Learning Credits. • Take advantage of new tax incentives for education. The ceiling on tax-sheltered contributions to an Education Savings Account is $2,000 per year. It allows tax-free withdrawals for private elementary and secondary school expenses as well as college costs. Tax-free withdrawals are allowed from state-sponsored Section 529 college tuition savings plans. Also permitted: tax deductions of up to $3,000 in annual tuition expenses. • Don’t overlook co-op and other ways to obtain an education. Study one term, work in your major the next. People who’ve done it recommend it. For detailed information on cooperative and other educational opportunities, go to the Internet: • co-op.edu takes you to the National Commission for Cooperative Education and everything you’d hope to learn about the subject. • getcollege.com provides information on loans, grants, and scholarships, as well as the considerable educational opportunities in the armed forces.

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Make a commitment to extend your life That’s a gift to those who love you

Live long, but live healthy. These days it’s not unusual for Americans who retire in their 60s to live for another 20, 30, or even 40 years. We at Balliett Financial have helped many of our clients prepare for a financially successful retirement, but material wealth will provide little comfort to those who spend their golden years in failing health. Just as we make long-term investments to ensure our financial security later in life, so should we make long-term commitments that will translate into a healthier retirement. Your main goal should be achieving a state of wellness. For too many of us, health becomes a serious consideration only when it turns bad. We expend substantial time, effort and wealth to treat our ailments, cure our illnesses, and relieve our pain and discomfort. But we devote far fewer resources to the task of preventing sickness in the first place. The concept of wellness, however, extends beyond maintaining a optimal level of physical health. Also, it requires a high degree of emotional, intellectual, and spiritual health. Live longer by making healthy choices. We can’t change our heredity, but we can control our behavior. Begin by eliminating those practices or activities that clearly pose a threat to your health. More than 400,000 Americans die each year as a result of tobacco use, and another 10 million suffer from diseases caused by smoking. Alcohol and substance abuse add to the toll, as do behaviors that leave people vulnerable to sexually transmitted diseases. Aggressive or reckless driving, a refusal to wear seat belts, or a failure to maintain vehicles in safe operating condition contribute to hundreds of thousands of highway deaths and injuries each year. Those are all behaviors we can control. If we do, we figure to live longer and healthier lives. Design your own blueprint for a healthier lifestyle. Start by preparing a nutritional game plan that will eliminate unhealthy food choices, promote moderation, and enable you to reach or maintain a healthy weight. The Government’s latest dietary recommendations call for five servings of fruit or vegetables every day—a target too few of us achieve. Regular exercise is another key ingredient in your blueprint for lifelong health. Reduce your risk of sickness, even for such killers as cancer and cardiovascular disease. For most Americans, being well is 143

While cancer may not yet be curable, our doctor-clients tell us two-thirds of all cancers can be prevented through dietary changes, avoiding environmental carcinogens, and refraining from high-risk behavior such as overexposure to the sun.

Start by preparing a nutritional game plan that will eliminate unhealthy food choices, promote moderation, and enable you to reach or maintain a healthy weight.

the rule and sickness is the exception. But when a cold or some other minor infection lingers on and on, it may be a signal from your body to slow down, rest, and allow your immune system to restore itself. Heeding that signal may help prevent a far more serious infection. Similarly, while cancer may not yet be curable, our doctor-clients tell us two-thirds of all cancers can be prevented through dietary changes, avoiding environmental carcinogens, and refraining from high-risk behavior such as overexposure to the sun. The death rate from coronary heart disease has dropped by 40% over the past 15 years, and Government health officials say a shift to a low cholesterol diet could produce even more significant declines. Maintain a healthy emotional balance. While the importance of maintaining a state of physical wellness is obvious, too many of us ignore the warning signs of emotional or mental illness. Depression and other emotional disorders can be every bit as debilitating and life-threatening as cancer. Be on the alert for unexplained mood swings and other warning signs of emotional distress within your family. Here are some resources that could add 5, 10, even 20 years to your life. You don’t have to go it alone; check out these resources: • atkinscenter.com takes you to the late Robert C. Atkins, M.D., the best-selling low-carbohydrate diet doctor. • dadamo.com takes you to Dr. Peter D’Adamo, author of the best-selling Eat Right 4 Your Type, with a dietary regimen for each of the four blood types. • nal.usda.gov/fnic/dga/dga95/lowfat.html takes you to the government’s page on a diet low in fat, saturated fat, and cholesterol. • Health and Wellness, Fifth Edition, by Gordon Edlin, Eric Golanty and Kelli McCormack Brown, Jones and Bartlett Publishers, $47.50. • The Complete Family Health Book, by Roslyn P. Epps, MD, St. Martins Press, $40. • The Wellness Book: The Comprehensive Guide to Maintaining Health and Treating Stress-Related Illness, by Herbert Benson, MD and Eileen M. Stuart, RN, Fireside, $16. • Dr. Judith Orloff’s Guide to Intuitive Healing : Five Steps to Physical, Emotional, and Sexual Wellness, by Judith Orloff, MD and Dean Ornish, Three Rivers Press, $14. • The 22 Non-Negotiable Laws of Wellness: Feel, Think, and Live Better Than You Ever Thought Possible, by Greg Anderson, Harper San Francisco, $14.

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Don’t give up on your marriage too soon The very idea of divorce may be part of the problem

Too often, divorce is the first response to marital difficulties rather than the last resort. The decision to dissolve a marriage ought to demand at least as much thoughtful consideration as the decision to begin one. Every year since 1975, over one million American marriages have ended in divorce. Sociologists blame the rise in the nation’s divorce rate on a number of factors, including the advent of no-fault divorce laws in the late nineteen-sixties and early ‘seventies. To one extent or another, such legislation is now in place in all 50 states. As divorce became easier, the marriage contract became less binding, and the proportion of failed marriages tripled. Don’t fall into the divorce-is-easy trap. The decision to split from someone you used to love—and may still love—should not be made impulsively. It’s a decision that will be painful to all involved. It’s one you will live with the rest of your life. Don’t give up on your marriage without reconsidering True, not all marriages are worth saving. If love, trust, and respect have been drained from a relationship, there may not be much left to salvage. When one or both spouses are chronically unhappy in the marriage, it’s time to at least consider a change. And if continuing the relationship may endanger the safety or sanity of your or your spouse, it’s time to physically separate the marriage partners. Before you divorce, resolve the financial issues. If you and your spouse entered into a prenuptial agreement, there may be little left to resolve. If not, how the family’s wealth and possessions are divided when the marriage dissolves may depend on where you live. In community property states such as California, the fruits of the marriage (i.e. all the wealth and property accumulated during the marriage) are divided equally between the spouses. One major financial mistake made by divorcing couples is failing to include the present value of a pension in the marital assets. Another is neglecting to designate the spouse who receives child support or alimony payments as the beneficiary of life insurance coverage on the other. It’s critical to heal the emotional scars of a divorce. Severing a marital relationship is a painful process for the partner who initiates the break-up and doubly so for the one receiving the news. Divorce counselors explain that, while the pain is often inevitable, it can be made more bearable by a good, adequate 145

Don’t fall into the divorce-iseasy trap. The decision to split from someone you used to love—and may still love— should not be made impulsively. It’s a decision that will be painful to all involved. It’s one you will live with the rest of your life.

explanation of what went wrong. Too many divorced spouses never receive the closure that comes with such an explanation, and as a result it becomes more difficult to accept the separation and move on with their lives.

One major financial mistake made by divorcing couples is failing to include the present value of a pension in the marital assets. Another is neglecting to designate the spouse who receives child support or alimony payments as the beneficiary of life insurance coverage on the other.

Whatever you do, don’t divorce your kids. The children of a divorced couple are often the real victims of a marital failure. They’re facing the most traumatic experience of their young lives, and it’s happening at a time when they are least likely to get even the normal amount of effective parenting. Regardless of your feelings for your ex-spouse, and regardless of the custody arrangements that have been established for the care of your children, you never stop being a parent. The children are not divorced; they need both a mother and a dad. You may find that you need them, too. Find resources to help you through the divorce process. There’s no shortage of Internet sites and books devoted to the subject of divorce. Here’s our sampling: • divorcenet.com takes you to a comprehensive resource on divorce. • divorcesource.com gives you another. • divorcehelp.com is a resource for those who would either save the marriage or avoid a confrontational divorce. • Divorce and Money: How to Make the Best Financial Decisions During Divorce, by Violet Woodhouse and Dale Fetherling, Nolo Press, $34.95. • Crazy Time: Surviving Divorce and Building a New Life, by Abigail Trafford, Harperperennial Library, $14. • The Unexpected Legacy of Divorce, by Judith S. Wallerstein, Julia M. Lewis, Sandra Blakeslee; Hyperion, $24.95. • How to Do Your Own Divorce in California: A Guide for Petitioners and Respondents (25th Ed), by Ed Sherman, Nolo Press, $34.95. • Fighting for Your Marriage: Positive Steps for Preventing Divorce and Preserving a Lasting Love, by Scott Stanley, Susan L. Blumberg, Howard J. Markman, Dean S. Edell, Jossey-Bass, $15.00.

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Chapter 9

Vacations: North America’s best Which of these places do you hope to visit?

Dee Balliett

I

n its 11-year run through the end of 1989, the Gene Balliett Family Finances Seminar moved up, down, and across North

America. In that time, 14,500 couples—mostly physicians and their spouses—bought tickets to hear my husband talk. His mother thought that was an amazing activity for him, and at the time I did, too. Most of the time, I’m the gregarious one and he’s the quiet one, especially around strangers, but there he was—speaking to small audiences and large, even as large as 300-350 people on several occasions and once over 500, in Vancouver. The seminar lasted two and a half days, Monday morning at 8:00 until Wednesday at 12:30, and then the same schedule from Thursday through Saturday—often at a different location. I could write a book about those 11 years, but for the purposes of this chapter I’ll say just this much: We sure visited lots of fascinating resorts and cities. The locations ranged from Maui to Vancouver and Banff. From Montreal to Acapulco and Puerto Vallarta. From the British Virgin Islands to Toronto, Chicago, and Fairbanks. Not to mention the Bahamas, Bermuda, Caymans, Fiji, France, Germany, Greece, Holland, Italy, Malta, New Zealand, Spain, Switzerland, and Turkey. Most often, we were in Las Vegas, Hilton Head, Orlando, and Georgetown (Grand Cayman). Those four drew the biggest audiences. In early 1984, to reduce travel, we added rented homes at Hilton Head and Orlando. In late 1986, we sold our home of 25 years and moved to Orlando—for convenience and weather. Sixteen years later, we still like both. Guess what: We could tolerate no more travel. Especially, no more airports. The final seminar, in 1989, was up the road from our new home in suburban Orlando, but it wasn’t until 2000 that I ever heard him say a word about going anywhere other than a NAPFA meeting. That spring, he agreed to take a Mediterranean cruise, which we did that September. Last year, he suggested we go—someday—to England, Wales, and Scotland. For me, our life together meant being more places than I had ever expected. I am more anxious to return to some of them than he is. Well, OK, New York is a given. It’s a three-hour plane 147

Nearly all of our clients are physicians and surgeons in private practice, and most of them live with stresses we can hardly imagine. They travel a lot, and we do understand what that’s about.

ride and a cab to our favorite apartment-hotel four short blocks from the Museum of Natural History. From time to time, he says, “I need a New York fix,” and back we go to the city. Once, I said, “I’ve got to get out of Dodge,” he said OK, and we were in Scottsdale and Phoenix to tour Taliesin West (franklloydwright.org) and the Heard Museum (heard.org) while letting the stress drain off.

There’s something about being somewhere else that can be chocolate for the soul.

I’m not sure time away is a necessity, but it may be. We manage many millions of dollars of other peoples’ money, and that’s a stressful job. But nearly all of our clients are physicians and surgeons in private practice, and most of them live with stresses we can hardly imagine. They travel a lot, and we do understand what that’s about. Maybe we ought to travel more. There’s something about being somewhere else that can be chocolate for the soul. We decided to add a chapter on travel because at times getting away can be necessary. But merely getting away isn’t always enough. If you lived in the city, why would you want to get away to Newark? Quality has merit. Quality matters, too. I used to understand the second-home thing, but now I’m no longer sure that I do. To me, getting away doesn’t mean going to another familiar place. Sure, we go to the same West Side hotel, but not always and not frequently—and once settled in, we see and do stuff that’s different and new to us. Shows, plays, dance performances, restaurants—all new, all refreshing. Since 9/11, many of us are wary of overseas travel. So, it didn’t take us long to decide to do a chapter on North American getaways. Our colleague Ken Rankin handled most of the research for us; his head is way more into travel than ours are. Thanks to his efforts, here’s what we’ll be covering in this chapter: • Best of the Nor theast. The Broadway theater scene, Washington’s museums, and Boston’s history. • Best of the South. Carolina’s Outer Banks, Dixieland in New Orleans, Disney in Florida. • Best of the Midwest. The Windy City, a Great Lakes cruise, music in the Ozarks. • Best of the West. San Francisco cable cars, San Diego sunshine, Hollywood tinsel. • Best of Canada and Mexico. High tea in Victoria, snorkeling in Cozumel, Banff and the Rockies • Best family vacations. A Colorado dude ranch, a motor-home road trip, a dinosaur dig. • Best cruise vacations. Alaska’s inside passage, Mississippi steamboats, French-Canadian waterways. • Best honeymoons. A chartered private yacht, the sizzle of Acapulco, romance on the rails.

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Best of the Northeast I’ll take Manhattan, Washington, Boston, Philly, and more

Take in the best of Broadway with a visit to the Big Apple. New Yorkers are rebuilding from the rubble of 9/11, and the city is being reborn in the process. Manhattan’s restaurants are serving up some of the world’s best meals, the Fifth Avenue shops are as trendy as ever, and, after a shaky start, Amtrak’s new high-speed Acela trains are whisking visitors to New York from other East Coast cities in record time. Best of all, Broadway shows are again playing to packed houses. So are the ballet and the philharmonic, our own personal favorites in the 27 years we lived in and near New York. In Boston, revisit American history—and the colleges. Walk the roads where Paul Revere rode, toast the patriots at the site of the Tea Party, climb Bunker Hill to listen for the shot heard ‘round the world. Boston seems to serve up slices of history at every turn. To see the best of it, take a stroll down the Freedom Trail—a 21/2-mile route that takes visitors past Boston Common, the Old North Church, the USS Constitution, and other shrines of the American Revolution. But there’s more to beantown than history. Boston is also the world’s largest college town. No visit to the area would be complete without a stop at Harvard, MIT, Boston College, Radcliffe, or one of the more than 40 other colleges and universities in the area. The city’s traditionally nightmarish traffic figures to ease with the opening of a breathtaking new white bridge linking Boston and Cambridge. And Boston’s infamous $14.5 billion Big Dig road project is scheduled for completion in 2005. In Washington, D.C., drop in on your government. Security has stiffened in the nation’s capital since 9/11, and the White House has curtailed tours of the executive mansion for all but organized school or military groups (call 1-202 456-7041 for details). But you can still visit your senators and congressman at the Capitol building. If Congress is in session, your representative or senator will happily provide you with a gallery pass allowing you to sit in on the floor debate. Next door at the Supreme Court, you may be able to witness the oral arguments on a key case. Then take D.C.’s Tourmobile shuttle service (tourmobile.com) for guided visits to the freshly restored monuments to Washington, Jefferson, and Lincoln, plus the city’s new memorial to FDR. For a history lesson, read the Declaration of Independence at the National Archives on the Mall, check out the Wright Brothers’ first flight plane at the National Air and 149

Many of them are here in the northeast U.S. Washington’s Smithsonian Institute complex alone is worth the trip to D.C.

Space Museum, and listen for the echo of John Wilkes Booth’s pistol at Ford’s Theater.

Philadelphia’s top attractions include the Franklin Institute Science Museum, the Pennsylvania Academy of Fine Art, and the Independence Seaport Museum.

In Philadelphia, catch a ballgame. The Phillies could be National League pennant contenders again this year. The Flyers are one of the most entertaining pro hockey teams. The Army-Navy game is a highlight of every college football season. And the high-flying Eagles go into a spanking new stadium this summer—and may again be Super Bowl contenders next fall and winter. But Philadelphia isn’t all sports and cheesesteak. Ben Franklin’s hometown is also home base for the Liberty Bell, Betsy Ross’ seamstress parlor, and Declaration House, where Thomas Jefferson wrote the Declaration of Independence. Philly is also a great jumping-off spot for day trips to such nearby attractions as the Pennsylvania Dutch countryside near Lancaster and York, or the boardwalk, casino shows, and glitter of Atlantic City. Don’t miss out on the best museums in North America. Many of them are here in the northeast U.S. Washington’s Smithsonian Institute complex alone is worth the trip to D.C., and the city’s newest attraction, Washington’s Spy Museum, is fun for all ages. Other attractions on D.C.’s must-see list include the National Portrait Gallery and the Holocaust Memorial Museum. In New York, check out the Guggenheim art museum, the Metropolitan Museum of Art (including its gift shop), and MOMA (Museum of Modern Art). Don’t you dare miss the Museum of Natural Histor y and the newly restored Hayden Planetarium. Philadelphia’s top attractions include the Franklin Institute Science Museum, the Pennsylvania Academy of Fine Art, and the Independence Seaport Museum. Visitors to Boston can chronicle the life and times of the city’s most famous family at the John F. Kennedy Library and Museum, while the 11-andunder set flips out for the city’s innovative Children’s Museum. Find more suggestions for a vacation in the North: • baltimore.to/baltimore takes you to the Web site of Baltimore’s Inner Harbor, a worthwhile vacation destination on its own and also a fascinating interruption for any I-95 roadtrip. The attractions include a world-class aquarium, tall ships, state-of-the-art ballparks for the Orioles and Ravens, and more crab cakes than you can eat. • bostonusa.com takes you to the Greater Boston Convention & Visitors Bureau (1-888 733-2678). It offers a comprehensive visitor information kit that includes a travel planner, guidebook, map, pamphlets, and coupons. • broadway.com provides one-stop shopping for online reviews and tickets to all the top New York shows. • esbnyc.com is the site of the Empire State Building, which offers online tickets to the building’s observation deck. • natzoo.si.edu takes you to the best free zoo in the U.S., the Smithsonian National Zoological Park. 150

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Best of the South Carolina’s Outer Banks, Dixieland in New Orleans, Disney in Florida

Stop by New Orleans for Dixieland jazz and a Creole feast. Catch a mule-drawn buggy at Jackson Square for a slow ride through the heart of the French Quarter, then soak up some of the world’s best jazz at Preservation Hall—a 250-year old New Orleans landmark just off Bourbon Street, where the price of admission is still (at this writing) only $5 (preservationhall.com). When you’ve worked up an appetite, stop in at K-Paul’s Louisiana Kitchen for some classic Cajun specialties, or order an expensive Creole dinner at Emeril’s flagship restaurant in the French Quarter. For bargains and beads, be sure to stroll all five blocks of the French Market near the banks of the Mississippi River—it’s the nation’s oldest public market. Then, check out the Mardi Gras floats on display at Harrah’s New Orleans Casino, where the jazz is sometimes the best in town. It’s a short stroll to some of the finest hotels in the city, and it’s just one block from the French Quarter. One of my fond memories of time in New Orleans was a dinner cruise with friends from Alabama, on a paddlewheeler. Hit the beaches on North Carolina’s Outer Banks. Go this summer of 2003, and you’ll be in time to help celebrate the 100th anniversary of the Wright Brothers first flight in Kill Devil Hills, just past Kitty Hawk on this string-thin chain of barrier islands. While houses, hotels and motels have sprung up along the coastline in towns like Nags Head, Duck, and Rodanthe, much of the Atlantic seashore is just as pristine as when Sir Walter Raleigh arrived on the Outer Banks in the 1600s to establish his ill-fated Lost Colony on Roanoke Island. When you’ve had enough beach, take the ferry across to Ocracoke Island to search for Blackbeard’s pirate treasure, or charter an oceangoing fishing boat at the Oregon Inlet just south of Nags Head. Rent a fourbedroom, three-bath oceanfront home for an August week in Kill Devil Hills for $2,995, or snag that same place in May or September for less than a grand. Soak up the sunshine in Florida. There’s more for vacationers to do here in the sunshine state than in most countries of the world. Where else can you catch a Space Shuttle launch at Cape Canaveral, shop ‘til you drop on Palm Beach’s Worth Avenue, then spend the night clubbing at art deco discos in South Beach—all in the same day. Visit the circus in Sarasota, make a pit stop for the Daytona 500 motor race, then drive your own muscle car through the surf on the hard-packed sand of the 151

One of my fond memories of New Orleans was a dinner cruise with friends on a paddlewheeler. We laughed a lot, ate too much, and enjoyed watching the city’s lights dance across the waters of the mighty Mississippi.

Of all the great beaches in our state, I most like the talcum-powder sand at Clearwater Beach and at the southernmost part of New Smyrna Beach, where the beach road ends.

town’s beach. Stroll through the historic district in St. Augustine, North America’s oldest city, or party all night at Papa Hemminway’s hangouts in Key West. Did I mention the Magic Kingdom, Epcot, and the MGM and Disney Studios at Walt Disney World, or other Orlando-area theme parks such as Sea World, Universal Studios Florida, and Discovery Cove? We like Epcot a lot (Gene calls its entranceway “a feast for the eyes”). It and Sea World are our favorite attractions in Central Florida. Of all the great beaches in our state, we most like the talcum-powder sand at Clearwater Beach and also at the southernmost part of New Smyrna Beach, where the beach road ends. New Smyrna is south of Daytona and northeast of Orlando. My favorite Florida towns are, in order, Winter Park’s downtown Park Avenue (15 minutes north of our runner-up favorite), downtown Orlando (especially the southeast part nearest Lake Eola), Naples, St. Augustine, and Delray Beach. Remember the Alamo in San Antonio. Begin your visit to this historic city with a pilgrimage to the battle site that became a rallying cry for Texas independence in the 1830s. Located smack in the heart of town, the Alamo is the perfect jumping off point for a riverbarge ride or a stroll down San Antonio’s Riverwalk, two and a half miles of winding riverbank, dotted with classy restaurants, cafés, shops and hotels. Don’t miss the nearby La Villita National Historic District, a Mexican-style village with shaded patios, plazas, brick and tile streets, restaurants, craft shops and trendy boutiques. Ride a streetcar from Alamo Square to HemisFair Park for a bird’s-eye view of San Antonio from the observation deck at the Tower of the Americas. Here’s where to find more ideas for a Southern-style vacation: • tripadvisor.com provides articles and guidebook reviews for top vacation sites across the South, throughout North America, and around the world. • flausa.com is Florida’s (888-735-2872) official tourism marketing agent, and it offers a free, comprehensive guide to The Sunshine State. • nojazzfest.com provides details of JazzFest, the Big Easy’s premier music festival; it runs nonstop for 10 food-and-musicfilled spring days at the New Orleans Fair Grounds (in 2003, April 25 to May 4). • imax-sa.com accepts reservations online to view the story of the Alamo on a six-story screen at San Antonio’s Alamo Imax Theater, across from the battle site. • The Unofficial Guide to Walt Disney World 2003, by Bob Sehlinger, $16.99. • harrahs.com tells you who’s starring at the glittering New Orleans downtown casino. • joelambjr.com is a Kitty Hawk rental agency for nearby Kill Devil Hills and elsewhere on North Carolina’s Outer Banks. 152

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Best of the Midwest The Windy City, a Great Lakes cruise, music in the Ozarks

Head for Chicago in the summertime. The Windy City is experiencing an outright renassaince, and there’s fresh excitement surrounding the resurrected North Loop theater district, the lakefront’s rehabilitated Navy Pier, and the new Michigan Avenue shopping opportunities along Chicago’s fabled Magnificent Mile. The best time to visit is in early to mid-summer when the lake sparkles and hordes of midwesterners flock to the area’s 29 miles of shoreline for biking, blading, sunning, and chilling out. Oak Street Beach—one of the top urban beaches in North America—is just a hop from the North Michigan Avenue hotels. After wriggling your toes in the sand, check out Chicago’s skyline from the Sears Tower Skydeck (or the less crowded observation deck of the John Hancock Building), enjoy a free summer concert in Grant Park, then take a side trip to nearby Oak Park for a visit to some of the earliest examples of Frank Lloyd Wright’s prairie-style homes. Living 27 years in metropolitan New York, we found that New Yorkers love New York—and Chicago, too. Take an unforgettable cruise through the Great Lakes. During the early 20th century, more passengers cruised the Great Lakes than all the world’s oceans. Great Lakes cruising died out in the ‘20s, but it has come roaring back to life with at least half a dozen ships now offering itineraries of 3-15 days to such ports as Little Current (a quaint village on Canada’s Manitoulin Island, where passengers powwow with members of the native Ojibway tribe), or Michigan’s Mackinac Island (where the clock stopped in 1875, and bicycles and horse-drawn carriages are the only transportation). The Great Lakes Cruise Company (greatlakescruising.com) operates five small ships (each carrying 100 passengers or less). It offers itineraries on all five lakes, from Duluth to Quebec City; rates start at $599 per person for a three-night junket. Camp out under the stars in Michigan. Forget Minnesota and its 10,000 lakes: The state of Michigan is a camper’s paradise with more than 11,000 inland lakes, 150 waterfalls, and 36,000 miles of rivers and streams. The Great Lakes give Michigan another 3,200 miles of shoreline—more than the entire U.S. Atlantic Coast—and over half the state’s land is forested. In addition to the four national forests in the state, Michigan has six state forests with 150 campgrounds with 7,000 miles of canoeable streams, 600 miles of trails, and 13,000 miles of trout waters. 153

Living 27 years in metropolitan New York, we found that New Yorkers love New York—and Chicago, too.

Campsite reservations at any of the state’s 96 parks and recreational areas can be made directly through the Michigan State Park System at 1-800-44PARKS. I have fond childhood memories of family summer vacations in Michigan. Like many other Buckeyes, Gene and I like everything about Michigan (except its football team, but only when it’s playing Ohio State).

Like many other Buckeyes, Gene and I like everything about Michigan (except its football team, but only when it’s playing Ohio State).

Kick up your heels in Branson, Missouri. This small rural town in the Ozarks is the unlikely “live music capital of the world,” and home-base for dozens of country and pop music icons of the ‘50s, ‘60s and ‘70s. Though it’s still a small town of 5,000 in the Ozarks, and Elvis may have left the building, but Andy Williams, Bobby Vinton, Roy Clark, and Tony Orlando, among others, have their own theaters in Branson and their shows are packing them in morning, noon, and night. Fact is, Branson boasts no less than 49 live performance theaters and an annual visitor count of more than 6.5 million. Although the town has a reputation as a geezers destination (average age of visitors is 56), youngsters find plenty to do after grandma is put to bed and the nightlife turns cool. But even without the music, Branson’s surrounding rivers, lakes and rugged natural beauty make the area an attractive place to visit. Houseboat down the Mississippi on the trail of Huck Finn. Head for La Crosse, Wis., the busiest recreational boating pool on the Mississippi River. It’s a particularly scenic stretch where three rivers converge, and there’s an abundance of beautiful beaches, secluded coves, intriguing islands, and historic riverfront towns for boaters to explore. Huck’s Houseboat Vacations (hucks.com), one of several outfits in La Crosse that rents houseboats to would-be Tom Sawyers and Huck Finns, will turn you loose for a four-day weekend in a luxury 62-footer complete with flying bridge, waterslide, and on-board hot tub, for under $3,000. Check these resources for more on vacationing in the Midwest: • uppermidwest.net is a resource for nature lovers in search of vacation destinations in Michigan, Wisconsin, and Minnesota. • greatlakescruiser.com is an online magazine covering cruise ships serving the Great Lakes. • branson.com offers information for planning a visit to Branson, including accommodations, restaurants, and online ticket sales to top shows. • 500 Best USA Vacations: The Ultimate guide to America’s Travel Treasures, edited by R. Alan Fox, $14.95. Inside information on some of the top vacation spots in the Midwest, and across America. • mackinacparks.com provides information on Mackinac Island’s parks, where costumed locals recreate18th and 19th century life in the Midwest. 154

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Best of the West San Francisco cable cars, San Diego sunshine, Hollywood tinsel

Ride the cable cars to Fisherman’s Wharf, but don’t stop there. There’s just too much to do in San Francisco—lunch in Chinatown, shopping in Sausalito, a visit to the seal rocks, Ghiradelli Square for chocolate, clubbing in North Beach, and maybe a nightcap at the Top of the Mark. This is everyone’s second hometown, and it could take a week of nonstop activity to touch all the bases there. Get up early to watch the fog roll in over the Golden Gate. Try to squeeze an afternoon free for the boat ride and tour of Alcatraz. Or maybe rent a car and cross the bridge to Muir Woods to experience the grandeur of the giant redwoods. Then, plan a day trip to majestic Lake Tahoe. On the way back, detour down Lombard Street for your own photo of the Crookedest Street in the World. For myself, I love visiting San Francisco, but I wouldn’t want to live there (too often cold, too often foggy). Make a score in Vegas without even hitting the tables. The surest way to come home a winner from Las Vegas is spend your time on activities that do not involve gambling. It won’t cost you a dime to watch the Bellagio hotel’s multi-million dollar fountain show synchronized to a Sinatra standard. The price is the same for the nightly pirate battles on the strip in front of Treasure Island, the periodic volcano eruptions at the Mirage, and the Freemont Street Experience’s four block-long light and music show downtown. If you must dig out your wallet in Vegas, do it at the ticket booth for such top shows as impressionist Danny Gans’ review at the Mirage, Cirque du Soleil’s surrealistic “O” water show at Bellagio, or Celine Dion in concert at Caesar’s Palace. I guess I just don’t get gambling. Poor people can’t afford it, and—why should rich people bother? Prepare to be enchanted by the Emerald City. Don’t let the drizzle discourage you from visiting Seattle. It’s an enchanted city, and the occasional showers that serve as Seattle’s trademark help keep the streets clean and the parklands green. The best view in town is from the funky Space Needle, a 605-foot observation tower built for the 1962 World’s Fair and connected to downtown Seattle by a soon-to-be-expanded monorail. Don’t miss the flying fish at the Pike Place Market, a sprawling, century-old marketplace where hundreds of local artists, craftsmen, and antique dealers operate stalls next to the area’s farmers and fishmongers. Take a ferry ride across Puget Sound for a winery tour on Bainbridge Island, watch the salmon swim up 155

I guess I just don’t get gambling. Poor people can’t afford it, and—why should rich people bother?

stream through viewports at the fish ladder at the Ballard Locks, and visit the nearby Mount St. Helens National Volcanic Monument.

We’ve seen lots of Broadway shows, but never anything as spectacular as Cirque du Soleil.

Become the ultimate tourist in Los Angeles. Count the sidewalk stars on Hollywood’s Walk of Fame, rent a convertible for a top-down cruise along Sunset Boulevard all the way to the Santa Monica Pier, then sleep in Long Beach on the fabled Queen Mary, which has been converted from an ocean liner to a hotel. Take a guided tour of the homes in Beverly Hills (Swimmin’ pools, movie stars!), stop for an authentic Mexican lunch on Olvera Street, and throw a small fortune into the upscale shops that line Rodeo Drive. Visit the original Disneyland in Anaheim, take the backstage tour at Universal Studios, and spend some quality time at the La Brea Tar Pits. Soak up the sunshine in San Diego. Don’t pack your coat. You won’t need it in this laid-back Southern California mecca where the year ‘round sun warms the soul as well as the body. Park yourself on the beach in front of the landmark Hotel del Coronado, stop for margaritas in Old Town San Diego, then catch the trolley to the Mexican border to shop for silver, gold, and leather bargains in Tijuana. Don’t miss the chance to visit Sea World or San Diego’s world-class Zoo and Wild Animal Park. Golfers should test the links at La Jolla’s Torrey Pines. In the evenings, check out the free summer concerts in Balboa Park, or head for San Diego’s trendy Gaslamp Quarter for more active nightlife. Check these resources for more on vacationing in the golden West: • seeseattle.org provides up-to-date Seattle tourist info online, by mail, and downtown offices at Eighth Avenue and Pike Street (1-206 461-5840;). • Golden Gate Ferry Service (1-415 923-2000) runs a frequent shuttle service across the bay from San Francisco’s Market Street pier to downtown Sausalito. The half-hour boat ride costs $5.60 each way for adults. • bellagiolasvegas.com sells tickets in advance for Cirque du Soleil’s invariably sold-out “O” show at the Bellagio Hotel & Casino in Las Vegas. Order up to 90 days in advance ($90 & $110) online or at 1-888 488-7111. We’ve seen lots of Broadway shows, but never anything as spectacular as Cirque du Soleil. • queenmary.com gets you to the hotel reservations desk Hotel Queen Mary (1-800-437-2934) for an overnight on the former ocean liner, now permanently berthed in Long Beach. First-class staterooms rent for $110 and up.

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Best of Canada and Mexico High tea in Victoria, snorkeling in Cozumel, Banff and the Rockies

Drop by Victoria for a taste of Britain in the Pacific Northwest. It’s a vest pocket-size English city, transported to British Columbia on Canada’s Southwest coast and complete with formidable Parliament buildings and a Governor’s Mansion, It’s situated on the southern tip of Vancouver Island. Victoria’s main attractions are wrapped around a bustling, scenic harbor. Visitors come and go by ferries, yachts, and seaplanes. Don’t be surprised if you run into the Queen at the Empress Hotel; she has been known to stop by for high tea when she’s on this side of the pond. Make a day-trip to Butchart Gardens on the island, and hop a ferry for a visit to nearby Vancouver. We’ve been to Vancouver twice, but never to the real attraction: Victoria. We’ll get there yet. Take in Puerto Vallerta for the sun and style. Not as flashy as Acapulco or as secluded as Zihuatanejo, Puerto Vallerta nevertheless occupies a special place in the hearts of millions of visitors from the U.S., Canada, and the rest of the world. Not long ago, “PV” was a quaint fishing village on Mexico’s Pacific coast, with cobblestone streets, whitewashed cottages, and year’round sunshine. The fishing boats, cobblestones, and sunshine are still there, but today Puerto Vallerta is a bustling resort destination that attracts an international clientele. Many became so enchanted with the area that they bought second homes or retirement villas. Activities range from deep-sea fishing and jungle safaris to whale watching and bull fights. The top hotel: The Four Seasons Resort (1-800 819-5053) a self-contained destination resort 40-minutes north of the PV airport. In the ‘80s, Puerto Vallerta was a favorite location for our seminar. We’d go back. Have a Rocky Mountain high in Banff National Park. It’s Canada’s top wilderness destination and a mix of snow-capped peaks, lush green forests, sparkling glacier lakes, and the freshest air in North America. The 6,640 sq. km. park, a brisk twohour drive from Calgary, straddles the Continental Divide on the border between Alberta and British Columbia. The more adventurous can mountain-bike the forest’s fire trails to pristine alpine meadows, take a backcountry snow shoe trek in search of Rocky Mountain sheep, or embark on an overnight horseback safari to the area’s native villages. The rest of us can enjoy the scenery and accommodations at the Fairmont Chateau Lake Louise (1-800-441-1414), rated by Frommer’s as “one 157

We’ve been to Vancouver twice, but never to the real attraction: Victoria. We’ll get there yet.

of the best-loved hotels in North America.” It’s my all-time, allplaces favorite.

The Fairmont Chateau Lake Louise is my all-time, allplaces favorite.

For snorkeling and scuba, it doesn’t get any better than the reefs of Cozumel. The Mayan Coral Reef that rims the west coast of this laid-back Mexican island is the largest and most spectacular of the Western Hemisphere, an underwater fairyland second only to Australia’s Great Barrier Reef. A flotilla of dive boats is available year ‘round to take snorkelers and scuba divers out to explore the exotic underwater life that thrives around the reef. If you’re a scuba wannabe, Cozumel is one of the few places in the world where a novice can become entirely dive certified during a one-week vacation. Nondivers can luxuriate on the sugar-white beaches at one of the all-inclusive resorts that rim the island’s Caribbean coast. For those hankering to spend quality time with several thousand 19-year olds on Spring Break, Cancun is only an hour’s drive down the coast. Fall in love with Montreal. Just go there, and you will do so. I like it better than Paris. Canada’s largest city is a cosmopolitan metropolis with European roots and a Parisian flair. In addition to the city’s stylish shops, historic hotels, and trendy galleries, visitors to Montreal can choose from among the most interesting and diverse collection of international restaurants in North America. Like other parts of Canada, Montreal is a bargain for U.S. visitors, thanks to the exchange rate (at this writing, 65 cents buys the Canadian dollar). Don’t hesitate to visit Montreal in winter; the city’s ever-expanding underground totals 20 miles of interconnecting subterranean corridors lined with shops, restaurants, and amusements, allows visitors to tour Montreal in January without a coat. Minneapolis is a lot like that, though nothing like 20 miles large. Here’s where to look for more ideas for Mexican and Canadian vacations: • canada.com has a wealth of information on Canada’s top cities, including Montreal, Vancouver, Victoria, Toronto, and Halifax. • vallarta-adventures.com is one of two companies offering jungle treetop adventures using cables and harnesses to transport participants high above Mexico’s tropical forests near Puerto Vallerta. The other is Canopy Tours de Los Veranos, 1322 223-6060 ([email protected]m). • cozumel-diving.net is an online directory of the island’s dive shops and scuba certification instruction courses.

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Best family vacations A Colorado dude ranch, a motor-home road trip, a dinosaur dig

Head for a dude ranch on your next family vacation. That sounds like a swell idea to this experienced camp counselor and waterfront director. I would have loved taking our kids to a dude ranch, but somehow that idea got away from us. With swimmin’ holes, trail rides, square-dance parties, fly-fishing, and campfire sing-a-longs on the daily agenda, there’s plenty to keep the whole family busy during a stay at one of the many dude ranches and family farm resorts throughout the U.S. and Canada. Between the hayrides and river rafting, city kids may learn to milk a cow, ride a horse, or spin a lariat. The resorts are perfect for multigenerational vacations, it says here, and they’re located in every region of the country. RanchWeb (ranchweb.com) lists hundreds of ranch resorts, from rustic bunkhouse-style mountain retreats to luxurious spa ranches offering massages, concierge services, and gourmet meals. Take the kids along on your next cruise. The increasingly competitive cruise line industry is catering to the interests of children with innovative programs to keep kids active and entertained while their parents enjoy the adult pleasures of a sea voyage. Princess Cruise Line (princesscruises.com) offers a “Love Boat Kids” program of treasure hunts, magic shows, and pizza parties organized by three different age groups. Children on Celebrity cruises (celebritycruises.com) can choose from among T-shirt painting, talent shows, and other activities hosted by “special youth counselors trained in child psychology.” The 100,000 children expected to sail on Carnival’s “Fun Ships” (carnival.com) in 2003 will have a choice of activities ranging from karaoke parties and photography workshops, to art classes and teen makeovers. Disney’s two cruise ships (disneycruise.com) offer an entire deck for children’s activities, plus complementary pagers allowing parents and kids to keep in touch during the day. See the USA up close with a family motor home vacation. Whether it’s a weekend dash to the mountains or a cross-country land voyage, renting a recreational vehicle lets you travel at your pace, linger at the sites you enjoy, and see more of the nation’s spectacular scenery than any other option. Newer motor homes come complete with TVs, VCRs, DVD players, and video game systems that keep the kids amused during the less interesting stretches. Companies like Cruise America (cruiseamerica.com) rent self-contained 27-foot RVs that sleep 159

Disney’s two cruise ships (www.disneycruise.com) offer an entire deck for children’s activities, plus complementary pagers allowing parents and kids to keep in touch during the day.

six for under $1,500 a week in “high season” (mid-June through early-September), including liability insurance and a 1,000-mile allowance. One-way rentals and fly/drive plans allow you to plan a trip itinerary with no doubling back.

Newer motor homes come complete with TVs, VCRs, DVD players, and video game systems that keep the kids amused during the less interesting stretches.

Take ‘em to Disney where there’s fun for all ages. Disney’s two U.S. theme parks have been expanded to offer more attractions and amusements than ever, and there’s plenty to enchant kids from toddlers to the college crowd. The original Disneyland in Anaheim has been joined by a new Disney California Adventure Park, and several new hotels have been added within the compound. A fiveday pass to both parks runs $165 ($135 for children). Walt Disney World near Orlando now includes the original Magic Kingdom, Epcot, a new Disney Animal Kingdom theme park, the Disney-MGM Studios, plus a recreated 1940’s Atlantic Coast boardwalk, a Cirque Du Soleil extravaganza, two waterparks, and an all-inclusive Pleasure Island nightclub area for the 18-and-older set. A five-night “Ultimate Park Hopper Pass” offering unlimited access to all parks and attractions goes for $293 ($235 for kids 3-to-10), plus the cost of a room at a WDW resort hotel. Send your kids on a real dinosaur dig. When a week at the beach or the lake starts sounding a bit tame to your family, shake things up with something entirely different: a family archeological expedition to a real dinosaur dig. Wyoming Dinamation (1-877 996-3466, [email protected]) offers parents and children a chance to spend a week prospecting for the bones of Allosaurs, Triceratops, and T-Rexs at several ancient Jurassic watering holes in Wyoming ($1,050 to $1,150 per person, including room, board, equipment, local transportation, and instruction). Dinosaur Discovery Expeditions (1-800 344-3466) offers a five-day dino camp for families staffed by paleontologists ($375 for kids, $850 adults). For more ideas on a cool family vacation, try: • clubmed.com takes you to Club Med’s all-inclusive beachfront resorts in Port St. Lucie, Fla., and Ixtapa, Mexico. Special activity programs are offered for children 3-17, and babies as young as 4 months are welcomed. • hersheypark.com is your link to the theme park in Hershey, Pa., (1-800-437-7439). It is only one of the attractions at Chocolatetown, USA, where the street lamps look like foil wrapped candy kisses. • www.dinosaurdon.com takes you to dinosaur expert “Dino” Don Lessem. It offers links to a number of dinosaur dig camps in the Western U.S. and Canada. • sailmainecoast.com (Maine Windjammer Association) offers cruises of 3-6 days along the coast of Maine on historic tall ships at rates starting $110 daily per family member. • duderanch.org lists over 100 members offering family dude ranch vacations throughout the Western U.S. (1-307 587-2339). 160

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Best cruise vacations Alaska’s inside passage, Mississippi steamboats, French-Canadian waterways

Explore the Alaskan wilderness from your stateroom balcony. Alaska is rapidly becoming North America’s top summer cruise destination, and all the major cruise lines—from upscale operators like Radisson to mass marketers like Carnival—are deploying ships in Alaska from May through September. The best deals are on the giant floating palaces that cruise the inside passage where fares often dip below $1,000. But you’ll come far closer to the Alaskan wilderness and wildlife on a small-ship adventure tour. Passengers on Glacier Bay Cruiseline’s MV Wilderness Adventurer (glacierbaytours.com) explore backcountry glacial inlets by kayak launched from the stern of the ship during seven-day Inside Passage cruises ($3,400 to $4,200 per person in July peak season). Cruise West (cruisewest.com), another small-ship specialist, offers a Gold Rush itinerary from Juneau on its 78-passenger Spirit of Alaska for $3,460 to $4,200 per person. Our cruise to Alaska was in the ‘80s, on the Love Boat, and we loved every minute of it. We saw whales, killer whales, lots of porpoises, and gorgeous scenery. I’m not much for cruises, but that’s one I’d take again. See America’s heartland on a Mississippi Steamboat cruise. Riverboating is thriving along the Mississippi these days, and there’s no better way to visit the colorful and historic towns that line its shore than on a luxury riverboat cruise. The 113year old Delta Queen Steamboat Company (deltaqueen.com) operates a fleet of passenger riverboats along the river, each with accommodations and amenities rivaling upscale ocean liners. Brochure fares range from $525 per person for a 3-night voyage, while 11-night cruises to such ports as Memphis, Vicksburg, Natchez and New Orleans start at $1,925. Like so many other children who grew up not far from Cincinnati, I was treated to a half-day cruise on the Island Queen when I was maybe 7 or 8. Ever since, I’ve wanted to see the full length of the Mississippi on a paddlewheeler cruise. Maybe next year. Try a theme cruise that ties in with your interests. Would-be cruisers who fear they may have little in common with their fellow passengers should consider one of the growing number of specialty theme cruises now being offered. Both Holland American and Norwegian lines are scheduling geek cruises with daily seminars and discussions of computer issues. Bridge and poker players are flocking to special tournament cruises to Alaska and the Mexican Riveria sponsored by Card Player magazine 161

We saw whales, killer whales, lots of porpoises, and gorgeous scenery. I’m not much for cruises, but that’s one I’d take again.

(cardplayer.com). Cruise West is providing daily shutterbug seminars by photography experts during a special cruise retracing Lewis and Clark’s expedition down the Columbia and Snake rivers. Murder Mystery Cruises on tall ships are offered by Windjammer (windjammer.com). Delta Queen runs an annual Civil War Cruise through the rivers of the Deep South. Cunard is offering a smorgasbord of theme cruises for those interested in topics ranging from British theater to ‘60s-era rock & roll.

I was treated to a half-day cruise on the Island Queen when I was maybe 7 or 8. Ever since, I’ve wanted to see the full length of the Mississippi on a paddlewheeler cruise. Maybe next year.

Sail the St. Lawrence and see New England, too. No need to fly south to some warm water port for this voyage. It’s a cruise through the best of the Northeastern U.S., the charm of Nova Scotia, and the beauty of French Canada. The best of the batch, I’d say, is on the Colonial Heritage—a jewel of a ship operated by Crystal Cruises, one of the world’s most luxurious lines. The 12-day/11-night odyssey begins in Montreal, with visits to stunning Quebec City, Sydney, Halifax, Bar Harbor, Boston, Newport, and my favorite, New York City. Brochure prices range from $5,805 (“deluxe stateroom with large picture window”) to $17,045 for the crystal penthouse with private veranda. I’ve got to admit that works for me! Take a private cruise—if your pockets are deep enough. If you don’t feel like sharing your seagoing vacation with a few thousand complete strangers, charter a private cruise on a luxury yacht. SailAway Yacht Charter Consultants (1800sailaway.com) can link you up with one of more than 750 world-class yachts available for charters ranging from a few days to several weeks. Experienced sailors may prefer a do-it-yourself bareboat charter (rates for a 36-foot sailing yacht start at under $300 per day). But if you want pampering, go for an ultra-luxury crewed yacht (complete with meals, limousine transfers, and your own personal charter consultant) for $25,000 to $250,000 per week. Here’s where to look for more ideas: • americancruiselines.com offers seven-night cruises through America’s inland waterways from Bar Harbor, Me., to Fort Myers, Fla., on two 49-passenger luxury ships. That’s American Cruise Lines, 1-800 841-6880. • cruisecritic.com offers a free online newsletter with updates on special cruises, discounts and price reductions. • catalinaexpress.com links to a high-speed ferry with up to 30 daily departures year-’round from San Pedro and Long Beach for the 26-mile ocean journey to California’s Santa Catalina Island. Round-trip fares are $40 for adults. That’s the Catalina Express, 1-800 481-3470. • cruise.com gets you online discounts for hundreds of top cruises, plus ship reviews and statistics, plus information on shore excursions. • whales.com offers whale-watching and wildlife cruises from Bellingham, Wash., through the San Juan Islands. 162

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Best honeymoons A chartered private yacht, the sizzle of Acapulco, romance on the rails

Honeymoon in style on your own private yacht. Get married at sea, then island hop the Florida Keys for a first or second honeymoon of two to seven days—aboard a luxurious 56-foot motor yacht. The package, offered by Latigo Wedding Cruises (latigo.net), includes a sunset ceremony, a wedding cake, gourmet meals served in the yacht’s honeymoon suite, and more, starting at $2,730 for the two-night voyage. For a bit more ($22,000 “plus expenses”), West Coast honeymooners can cruise the Pacific coastline from Alaska to the Mexican Riviera in the VIP suite aboard the 70-foot luxury yacht Stephanie Ann (atosea.com). Elope to a romantic country inn or B&B. No need to travel half way around the world for the perfect honeymoon. In fact, you may not need to leave town. The U.S., Canada and Mexico are peppered with hundreds of charming inns and romantic bed & breakfast retreats that cater to newlyweds and second honeymooners. Romantic Riversong Inn (romanticriversong.com), at the foot of Giant Track Mountain in Estes, Colo., offers an elopement package that includes an antique-furnished room with sunken tub, gourmet candlelight dinners, and a snowshoe wedding ceremony. The Inn at Heavenly in South Lake Tahoe (innatheavenly.com) lets honeymooners bring their pets along to a private mountain cabin in the spa-resort, just a hop from the area’s ski slopes, lakefront activities, and casinos. Barrett’s B&B and Tea Room on the Chesapeake in St. Michaels, Md., (barrettbb.com) has put together a three-night honeymoon package that includes Tea for Two each day, two gourmet dinners, a sunset cruise on the bay, and roses. What’s more, “the bride takes home the wedding-night quilt.” Acapulco just might be the most romantic spot in North America. You won’t find Liz Taylor, John Wayne, Hedy Lamar, and the other movie stars whose names aren’t often recognized by the Hip Hop Generation. But you know them, and so do I, and we remember that they made this Pacific Coast resort town famous during the ‘50s and ‘60s. Acapulco remains Mexico’s shining jewel on the sea and an ideal destination for newlyweds and lovers of all ages. Acapulco’s drawing cards include a glistening horseshoe-shaped bay, ringed by luxury hotels, spectacular cliffs overlooking the sea, hundreds of trendy restaurants and jazzy nightspots, and guaranteed sunshine 365 days a year. Book a room at Las Brisas, a cliff-side luxury hotel over 163

Though it’s just off the coast of Massachusetts, Martha’s Vineyard is a world away from the realities of the mainland and an ideal choice for a laid-back summer or fall honeymoon.

looking the bay that offers private pools with its suites, views to die for, and a fleet of pink and white jeeps to shuttle guests to area attractions. I liked it, but Gene preferred to stay in town.

The unanticipated beauty of Sedona blew me away.

Plan an island honeymoon right here in the USA. Though it’s just off the coast of Massachusetts, Martha’s Vineyard is a world away from the realities of the mainland and an ideal choice for a laid-back summer or fall honeymoon. The island is dotted with quaint shops, fashionable restaurants, and interesting little towns that couples can explore by bicycle or moped. Foder’s Travel Guide calls the Lambert’s Cove Inn “the most romantic inn on the island (lambertscoveinn.com). A short walk to the beach, the inn is located on 71/2 secluded acres in the pastoral town of West Tisbury. The Thorncroft Inn in Vineyard Haven (thorncroft.com), a vest-pocket, four-diamond B&B that specializes in honeymoons and romantic getaways, offers rooms with two-person whirlpools and private hot tubs. In Oak Bluffs, stay at the Oak House, a romantic Victorian B&B on the beach that once served as the island governor’s mansion (vineyardinns.com). Take a honeymoon ride of a lifetime through the Canadian Rockies. VIA Rail, Canada’s national train system, offers a Romance by Rail package that provides all meals, fresh flowers in your stateroom, and sparkling wine and chocolates on your pillows as you travel overnight in sleeper class. The three-day journey from Toronto to Vancouver passes through some of North America’s most spectacular scenery, and the accommodations—a spacious suite comprised of two regular sleeper class bedrooms—are first class all the way. One-way fares from Toronto to Vancouver start at $3,846 per couple, while a shorter Eastward journey from Montreal to Halifax begins at $638 for two. Check viarail.ca for details. Here’s where to find more ideas for the perfect honeymoon: • honeymoonsguide.com gives you an online directory and guide to hundreds of romantic inns, B&Bs, and hideaways in every part of the U.S. • ayacht4u.com/honeymoons.html provides private yachts for honeymoon packages for newlyweds. Thaler’s Yacht Charters and Vacations, 1-610 923-0200. • mvol.com provides detailed information on the island’s hotels, inns, B&B’s, and vacation rentals, as well as schedules for ferries. That’s Martha’s Vineyard Online. • lovetripper.com presents ideas for such intriguing honeymoon destinations as fantastic Sedona, Ariz., Alaska’s Pearson’s Pond, and “romantic Kentucky.” The unanticipated beauty of Sedona blew me away. • modernbride.com is where Modern Bride magazine and its online relative offer their own rankings of the 50 top honeymoon destinations for today’s newlyweds. 164

Chapter 10

Yes, you can cope with insurance You may be in an adversarial relationship when buying an insurance policy

Gene Balliett

T

hose of us who know about the war clause in insurance

policies winced when President Bush described the horrifying events of September 11, 2001, as an “apparent

act of terrorism.” Then, still thinking about the insurance implications, we raised our eyebrows when he announced that the United States is at war with terrorists. Certain insurance contracts exclude from coverage claims rising from “warlike action by a military force, including action in hindering or defending against an actual or expected attack, by any government, sovereign, or other authority using military personnel or other agents.” The word terrorism probably does not appear in your insurance policies, but the words warlike action may be there. Those certainly can be used to describe the attack on the World Trade Center and the Pentagon. The President’s words, a day after the attack: “...the deliberate and deadly attacks which were carried out yesterday against our country were more than acts of terror. They were acts of war.” At the very least, his statement raised anxieties about insurance coverage. When insurers invoke the war clause, there’s a reason. The war clause justifies not paying on their policies: business interruption, commercial crime, commercial property, home (including renters), vehicle, and workers compensation. Some insurers, not all, include a war clause in the following policies: accidental death and dismemberment, health, and life (both individual and group coverages). Some members of Congress quickly warned insurers. On September 17, in a letter to the National Association of Insurance Commissioners, the House Financial Services Committee said: “Through necessity our government is expressing America’s outrage through words of war. But this rhetoric reflects the passion and determination of our country, not the legal reality of Tuesday’s destruction. Any attempt to avoid coverage obligations by either primary insurers or reinsurers based on such legal maneuvering would be . . . unsupportable and unpatriotic.” 165

Some insurers, not all, include a war clause in the following policies: accidental death and dismemberment, health, and life (both individual and group coverages).

Did insurers heed the warning? They did, while finding another way to protect themselves from losses. They surely understood any decision not to pay on claims would raise a public outcry and perhaps restrictive legislation. They pressed for government aid, and got it—while filling the re-election campaign chests of incumbents in the U.S. House and Senate.

Insurers did press for government aid while filling the re-election campaign chests of incumbents in the U.S. House and Senate.

In this chapter, we discuss most kinds of insurance. You will find straight-to-the-point suggestions of what to do about the following: • Disability and LTC (Long Term Care). LTC is worthwhile; buy it before you need it. • Health insurance: Will it disappear? It’s still a shield against illness and financial ruin. But consider this possibility: • Medical Savings Accounts: the future? For many, an MSA can be the smartest choice for health coverage. (How could it be such an unknown?) • Homeowners and renters coverages. They’re protection for the homestead and what’s in it. • Vehicle coverage: cars and more. Insurance for your car— and your watercraft, too. • Liability insurance: a necessity. You are at risk even though you or your business did nothing wrong. (Just a grim reminder.) • Business insurance: filling gaps. Hope for the best, but protect against the worst. • Life insurance: covertly adversarial. Do a little homework, and you may know more than the insurance agent about competitors’ products and less costly strategies • Cash-value life insurance: the straight story. Why those who know recommend term insurance.

70 Billion years BC Fetch me a man!

Well, an unexpected tiger, lion, or bear would give us something else to talk about!

You’ve got a point. Hunting and gathering is satisfying work, but it’s dangerous.

It’s not fair that we women hunt and gather while the men loaf around the cave.

They ought to be out here helping us!

What would motivate them?

CH & GB 2000

What will it take to stop us from talking about men?

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Tempt them Better, reward them with our charms! when they bring home the bacon! That way, we get the cave. Isn’t that the better way?

insurance

Disability and LTC insurance LTC is worthwhile, so buy it before you need it—but shop comparatively

Long term care insurance is becoming an attractive option for many of us. For a couple nearing retirement, the odds are 50%-50% that one will incur a six-figure LTC expense. Neither traditional medical insurance nor Medicare provides much longterm coverage. In time, Medicaid may cover basic nursing home costs for those who have impoverished themselves by first paying the expenses out of pocket. Those we know who have witnessed Medicaid-level care want no part of it for themselves. The cost of long term care can drain your family’s wealth. Nationally, the average cost of basic nursing home care was recently estimated at $46,000. In some regions, the costs are double that sum. Home care can be less costly, but it doesn’t come cheap. Even routine round-the-clock staffing can push costs into the vicinity of nursing-home expenses. Don’t wait to buy LTC until you need it. If you’re already in failing health, you are probably uninsurable. Also, the yearly cost of LTC coverage rises rapidly with age. Policies purchased by relatively healthy individuals in their late 50s or early 60s tend to be affordable. Variables other than age also influence premium costs: • Daily benefit. At this writing, many policies offer daily benefits ranging from $50 to $500 per day. Check the present cost of LTC in the area when you visit three or more nursing homes. • Benefit period. Most plans allow selection of two to five years, but we recommend lifetime LTC coverage to those who can afford it. The purpose of insurance is to cover risks you cannot or prefer not to cover yourself. • Elimination period. The most-expensive plans provide coverage from day one, but policies with 30, 60, or 100 day elimination periods are more affordable. We generally suggest the longest period you can afford to self-insure. Buy a policy that’s tax-qualified. If you don’t, you could miss out on a potentially significant tax deduction. Look for a policy that’s non-cancelable and guaranteed renewable. We often recommend the home-care and day-care options. Be aware of provisions establishing waiting periods for pre-existing conditions. Steer clear of policies that provide no benefits for Alzheimer’s or other cognitive disorders; they are the leading cause of nursing-home admissions. Avoid poli 167

The purpose of insurance is to cover risks you cannot or prefer not to cover yourself.

cies that require hospitalization to qualify for benefits. Also, shun policies requiring skilled nursing home care before receiving benefits for intermediate or custodial care. Does someone you love need your help with LTC decisions? The comparative shopping tends to become harder, even baffling, as old people grow older. Expertise within the family is a must. Recommendations by salespeople need to be monitored.

Steer clear of policies that provide no benefits for Alzheimer’s or other cognitive disorders; they are the leading cause of nursinghome admissions.

Is disability insurance a live alternative to LTC? Maybe, depending on a number of factors including the strength of your capital assets, health, the size of your disability benefit, and your age. Compare premiums for disability and LTC policies— and for disability policies that eventually become LTC policies. Avoid disability income protection coverage—if you can. I think it’s relatively lame protection. Suppose Roger Clemens lost the use of his right arm. An income protection policy might not pay a dime if the New York Yankees’ star refused to learn to pitch left-handed. Exaggeration? I hope so! Point is, a policy that provides coverage in your own occupation is your best bet— but that kind is vanishing. Not long ago, it was still being offered (for certain occupations) by Guardian/Berkshire Life, Lloyds of London, MetLife, and Principal Financial Group. Be wary of group disability coverage. It costs less than individual policies, because it pays less. Be sure to compare coverage levels as well as rates. Rather than reducing the disability benefit to cut costs, consider reducing premiums by accepting a longer elimination period—the number of months you must be disabled before benefits commence.

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Health insurance: Will it disappear? It’s still your family’s shield against illness and financial ruin

Your young adults had better learn the ABCs of health insurance coverage—while it’s still available. HMOs (Health Maintenance Organizations) are often the most affordable options, but they can place considerable restrictions on choice of provider and treatment options. Traditional fee-for-service indemnity plans reimburse a portion of out-of-pocket health care expenditures. Such plans offer a wider range of provider and therapy choices but tend to be pricier. PPOs (Preferred Provider Organizations) assemble networks of participating health professionals and fall somewhere in between in terms of cost and flexibility. Point of Service (POS) plans, a hybrid of the HMO and PPO, extend coverage to services by out-of-network providers, but patients who stray from the network receive lower benefits. Advise them to watch out for what’s not covered. Virtually all plans exclude coverage for pre-existing conditions—a potentially important issue for someone considering a change of carriers. Also, a growing number of plans exclude coverage for organ transplants and sexually transmitted diseases. Few pay for elective cosmetic surgery, and most exclude hearing aids and eyeglasses. Many offer limited coverage for mental health services, but substance-abuse treatment is generally excluded. Some plans refuse to pay for routine medical exams. Some pay for no expenses related to normal pregnancy, childbirth, or wellbaby care. It’s important to be sure services that are important are covered before signing the dotted line. Tell ‘em: If you lose your job, you may lose your health coverage. Federal law may protect your young adult from an abrupt termination of coverage. Provisions of the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) entitle workers in employer-sponsored group health plans to continue coverage for themselves and their dependents for 18 months after leaving their jobs. The same law provides for continued coverage for a worker’s family in the event of the employee’s death or divorce. But COBRA coverage can be so expensive that someone out of work may be unable to afford it. Also, it’s not automatic. Application for COBRA benefits must be made within 60 days of leaving a job. Pass along the good news: New health insurance options are opening for the self-employed. Finding affordable health cov 169

Some plans refuse to pay for routine medical exams. Some pay for no expenses related to normal pregnancy, childbirth, or well-baby care. It’s important to be sure services that are important are covered before signing the dotted line.

COBRA coverage can be so expensive that someone out of work may be unable to afford it. Also, it’s not automatic. Application for COBRA benefits must be made within 60 days of leaving a job.

erage for self-employed individuals is not as difficult as in the past. One online information source (ehealthinsurance.com) provides instant price quotes on non-group health insurance policies available in various parts of the country. A recent check of that Web site’s database turned up 28 different health-insurance options for self-employed individuals and their families in Maryland alone. One option available to a 59-year-old self-employed nonsmoker and his wife was a $118 per month indemnity plan with a $10,000 per person annual deductible and 20% coinsurance requirement; another was a $1,029 per month PPO with a $100 deductible and 10% coinsurance. A Medical Savings Account may be a more attractive option. Advise considering coverage to supplement basic health insurance. Major-medical insurance is designed to click in when basic coverage taps out. Coverage limits of one or two million or more are available. Some feature deductibles as high as $25,000 to $50,000, which can be satisfied either with expenses paid by basic health insurance or out of pocket. The better major-medical plans also provide long-term nursing home and/ or home health-care benefits. Individuals on Medicare should consider Medigap. It covers some of the benefit gaps in Medicare, and benefits are available in 10 standard plans ranging from plain vanilla to comprehensive, including prescription drugs. Coverage is identical from one insurer to the next, but rates can vary widely. If you’re an employer, here’s what you need to know. While health insurers are rating your employees in an effort to reduce costs, you should be checking up on the insurers. The National Committee for Quality Assurance (www.ncqa.org) reports on the quality of HMO and POS plans; A.M. Best (www.ambest.com) offers ratings on over-all financial strength and ability to meet claims commitments; and ratings by Standard and Poor’s (www.standardandpoor.com) serve as indicators of insurers’ ability to pay claims.

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Medical Savings Accounts For many, an MSA can be the smartest choice for health coverage

A Medical Savings Account could put you dollars ahead. Thanks to Federal legislation that took effect in 1997, millions are able to sidestep the managed health-care mess by capping their family’s out of pocket health expenses at a reasonable level. MSAs couple a tax-deferred savings account with a low-premium, high-deductible major-medical policy. They tend to carry annual deductibles of $3,200 to $4,800 for family coverage, with an out-of-pocket maximum of less than $6,000, including the deductible and coinsurance payments. Because of the high level of patient cost-sharing, such catastrophic coverage is available for as little as half the cost of traditional health insurance. The premium savings are then plowed back into the family’s MSA investment account for use in meeting the deductible and coinsurance charges. Contributions to an MSA are tax deductible. What’s more, the contributions can be invested for tax-free growth. With an MSA, if your family’s medical expenses are low, the unspent funds can be carried over from one year to the next to meet future deductible expenses. Any funds not withdrawn to pay for medical expenses are not taxed. At retirement, the remaining MSA balance can be used to pay for LTC and other post-retirement needs not covered by Medicare. Fly in the ointment: MSA’s aren’t for everyone. By law, Medical Savings Accounts may be set up by self-employed individuals and by employers who qualify as small businesses (50 or fewer employees). Larger corporations and their employees are out of luck. An MSA frees you from managed care restrictions and benefit limits. In contrast to the health-care service restrictions imposed by most traditional health plans, funds withdrawn from a tax-sheltered MSA can by used for prescription drugs, long term care costs (including home care), and vision care. Best of all, since you pay the bills, you pick the doctors. With an MSA, there’s no penalty for selecting a non-network provider, and your physician is free to choose therapies based on their value to the patient rather than on limitations imposed by an insurance carrier. Another key advantage: MSAs are portable. Even if the MSA was set up by your employer, you own the account—so it goes 171

At retirement, the remaining MSA balance can be used to pay for LTC

The funds accumulated in your MSA can be used to purchase temporary bridge insurance when you are between jobs.

with you when you leave your job. What’s more, the funds accumulated in your MSA can be used to purchase temporary bridge insurance when you are between jobs. That’s an important consideration if you have a pre-existing condition that could make you uninsurable if there’s a lapse in your health coverage. Some plans even offer a hospital indemnity rider to protect against major hospitalization expenses during the initial months of coverage when deposits are not yet sufficient to cover the annual deductible and coinsurance requirements. Is the MSA the ultimate solution to all the health-care financing problems? We think so, but many others disagree. Their central argument is that many people would forego necessary health care, preferring to keep the money in tax-free investment. To keep their bodies from littering the streets, government funding would need to provide necessary health care. What’s your opinion? Here’s where to learn more: • www.americanhealthvalue.com takes you to American Health Value, LLC, which describes itself as a consumer-friendly, innovative MSA sponsor. • www.firstmsa.com provides a detailed explanation of MSA. • www.goldenrule.com takes you to the insurer that pioneered Medical Savings Accounts. • www.medicalsavings.com shows premium information, state by state. • www.msabank.com takes you to an MSA sponsor, and its Web site is a fountain of MSA resources.

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Homeowners and renters policies Protection for the homestead and what’s in it

Beware: The policy may protect the lender’s interests rather than yours. Every few years a stem-to-stern re-evaluation of homeowners coverage is wise. Your own protection requires the right type of policy for your needs, with appropriate levels of protection (including riders for jewelry, computers, or other valuables)—plus supplemental coverage for damages not covered by the basic policy required by lenders. Basic policies cover losses from 11 perils. Basic (HO-1) coverage pays for damages from fire or lightening, windstorm or hail, explosion, riot or “civil commotion,” aircraft, vehicles, smoke, vandalism or “malicious mischief,” theft, damage from glass building materials, and volcanic eruption. “Basic plus” (HO-2) protects against those 11 perils plus six more: falling objects, weight of ice or snow, losses resulting from an electrical surge, and (only) three types of water-related damages. The most popular policy, “broad risk” or “extended homeowners” coverage (HO-3) will pay for losses resulting from those 17 and most perils not specifically excluded by your policy. Watch out for what’s not covered. That includes damage from earthquakes, flooding, war, and nuclear accident—just for openers. Even HO-3 policies, carried in 2001 by 84% of homeowners, also fail to cover freezing of pipes in an unoccupied building; wear and tear due to insect or rodent infestation; cracking of walls, foundations, or pavements; damage caused by domestic animals, pets, or livestock; and losses from damage to cars, trucks, boats, and aircraft. If you rent part or all of your property, your tenants’ belongings are not covered by your basic policy. Also, structures used for business purposes also tend to be excluded. Read the small print; if any exclusions trouble you, buy supplemental coverage. Make sure you’re protected against the latest homeowner’s horror: toxic mold. It’s a problem in many parts of the country —so troublesome in Texas that some carriers have stopped selling homeowners policies there. Insurers are denying coverage even for mold-related losses resulting from a covered peril. Caveat emptor—and shop for the coverage you need. Insure your dwelling and its contents for replacement values. That amount can be different from market value or from depreciated cash value. Review your policy limits every year 173

Read the small print; if any exclusions trouble you, buy supplemental coverage.

Review your policy limits every year or so, or get homeowner’s coverage with automatic inflation adjustments.

or so, or get homeowner’s coverage with automatic inflation adjustments. Standard coverage usually insures possessions at 50% of the value of the dwelling, but many boost the coverage to 70% or more. Most policies offer relatively inexpensive floaters that provide additional protection for jewelry, furs, cameras, computer equipment, and other personal property. The standard level of liability protection in homeowners policies used to be $100,000, but $300,000 coverage limits are becoming more common. Use these strategies to hold down costs. The simplest way to trim the price is to raise the deductible. A policy with a $1,000 deductible per claim may cost 20% or 30% less than one with a $250 deductible. Security devices such as deadbolt locks, alarm systems, and smoke detectors can lower rates. But they can be driven upward by an in-ground pool, a backyard trampoline, and ownership of certain breeds of dogs. Other cost-cutting strategies include buying home and auto policies from the same carrier; securing senior discounts for homeowners over age 55; and exploring group rates through a business association, professional group, or alumni organization. Also, make sure that the coverage reflects the value of your home and its contents but not the land. Your claims history can drive up premiums. A single claim— even a large one—is unlikely to have a negative impact on your rates, but several claims over a period of two or three years figure to trigger readjustment. Worse, multiple claims in the same year can lead to a policy cancellation. If canceled, you may find yourself uninsurable. If you rent, get insurance. Renters insurance (HO-4) and condo owner’s coverage (HO-6) protect personal property from the 17 perils named above. Additional riders can be purchased to cover jewelry, computers, and other expensive items. Beware of policies providing ACV (actual cash value) coverage; instead, get replacement-cost coverage.

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Vehicle coverage: cars, boats, and more Rule of thumb: Buy as much liability coverage as you can afford

Bare bones auto insurance coverage can be risky. Minimum coverage levels required by state law are far too low. Liability coverage minimums required in many states pay only $20,000 in bodily injury expenses per person ($40,000 total per accident) and $20,000 in property damages (20/40/20). Required levels are even lower elsewhere. We generally advise buying as much such coverages as you can afford. Also: Figure on collision and comprehensive coverage. The collision component pays for repairs to your vehicle in the event of an accident; comprehensive, for losses relating to auto theft, vandalism, or natural disasters. If you’re financing a new or latemodel used car, your lender will require both coverages. If you own the vehicle outright, comprehensive and collision coverages are probably worth buying. Just be sure you’re not paying more for collision and comprehensive than the car is worth or what you can comfortably self-insure. Look into MedPay and some other options. Medical payment insurance covers medical expenses for you and passengers (including injuries incurred as a pedestrian), regardless of who is at fault. Personal injury protection (PIP) and broader “no-fault” coverages are expanded forms of medical-payments protection that may be required in your state. Uninsured motorists coverage pays if you’re the victim of a hit-and-run driver or one with no insurance. Underinsured motorists coverage will pay if the driver who hit you causes more damage than his policy covers. Don’t be shy about shopping. Rates for the same coverage can vary by as much as 100% from carrier to carrier. Consider higher deductibles; moving your collision deductible from $200 to $500 can trim your premium by as much as 30%. Avoid high profile vehicles that are expensive to repair or have a high theft rate; insurance costs are significantly higher for them. Press your insurer for discounts. Depending on the carrier, you may qualify for a rate reduction because of safety features (automatic seat belts, air bags, anti-lock brakes, etc.), anti-theft devices; taking driver’s training classes, being accident-free for three years, buying car insurance on the Internet, being a senior (over 50) driver, or insuring your home or additional vehicles with the same company. Some insurers are even offering discounts to selected occupational groups (the 21st Century Group offers premium discounts to scientists and engineers; Horace Mann 175

The general liability insurance policies carried by most businesses offer no coverage for vehicles, so you will have to contract for this separately.

Insurance Co. provides rate reductions to teachers; and GEICO offers 2% to 15% off rates for active and retired military personnel). And FYI: Car insurance in cities can cost three times as much as in rural areas.

Rates for the same coverage can vary by as much as 100% from carrier to carrier.

Check on your business vehicle liability coverage. The general liability insurance policies carried by most businesses offer no coverage for vehicles, so you will have to contract for this separately. Your liability insurance should cover not only the company’s own cars and trucks, but also vehicles owned by employees when they are used for business. Known as Employer’s Non-Owned Automobile Liability Insurance, this supplemental coverage is relatively inexpensive (figure on $65 to $100 for $1 million in protection annually). If your business owns no vehicles but rents or leases them occasionally, consider Hired Vehicle coverage for both property damage and personal injury protection. If a number of your employees make use of insured company vehicles, the carrier may conduct occasional checks of their driving records. An employee with a bad record may be excluded from coverage. Car rental insurance: it’s one type of coverage you probably don’t need. Car rental companies charge between $7 and $25 per day for loss damage waivers and collision damage waivers that duplicate your own collision and comprehensive. Although your auto insurance carrier will expect you to satisfy a deductible before paying for damage to a rental car, even this charge may be covered under your homeowner’s insurance policy. Uncertain? Ask the agent. You’ll need insurance to keep your boat afloat. Separate coverage is recommended for each of the three types of insurable watercraft: boats (generally between 16 feet and 25 feet 11 inches); yachts (26 feet or longer); and personal watercraft (jet skis, wave runners, and the like).

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Liability insurance: a necessity You are at risk even though you or your business did nothing wrong

General liability coverage is your business’ first line of defense from damage suits. The fact that you or your company did nothing wrong is no guarantee that you won’t be sued. Operating as a corporation may shield your personal assets in the event of a business-related liability suit, but the company itself remains at risk. General liability insurance will provide the business with protection from a wide range of liability exposures, including bodily injuries to customers on the company’s premises, property damage or loss, personal injuries (including libel, slander, defamation, false imprisonment, and false arrest), and advertising injury (e.g. charges of negligence resulting from the promotion of your company’s goods or services). In addition to covering the cost of a settlement or court damage award, the coverage will also pay legal fees and other costs of defending your business against a lawsuit. But plain vanilla liability insurance won’t cover every potential litigation peril. Don’t expect the policy to pay punitive damages awarded by a court to punish your business for willful or malicious conduct rather than to compensate the injured party. Additionally, not all general liability policies pay for damages resulting from allegations of wrongful termination of employees, workplace sexual harassment, or employment discrimination. If such litigation is a concern, consider special employment practices liability insurance. Non-performance of contractual obligations may also be excluded from the coverage, but a surety bond can be taken out as performance insurance. You’re out of luck, however, if your business’ liability exposure comes as a result of the company’s criminal activities. And, of course, you’re also out of luck if the damages awarded exceed the policy’s coverage limits. How much liability coverage do you need? Liability policies usually state a dollar limit per occurrence and an aggregate dollar limit for the policy year. For example, your policy may say that it will pay $500,000 per occurrence for personal injury or a total of $1 million in any one policy year. How much coverage you need for your business is tricky to figure. Unlike property, which has a fixed value, liability claims have no limitations. One school of thought holds that a prudent business should take out enough coverage to match the largest court award relevant to that business. Another approach is to base coverage on the company’s assets. 177

In addition to covering the cost of a settlement or court damage award, the coverage will also pay legal fees and other costs of defending your business against a lawsuit.

How much coverage you need for your business is tricky to figure. Unlike property, which has a fixed value, liability claims have no limitations.

You may need to supplement your general liability protection with specific coverage. Most businesses need to add workers’ compensation insurance and automobile fleet coverage to their liability package. Physicians, dentists, and other healthcare professionals need at least as much malpractice coverage carried by their peers. Professional liability insurance is becoming increasingly necessary in other fields including law, accounting, engineering, and architecture. Top corporate boardroom executives are taking out directors & officers coverage as protection against litigation. Watch out for the claims made vs. time of occurrence trap. Since years can pass between the time of an injury and the time a claim is filed, how your liability carrier handles a belated claim can be critically important to your business. Traditionally, liability insurance has been written as time of occurrence coverage; it provides protection in the event you change carriers or lose your insurance. An injury that occurred in 1997 when your business was insured with Company A continues to be covered by that company even if you changed insurers before the claim was filed. In contrast, claims made coverage provides protection by the carrier holding your policy at the time the claim is made. Changing from claims made to time of occurrence can leave your business vulnerable. Maybe you can close the gap by purchasing supplemental ERP or tail-end coverage from your former carrier—at a stiff price. An umbrella policy can keep you dry. Individuals and families with substantial assets often seek out higher levels of protection than those typically offered by car and homeowners policies. Umbrella policies offering $1 million to $10 million or more in additional liability protection are readily available to both businesses and individuals.

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Business insurance: filling the gaps Hope for the best, but protect against the worst

Avoid a business catastrophe with the right mix of insurance. Starting your own business is risky enough, but don’t increase the danger by failing to insure your company against the hazards of nature and the perils of marketplace. Basic property insurance generally covers losses caused by a fire or lightning strike, and most policies also cover damages due to windstorm, hail, civil disorders, and vandalism. If your business facilities are where earthquake, hurricane, or flooding is a significant danger, know that riders covering such perils are wise. Cover the other basics, too. In addition to coverage for your buildings, furnishings, and equipment, a good business insurance policy should also cover leased equipment, inventory, business records, money, securities, intangible property (such as copyrights, trademarks, and goodwill), and damage caused by leaks in steam and water pipes. Some business insurance is required. Laws in every state require businesses with employees to provide workers’ compensation insurance covering the medical expenses of those injured on the job. Liability coverage may be mandated as well. In addition, contractual requirements may impose other insurance obligations. The terms of an office lease may require a tenant to secure certain coverage; lenders often require businesses to insure collateral used for loans; and companies that lease office equipment may insist that their customers take out insurance against damage. Failure to maintain the coverage could result in the termination of a lease or a contract. Also, there’s a risk that, unless the various mandates are coordinated, your business could incur unnecessary costs due to overlapping coverages. If your office is in your home, you may need special coverage. Operating a business out of your home can present advantages, but one is not a free ride on insurance coverage. You may need a commercial rider to your homeowner’s insurance policy to ensure that you are protected against fire, theft, and accidents. Even if your at-home business has no employees other than yourself, you could find yourself vulnerable for losses unless you notify your insurer of the on-premises commercial activity. What’s more, many homeowners policies place limits on coverage for business type equipment such as personal computers, so a rider offering protection may be needed. 179

Failure to maintain the coverage could result in the termination of a lease or a contract.

Even if your at-home business has no employees other than yourself, you could find yourself vulnerable for losses unless you notify your insurer of the on-premises commercial activity.

Business interruption insurance can be your company’s lifesaver. The coverage compensates for lost income if your company has to vacate the business premises due to a fire or other disaster-related damage covered under your property insurance policy. In addition to covering the profits you would have earned had the disaster not occurred, business interruption insurance can compensate you for utility expenses and other operating costs that continue even though business activities were suspended. Extra expense coverage reimburses expenses incurred to avoid having to shut down during the restoration period. Generally there is a 48-hour waiting period before business interruption coverage kicks in, and normally it is available only as part of a broader business property policy. Protect your company from theft. If you have special form property insurance, your company is probably already covered for losses from burglaries, robberies, and other thefts by non-employees. With a lesser policy, you may be vulnerable. Safeguarding your business from dishonest employees is a different matter. If embezzlement concerns you, contract with a bonding company. Insure against the loss of your key personnel. It may be true that no member of a business organization is absolutely indispensable, but the death or disability of certain key associates, executives, or partners could have disastrous consequences. The loss could depress the value of the business and its ability to continue. Key person life and disability insurance can help it survive. A variation known as buy-sell insurance may be critical if your have one or more equity partners. Without it, the business may need to be sold in order to pay the heirs.

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Life insurance: covertly adversarial Do a little homework, and you may know more than the insurance agent

Warning: The salespeople are selectively trained. Life-insurance salespeople are among the nicest human beings you can meet. Genuinely nice people are what the industry works hard to recruit. Trouble is, their training may not include the flaws of the policies they’re selling, nor comparisons with better policies offered by competitors. Despite those gaps of knowledge, they tend to claim expertise. What to do? Your homework. Base your decisions on your own knowledge. Choose term coverage: Rescue cash for investment. Shop well, and you’re likely to find good term-insurance policies with annual premiums only 10% to 20% of the premiums for cash-value policies. Annual renewable term policies are automatically renewable year by year at progressively higher rates. Level premium term policies retain the same premium for periods of 5 to 30 years (customer’s choice). The cash you rescue could be all you need to invest. While writing Vision of Riches, Dee and I compared a good 10-year level-premium term policy with a good cash-value policy that matured at age 100. Each had a death benefit of $1,000,000 (less any outstanding loan balance in the cash-value policy). At age 100, the cash-value policy could be surrendered, assuming no outstanding loan balance, for $1,000,000 in cash. The annual premiums for a 35-year-old male in good health, a nonsmoker, were fixed for each of the 10 years at $370 for the term policy, compared with $10,800 yearly to age 100 for the cash-value. For each of 10 years, the difference in premiums was $10,430. If that sum were invested in each of the 10 years, with no further contributions of capital, the investment would compound (at 7% yearly) to $5,954,000 at age 100. That’s sure a lot more than $1,000,000. Before canceling, be sure your new policy is in force. Go to the Internet for a premium comparison. Identify a well-rated insurer with a competitive level-term policy. Buy it online or from an agent or broker, as you prefer. Read the new policy carefully; if it’s not what you requested, reject it promptly. To avoid a gap in coverage, delay canceling the old policy until the term policy is accepted and in force. A higher-premium (“rated”) term policy is often available to a customer with a preexisting health issue, but sometimes a higher-premium cash-value policy is the only coverage available. 181

The investment would compound (at 7% yearly) to $5,954,000 at age 100. That’s a lot more than $1,000,000.

If you fail to repay, the insurer will increase your loan balance by the amount of interest due for the following year. The process will be repeated annually until the cash values disappear and the policy is lapsed, worthless.

Be alert to the well-hidden problem of policy loans. When researching life insurance, you may give up trying to find any reference to the repeated roll-up of interest into the loan after money is borrowed from a policy’s cash values. If you fail to repay, the insurer will increase your loan balance by the amount of interest due for the following year. The process will be repeated annually until the loan is paid off or the cash values disappear and the policy is lapsed, worthless. By then, replacement coverage may be unavailable (because you’re too old). The customer may be left with a huge tax obligation for the loan never repaid. When the policy lapses, it becomes taxable income to the policy’s owner. Lesson: If you have a policy with cash values, don’t borrow. If you’ve borrowed, pay the interest due. Shop for the best price and coverage. For our current listing of insurance sites, go to the Concierge section at BalliettFS.com Consider buying through an insurance trust. Own your own policy, and any benefits paid to your children (or any person other than your spouse) may be subject to estate tax. Avoid the tax trap by creating an irrevocable trust, funding it appropriately, and directing the trustee to buy a well-shopped term policy covering your life. (Lots of policies covering children’s lives are sold. There’s seldom any clear need. As an alternative, we’ve often suggested that clients shun the insurance and, instead, invest the money in the child’s name in a broad-based index ETF.) Consider term but not cash value for business use. Good term policies can generally be bought for business purposes, but some insurers are reluctant to sell anything other than a cashvalue policy for business use. (Federal law doesn’t permit life insurance in an Individual Retirement Account. We think it should be banned from pension and profit-sharing plans; despite insurers’ insistence to the contrary, insurance is not an investment—according to a 1911 decision by the U.S. Supreme Court.)

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Cash value life insurance: the straight story Why those who know recommend term insurance.

I once spoke in favor of a cash-value policy. In 1983, I advised a new client, age 62, a cardiologist, to keep the $2,000,000 cashvalue policy covering his life. It had been in force 12 years, and the annual premium his insurance trust was paying was more than 10 times the premium for a 1982-new, well-shopped, annual renewable term policy with the same death benefit. He’d told me he would surely die in two years, maybe three; he had a certain heart condition that was not treatable. “You’ve got ‘em,” I responded. “So, I’m telling you something I may never again tell anyone: Keep your whole life policy. Tell your trustee, in writing, to be sure to pay the premiums on time and never to borrow any of the cash values.” My friend died late in 1985. His widow, now 79 and still playing tennis, continues to live in their big, comfortable home in New England when she’s not wintering in their spacious condo on Longboat Key, south of Tampa. Dee and I still take her to dinner each February to celebrate her birthday and her late husband’s meaningful life. Next time I see the need for it, I’ll say so. At Balliett Financial, our five financial advisors begin our relationship with new clients by running two studies, each of our own design. One gives us a snapshot of the couple’s financial path. The other determines how much life insurance is warranted, if any. When we confirm a need, we usually recommend level-premium coverage for a term of 5 to 30 years, depending on the situation. If we ever see a situation where cash-value coverage is appropriate, we will recommend it and say why—as in that one instance. We’ve seen lots of big cash-value policies bought to cover death taxes. Each time, we advised the client that the insurance was an expensive alternative to a good estate plan. By that, I mean this: Each spouse leaves everything to the other, and the surviving spouse leaves everything to charity. Result: zero estate tax. Those who wish to leave a legacy of old-age financial security to a child and grandchild can fund the kid’s IRA. Clients with deep pockets can fund an asset-protected dynasty trust with the $11,000 annual exclusions or the $1,000,000 lifetime exemption from gift taxes. Enormous wealth can be created in real estate or by compounding a stock portfolio over 40, 50, or 60 years. Also, the tax breaks can be stunning, enduring even for generations when the capital is growing inside the right kind of trust fund. 183

We advised the client that the insurance was an expensive alternative to a good estate plan. By that, I mean this: Each spouse leaves everything to the other, and the surviving spouse leaves everything to charity. Result: Zero tax.

To illustrate the low prices on term insurance, we go online. The Concierge section of our Web site (BalliettFS.com) identifies the better sites we’ve found for scouting out premiums, ratings, and term policies. The listing is subject to change at any moment, but at this writing these eight are on the list in alphabetical order): www.youdecide.com, insurance.com, Insweb.com, netquote.com, quicken.com, quicken.com, ReliaQuote.com, and Term4Sale.com.

Many cash-value policies are dropped after about seven years of paying high premiums, so we don’t often see one that’s been in force 10 or 12 years or longer.

We’re looking for illustrations, not insurers to recommend. We’re convinced many people buy cash-value policies from friends or relatives because they like them, have done no meaningful shopping, and have much less knowledge of life insurance than they believe. When we go online, we usually find more than a dozen low bidders rated for financial strength from A+ to A++ (good to excellent). We hand the printout to a client and suggest that the annual premiums shown be compared with the premium being paid for a cash-value policy. Many cash-value policies are dropped after about seven years of paying high premiums, so we don’t often see one that’s been in force 10 or 12 years or longer. The last such policy I saw had been owned 12 years, and the client was convinced I’d waste time by going after the numbers. Even so, I went after the facts, and I found that a new term policy would be substantially cheaper and would remain so for another 10 years or more. Yes, we also refer to even lower-priced insurers. They’re highquality, low-premium term insurers that do not participate in online comparisons. We use the online study as an eye-catching first step in the educational process. Not long ago, I shopped for a 20-year level term policy for a physician-client, age 45. Protection: $1,000,000. The four lowest online quotes at the time, for standard issue, ranged from $2,470 yearly (First Colony Life) down to $2,265 (Canada Life Assurance Company). Three of the four were rated A+. His preference, First Colony, was A++. The premium would have been less if he’d been rated preferred or preferred plus. If the latter, First Colony would have dropped the annual premium to $1,340 from $2,470. But that didn’t happen. He called the three phone numbers I gave him and bought a much cheaper policy from an insurer with an equal rating for financial strength. The shortcomings common to whole life policies also burden VUL. So, I see no reason to fuss about VUL’s special problems. The following issues are usually more than reason enough to avoid VUL (variable universal life) and every other kind of cashvalue life insurance coverage: • Despite what they say, it’s a loan. Money taken from a policy is not an “early distribution” or “an early withdrawal from your savings,” words I have heard from commissioned planners who 184

sell cash-value policies. The money withdrawn from cash values is a policy loan. • The loan quietly gets bigger, year over year. Unless timely repayment of loan interest is made, an additional policy loan will be charged to the loan account by the insurer at the start of the following year in the amount of interest to come due at year’s end. That process is repeated year after year until the policy owner pays the accrued interest or the insurer lapses the policy. • It’s no tax shelter. That continuing, automatic rollup of money into the loan is such an overriding issue that it overwhelms words of encouragement like these: “All or most of your ‘early withdrawal’ will be income-tax free!” The agent’s reference is to the after-tax cash that had paid premiums; it is not taxed a second time. So, the “tax-free” return of capital is no special benefit, and the withdrawal is a loan. • If the insurer lapses the policy? Either of two events occurs, and each is bad. One: If the remaining balance of cash values covers the loan balance, the insurance coverage is lost but the debt, too, goes away. Two: If the insurer delays lapsing the policy until all cash values are depleted, the insurance disappears but the debt does not. The policyholder is then subject to the insurer’s lawsuit to recover the loan balance due. And: • There’s an income-tax problem. In addition, the owner receives a bill from the IRS for ordinary income taxes due on the unpaid loan balance, because it represents ordinary income taken by the policy owner but not reported on an IRS Form 1040. The IRS can be expected to add interest and penalties for the policyholder’s failure to report the debt as income. • The salespeople urge their customers to borrow. Despite the severe consequences, insurers and their agents encourage policy owners to borrow from their policies—e.g., to send a child to college, to pay off the mortgage or credit-card debt, to cover living expenses in retirement, or even to pay the policy’s premiums. Some insurers’ agents encourage their customers to think of the c.v. policy as a supplemental retirement plan with no requirement to contribute to employees’ accounts; a “better” IRA with no limitation on “contributions”; or a savings account from which one may draw from freely. What’s more: • It’s not necessarily a lifelong arrangement. Some insurers through their agents encourage policyholders to think of their c.v. policy as coverage for their entire life long. But if the insured person lives long enough (usually to age 100), the c.v. policy “matures,” meaning the policy is lapsed and the face amount of the policy (less any loan balance) is paid out to the policy owner. In that event, every dime of the taxable portion of the distribution is taxed as ordinary income. Worse: • Between the end of 1945 and the end of 2002, the cost of living index has risen by a yearly average of 4.2%. At that rate, the U.S. dollar loses half its purchasing power about every 17 years. The $100,000 policy purchased in 1986 has a COL value of about 185

Unless timely repayment of loan interest is made, an additional policy loan will be charged to the loan account by the insurer at the start of the following year in the amount of interest to come due at year’s end.

$50,000 in 2003; the $100,000 policy purchased in 1969 has a COL value of about $25,000; and the $100,000 policy purchased in 1952 has a COL value of about $12,500. So, even in the absence of a policy loan, a life-insurance policy is an asset that loses purchasing power year over year.

The IRS can be expected to add interest and penalties for the policyholder’s failure to report the debt as income.

The best use of life insurance is to protect beneficiaries’ need for capital. There’s no denying the value of life insurance protection in the relatively short term. Longer term, a family’s financial security may depend less on life insurance than the family’s income production, savings rate, and investment capability—accompanied by a disciplined spending plan. I’ve not yet mentioned policy dividends. They’re not. They’re a partial return of excessive premiums, so determined in a U.S. Supreme Court case in 1911 and no less true today. So-called vanishing premium cash-value coverage merely applies annual “dividends” to the payment of premiums. More often, the premiums are covered in full or part by additional loans from cash values. Oh, did I mention surrender charges? Many cash-value policies are sold on the basis of projections that show an impressive buildup of cash values in the first five or so years, but cash values are a mere part of the story. The missing part: surrender charges. They can significantly reduce any distribution of the buildup of cash values for 10, 15, or even 20 years—perhaps to zero for the first four or five years. In closing, one last point: the mortality surcharge. It skyrockets when the insured person lives into the 80s and 90s, increasing the probability of the failure of a policy also burdened by debt. My friend who died at 64 got ‘em even better than he knew. Knowing him, I’m pretty sure he was pleased about that right to the end. Postscript: How will your insurance friend respond? Chances are, with that deer-in-the-headlights look. Insurance companies teach their agents what they need to know to sell insurance. Your friend probably knows nothing of the shortcomings of the cashvalue policies he’s been trained to sell—nor of better policies and lower premiums available from a competing insurer. There’s no doubting your friend is a wonderful person; that’s not an issue. Insurers hire some of the nicest people on the planet—deliberately, knowing most policies are sold to friends and relatives by salespeople who are enthusiastic and positive about the use of life insurance as a financial safety net for families. Your friend’s response, because of the training, may be something like this: “I don’t know where that guy gets that stuff, and he’s probably right about some policies—but not mine. My company’s insurance policies are burdened by none of those problems. Trust me.”

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Life insurance Let’s compare the numbers

First, understand how life insurance works. 1. There’s term insurance. These are the mainstream types: • Annual renewable term • Level-premium term: 5year, 10-year, 20-year, and 30-year level premium. 2. Also, there’s cash-value insurance. These are the common examples: • Whole life (also called straight life and ordinary life) • Universal life. • Variable universal life.

At 35, buying term insurance (rather than whole life) and investing the difference in premiums for 10 years The $1,000,000 whole life premium is payable to age 100. Investment of fresh capital stops after 10 years, but the balance continues to be invested till age 100.

Age 35 36 37 38 39 40 41 42 43 44 45 60 65 70 75 80 85 90 95 100

Premium: 10-yr Whole term Life 370 11,170 370 11,170 370 11,170 370 11,170 370 11,170 370 11,170 370 11,170 370 11,170 370 11,170 370 11,170

The difference 10,800 10,800 10,800 10,800 10,800 10,800 10,800 10,800 10,800 10,800

Invest at 7% 10,800 22,356 34,721 47,951 62,108 77,256 93,463 110,806 129,362 149,218 159,663 440,515 617,845 866,559 1,215,395 1,704,654 2,390,865 3,353,312 4,703,193 6,596,472

Invest at 9% 10,800 22,572 35,403 49,390 64,635 81,252 99,365 119,108 140,627 164,084 178,851 651,462 1,002,355 1,542,248 2,372,940 3,651,062 5,617,611 8,643,392 13,298,929 20,462,051

Invest Invest Invest at 11% at 13% at 15% 10,800 10,800 10,800 22,788 23,004 23,220 36,095 36,795 37,503 50,865 52,378 53,928 67,260 69,987 72,818 85,459 89,885 94,540 105,659 112,370 119,521 128,082 137,778 148,250 152,971 166,490 181,287 180,598 198,933 219,280 200,463 224,795 252,172 959,135 1,405,926 2,051,941 1,616,199 2,590,328 4,127,185 2,723,389 4,772,512 8,301,244 4,589,069 8,793,043 16,696,767 7,732,847 16,200,612 33,583,162 13,030,298 29,848,578 67,547,735 21,956,809 54,994,071 135,862,621 36,998,501 101,323,010 273,268,260 62,344,625 186,681,079 549,640,079

How whole-life policies work. 1. The premium never changes. 2. You pay all of the premium directly, or: Source for premium examples (real policies): Insurance Department, Jack White & Co. 3. You pay some directly, the rest indirectly. • The so-called dividend may pay part of the pre- 6. In time, there is no more cash value—so, the policy lapses, worthless. mium. • A loan from cash values may pay part of the 7. If the insured dies before the policy lapses, the beneficiary receives: premium. Example: 1,000,000 The face value What happens when you borrow. - 150,000 Loan + interest due 1. You may not realize you are borrowing cash = 850,000 Net paid to beneficiary values. 2. You do owe interest on the loan (and the loan is Our constant advice. a debt). 3. At the start of each new year, the interest for Buy term and invest the difference between a term policy and the cash-value policy. Shop for that year is added to any loan balance. 4. So, the interest owed for the new year grows quality (of the insurer) and the price. Some term policies are grossly overpriced, so not just any larger, year after year. term policy will do. 5. And the loan thus grows larger year by year.

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Understanding the accompanying tables. They illustrate the implications of buying term and investing the difference: • At age 35, a husband and father obtains quotes for both whole life (renewable to age 100, by paying the annual premium) and term insurance with a level premium for 10 years (also renewable long beyond that time, year by year). Coverage: $1,000,000. Premium difference: $10,800 for each of the 10 years. (After 10 years, the premium is at annual renewable term rates, and the policy is renewable to age 100 simply by paying the annual premium.) For each of the first 10 years, he invests the difference in premiums ($10,800 yearly). Thereafter, the 10-year investment balance continues to grow larger, though no additional fresh capital is contributed. If growth is at 7% annually, the investment account’s balance is above $6.5 million at age 100. If growth is greater than 7%, the account’s balance is greater (illustrated). • At age 45, the same procedure is followed. At 7%, the balance at 100 exceeds $5.2 million. • At age 55, the same procedure is followed. At 7%, the balance at 100 exceeds $4.2 million.

At 45, buying term insurance (rather than whole life) and investing the difference in premiums The $1,000,000 whole life premium is payable to age 100. Investment of fresh capital stops after 10 years, but the balance continues to be invested till age 100.

Age 45 46 47 48 49 50 51 52 53 54 55 65 70 75 80 85 90 95 100

Premium: 10-yr Whole term Life 890 17,900 890 17,900 890 17,900 890 17,900 890 17,900 890 17,900 890 17,900 890 17,900 890 17,900 890 17,900

The difference 17,010 17,010 17,010 17,010 17,010 17,010 17,010 17,010 17,010 17,010

Invest at 7% 17,010 35,211 54,685 75,523 97,820 121,677 147,205 174,519 203,746 235,018 251,469 494,678 693,811 973,106 1,364,831 1,914,246 2,684,830 3,765,612 5,281,466

Invest at 9% 17,010 35,551 55,760 77,789 101,800 127,972 156,499 187,594 221,488 258,432 281,691 666,864 1,026,053 1,578,710 2,429,041 3,737,380 5,750,423 8,847,738 13,613,342

Invest at 11% 17,010 35,891 56,849 80,113 105,935 134,598 166,413 201,729 240,929 284,441 315,730 896,490 1,510,638 2,545,513 4,289,337 7,227,783 12,179,235 20,522,719 34,581,975

Invest Invest at 13% at 15% 17,010 17,010 36,231 36,572 57,951 59,067 82,495 84,937 110,229 114,688 141,569 148,901 176,983 188,246 217,001 233,493 262,221 285,527 313,320 345,366 354,052 397,171 1,201,852 1,606,779 2,214,334 3,231,806 4,079,767 6,500,317 7,516,706 13,074,459 13,849,043 26,297,408 25,515,965 52,893,480 47,011,511 106,387,682 86,615,661 213,983,629

Source for premium examples (real policies): Insurance Department, Jack White & Co.

At 55, buying term insurance (rather than whole life) and investing the difference in premiums The $1,000,000 whole life premium is payable to age 100. Investment of fresh capital stops after 10 years, but the balance continues to be invested till age 100.

Age 55 56 57 58 59 60 61 62 63 64 65 70 75 80 85 90 95 100

Premium: 10-yr Whole term Life 2210 29,440 2210 29,440 2210 29,440 2210 29,440 2210 29,440 2210 29,440 2210 29,440 2210 29,440 2210 29,440 2210 29,440

The difference 27,230 27,230 27,230 27,230 27,230 27,230 27,230 27,230 27,230 27,230

Invest at 7% 27,230 56,366 87,542 120,900 156,593 194,784 235,649 279,374 326,161 376,222 402,557 564,608 791,891 1,110,669 1,557,770 2,184,853 3,064,370 4,297,937

Invest at 9% 27,230 56,911 89,263 124,526 162,964 204,860 250,528 300,305 354,563 413,703 450,937 693,822 1,067,531 1,642,529 2,527,235 3,888,464 5,982,884 9,205,409

Invest at 11% 27,230 57,455 91,005 128,246 169,583 215,467 266,399 322,932 385,685 455,340 505,428 851,675 1,435,122 2,418,264 4,074,916 6,866,470 11,570,402 19,496,800

Invest at 13% 27,230 58,000 92,770 132,060 176,458 226,627 283,319 347,380 419,770 501,570 566,774 1,044,244 1,923,952 3,544,757 6,530,985 12,032,916 22,169,868 40,846,544

Source for premium examples (real policies): Insurance Department, Jack White & Co.

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Invest at 15% 27,230 58,545 94,556 135,970 183,595 238,364 301,349 373,781 457,078 552,870 635,801 1,278,822 2,572,169 5,173,550 10,405,857 20,929,896 42,097,497 84,673,102

Chapter 11

Help your kids learn to handle money They won’t get that skill at school; not knowing how could lead to trouble

Dee Balliett

Y

our children or grandchildren won’t magically learn to become financially responsible. Nor are they likely to

learn about personal finances in grade school, high school, or college. If you want them to grow up to be financially responsible adults, you must teach them to handle money often, well, and from an early age. They need to practice saving, spending, banking, and investing. They need to learn early on what it feels like to blow their money on something frivolous, thus discovering what it feels like not to have money available for something they really want or need. Failure to learn as a child

may result in an adult who is financially irresponsible, remains financially dependent on parents, and winds up deeply in debt. Few know enough about personal finances. I have seen young adults pile up five-figure credit-card debt even before graduating from college. I’ve seen couples and singles filing for bankruptcy before age 30. I’ve seen young marriages fail because of the weight of debt, much of it brought into the marriage without prior discussion. So, it’s no surprise to me to see marriages fail because of money issues. There’s more than debt to consider. Teaching nothing useful about money to a child can lead to a host of problems beyond debt. Some children become adults who equate money with selfworth, seemingly addicted to possessions and believing their happiness depends on owning gadgets and toys. Few young adults know how to set financial goals, to save money for the future, or to be a smart consumer. Fewer still has any practical insight into estate planning, tax management, investment strategies, personal insurance, retirement issues, or asset protection. But then, their parents and grandparents are in the same boat. That’s a shame, and we at Balliett Financial are trying hard to make things better. So are our colleagues at NAPFA, the National Association of Personal Financial Advisors (napfa.com). Some practical-minded tips right off the bat: • Children learn best from parents’ examples. • Saving for a rainy day doesn’t mean much to children. It’s better to save for a definite goal that they can picture, maybe lust for. 189

It’s no surprise to me to see marriages fail because of money issues.

Some children become adults who equate money with selfworth, seemingly addicted to possessions and believing their happiness depends on owning gadgets and toys.

• Goals need to be realistic. Consider the child’s age and maturity. • Money can add up faster when a child learns to save regularly, no matter how small the sums saved may be. • Children tend to learn better from praise and encouragement than from criticism and scolding. Pick out what’s being done right and try to build on it. • Money mistakes can become valuable events when put to work as useful, insightful lessons. You can help your kids learn to be financially responsible adults. What you need to do is outlined within these pages: • Weekly allowance: Think Money 101. It’s a good way to begin a kid’s experience with financial matters. • Spending plan: a vital lesson. Approach it by looking at the world of money from a kid’s perspective. • Wants and needs: There’s a difference. Getting the concept across may be your biggest challenge. • Money skills: one step at a time. Do you wish you had started investing sooner? • Setting goals: targeting savings. Money management needn’t be a subject for adults only. • Getting money: How and where. You can’t teach kids to manage what they don’t have. • Credit cards: How to avoid a tragedy. Example: At 18, an ignoramus with a new credit card; at 21, bankrupt. • How to invest: It’s worth learning. Won’t hurt to add insight into IRA and entrepreneurship.

70 Billion years BC I wish they could learn to hunt and gather. If they were out here doing the work, I could be doing my nails.

Be careful what you wish for!

Women have been doing all the work since forever.

We deserve to be retired!

Retired! What’s that?

Earning the right to let someone else put the food on the table.

CH & GB 2000

It annoys me to know we’re working while the men hang out all day in the cave.

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You two wouldn’t feel that Not having to way if you loved your work do work we like I do. But I admit, I hate. wouldn’t mind chasing Panthers down food only when it’s scare me! not too hot, not too cold, and not snowing or raining.

kids & money

Weekly allowance: Think Money 101 It’s a good way to begin a kid’s experience with financial matters

An allowance is a set amount of money given regularly to a child. It represents a child’s share of the family income, and it’s to be used within certain defined, agreed-upon boundaries. In one family, the child may pay for school lunches with allowance money; in another, for all clothing; in a third, for charitable giving, too; and in still another, for saving through a passbook bank account while investing in a no-load mutual fund. Giving allowances is one way to help a child gain experience in handling money. That includes making decisions about how it should be spent, saved, and invested. The important characteristic of an allowance is that it is a regular source of income that can be counted on and used. Before you even decide to encourage your kid to learn to manage money, it’s important that you consider what money means to you and what you want your child to learn. Was money management an important part of your early life? What mistakes were made when you were a child that you can avoid now that you are a parent? Provide money and opportunities to spend it at an early age. Increase the experiences as your child matures. Emphasize the purpose of the spending and the saving. When a child has money of her own, it’s important that she make choices on how to spend it. She must learn that once she spends the money, it’s gone. Count on your child to make mistakes; they’re a vital part of the learning process. How much allowance? Since an allowance is a fixed amount of money for spending over a given time period, several factors figure into how much an allowance should be. Start by sitting down with your child to estimate expenses. Base the amount of allowance on the expense estimate, and revisit the number on a weekly basis. Help your kid keep a record of money spent during the first few weeks. Then, sit down together again, to decide if the allowance needs adjustment. That approach will help your child learn to be comfortable about discussing money. The experience of recording the amount and purpose of money spent can be an introduction to systems, procedures, and decisionmaking. Make it clear whether or not you will provide extra money for special items. Plan to review the allowance on a regular basis. Whatever amount you decide on, make sure there’s room 191

When a child has money of her own, it’s important that she make choices on how to spend it. She must learn that once she spends the money, it’s gone. Count on your child to make mistakes; they’re a vital part of the learning process.

for discretionary spending. An allowance that doesn’t allow a kid to make decisions is self-defeating. Don’t tie allowances to routine chores. In most homes, daily chores need to be done; sharing them among family members can be a lesson in cooperation. Additional chores that appear occasionally, such as seasonally, may be offered to a child as money-making opportunities.

Base the amount of allowance on your expense estimate, and revisit the number on a weekly basis. Help your kid keep a record of money spent during the first few weeks. Then, sit down together again, to decide if the allowance needs adjustment. That approach will help your child learn to be comfortable about discussing money.

Think twice about paying an allowance for good grades or good behavior. Children may learn to equate money as a bribe or punishment. Positive behavior can be reinforced in other ways. An expression of appreciation for a job well done often means more to children than a financial bonus. Now, the overview: You decide the methods. Only you can determine the best ways to share income with your children. There is some evidence that children who get spending money without asking for it are likely to develop a sense of the real value of money. Children seem to learn healthy attitudes about money when they have regular, realistic incomes and can use the money independently. The experience can be an early opportunity to make their own choices. That’s why minimal guidance is important. So is the chance to record purchases, to share, and to save for realistic goals. Once choices have been made, allow your children to live with the consequences of their decisions. In short: Let them make mistakes. That way, they can come to recognize blunders for what they are, accept responsibility for them, and learn from the experience. You don’t want them going through life denying their mistakes and thus drawing no lesson from them.

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The spending plan: a vital lesson Approach it by looking at the world of money from a kid’s perspective

Life is good. Stuff is cheap. To your kid, food magically appears on the table. There’s always (well, almost always) another clean shirt in the closet and a car and adult driver to chauffeur him from place to place. She flicks a switch, and her computer turns on. She flicks another, and she’s watching MTV. With so much taken care of for them, it’s not surprising that children cannot begin to appreciate what it costs to keep a household running or why a new bike just doesn’t fit into the family budget. The cold, hard truth: In the big picture of life, money affects us in a big way. No matter how much of it we have or don’t have, it affects our moods, our relationships, our marriages, our goals, our dreams, and our personalities. To give your children a glimpse into the real world, play a version of Let’s Pretend that’s suitable for kids 10 and older. Adjust the following figures to match the economics of your family and the age of your child: Pretend that your kid is 18 and wants to be on her own. Let’s say she works full time at a fast-food restaurant making $6 an hour. That’s $240 a week for 40 hours of work, but in reality she will probably have to work two part-time jobs, earning perhaps not more than $300 a week, $1,300 a month, $15,600 a year. For further emphasis, use actual real or play money in small denominations rather than figures on paper. Count out $1,300 on the table. From that, transfer to a second stack (for money spent) 20% ($260) for tax withholdings. That leaves $1,040. Then, transfer 10% ($130) for savings and investment—as she’s already been taught to do. That leaves $910. Now: Check your local paper for the going rental rates for small apartments. Let’s say the going rate is $350 monthly, so transfer that sum to the money spent stack. She’ll probably have to pay for electricity and heat; for now, let’s give her a break and assume utilities are included in the rent. Out of the $560 that’s left, she’ll have to buy food. To keep things simple, figure that she’ll spend about $30 a week, or $120 a month. (Remember, that’s only for groceries, not restaurant meals or pizza delivery.) We’re now down to $440. And we haven’t even covered phone bills, cable fees, health care, clothing, or car payments, insurance, gas, oil, repairs, and maintenance. Not a pretty picture, is 193

In this life, even a young adult needs at least one employable skill so as to rise above the world of food stamps and welfare benefits.

it? But that transfer-of-money procedure illustrates the reason you’ve encouraged your kid to go on to college or a technical school to train for a job that pays, well, lots more than $300 a week. In this life, even a young adult needs at least one employable skill so as to rise above the world of food stamps and welfare benefits.

Markets crash, wars start, and terrorists, rapists, and thieves run amuck. The more skills we instill into our children, the better their chances of surviving the challenges they will face during the course of their lives, financial and otherwise. Expertise in personal finances begins with a spending plan.

With the younger teens, try using play money or, better, real money in small denominations. Start off with a stack of bills (which will look like a fortune to them), and start deducting your own fixed monthly expenses. You needn’t get into the details of complicated matters like your 401(k), IRA, or other retirement plans; just tell them it’s money that needs to be set aside for when you get older and stop working. Keep the exercise simple; emphasize the family spending that makes sense in their world: food, clothing, utilities, car expenses, household repair and maintenance, insurance premiums, debt service (including mortgage payments), savings, and investment. Even trust-fund babies ought to be taught the basics of personal finances. Everyone needs to learn that money does not grow on trees, and that there is no inexhaustible supply of anything. Life as we know it can change right this second and move into any other direction. Markets crash, wars start, and terrorists, rapists, and thieves run amuck. The more skills we instill into our children, the better their chances of surviving the challenges they will face during the course of their lives, financial and otherwise. Expertise in personal finances begins with a spending plan.

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kids & money

Wants and needs: there’s a difference Getting this concept across may be your biggest challenge

What’s your earliest memory of money? How do you think it has affected your life? Just to illustrate what I’m getting at, mine is centered on the nickel my grandfather gave me—my mother’s father, Grandad. It was midafternoon at my grandparents’ house on a Sunday. I’m not sure how old I was. It may have been the first money I ever had in my hand. I remember examining it closely, this buffalo nickel, recognizing it as an enthralling piece of art. How I felt was much the same as the almost-electrical jolt I sensed when I first experienced, many years later, in Florence, the determination and intention and self-confidence expressed in the eyes and body language of David. Kids become consumers early on in life. Starting at about the age of two, the average child starts making demands at the grocery store. As children grow older and learn more about money, one of the hardest lessons to get across is the difference between a want and a need. That’s especially true when you don’t quite grasp the difference yourself. Children are not born with money sense. Money-management skills must be learned. Whether you realize it or not, children’s attitudes and values about money are highly influenced by what they see and hear at home. The way that parents and grandparents discuss, spend, borrow, save, share, and invest money affects a child’s value system concerning money. Effective money management is based on a realistic evaluation of individual and family needs, wants, values, goals, and resources. A need is something that is necessary, like food, shelter, health care, clothing, and basic transportation—not to mention insurance premiums, debt service, savings, and investment. All of those are needs you’d better have money for; a want is something you would like to have. Do you catch yourself saying, “But I need that new [fill in the blank].” Do you really need it, or do you just want it? To be an effective money manager, one must meet needs before satisfying the wants. If your entire management style revolves around what you want, whether or not you need it or can afford it, then you have some matters to think about. The “do as I say, not as I do” style of parenting breeds resentment in kids whose parents aren’t forthright about their own imperfections. Don’t be afraid to be honest with them if you have a problem with impulse buying. You can even enlist their aid if you have a tendency to pick up stuff at the checkout aisle without thinking. 195

A need is something that is necessary, like food, shelter, health care, clothing, and basic transportation—not to mention insurance premiums, debt service, savings, and investment. All of those are needs you’d better have money for; a want is something you would like to have.

You don’t want to raise a child who spends her paycheck before she’s earned it any more than you want to raise one who avoids spending money for anything but the bare-bone essentials.

On the other hand: If your entire life revolves around pinching every penny, never splurging for even an ice cream cone (even though it is well within your means), you’re not doing your kids any favors. Not if you believe life is to be enjoyed. Before attempting to teach your kids the difference between wants and needs, be sure you understand the difference. You don’t want to raise a child who spends her paycheck before she’s earned it any more than you want to raise one who avoids spending money for anything but the bare-bone essentials. Oh, yes: the rest of my story. During an earlier Sunday while visiting with my grandparents, I’d accompanied Grandad to a tiny neighborhood grocery that was unusual in that it had a soda fountain with an old-fashioned marble counter and a refrigerated ice-cream case. He bought me a chocolate ice cream cone, with sprinkles. I’d had ice cream cones before, but not often and never with sprinkles. The place was a long block up the street from my grandparents’ house, turn right at the corner, then walk a short block to the store. In my excitement with owning a buffalo nickel of my own, and of being given the freedom to decide what to do with it, I’d forgotten to tell anyone I was leaving the house on a mission. To this day, they still tell the story of the Sunday afternoon when I was suddenly missing and nowhere to be found, and the family was frantic with worry. Then, suddenly, I was there. With chocolate and a smile on my face—a tad older and a lot wiser.

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kids & money

Money skills: one step at a time Do you wish you had started investing sooner?

How soon to start teaching children about money? As soon as they’re old enough to count coins. Here are some steps you can take to get the kids in your family started: Open a passbook savings account. Give your child an allowance in coins, so that it’s easy to put 10% of it in a jar each week. The idea is to let her experience saving 10% of her money—and maybe to develop a savings habit that will last a lifetime. Find out if your bank makes passbook accounts available to children; if yours doesn’t, some other in town does. When your child has filled her coin jar, take it and her to her bank to open a savings account. When there’s $50 in the jar, move the cash into a money market mutual fund. Looking well ahead, make sure it’s in a fund family that allows minors to put money earned by working into a stock index mutual fund via a Roth IRA (Individual Retirement Account). When she’s old enough to earn money regularly, help her open the IRA. Watch her fascination rise along with the accrual of tax-free dividends and capital gains in the index fund. Show how stocks work. At 8 or 9, your child may be ready to learn about them. You can use the daily newspaper and the Internet to show her how to invest in ownership shares of a large company. Pick companies your child will enjoy reading about—the makers of the clothes she wears, the soda she drinks, and the film company associated with a favorite movie. The Stock Learning Center (try the search engine at google.com) is a good place to find some stock picking ideas for children. It also has some great information to help you teach your children about buying stock. Use the resources of the Internet. Your children may already know how to surf the Net. Direct them to any of a number of great sites that are fun places for kids to learn about investing. To see if they are age-appropriate for your child, check out kidsmoney.org, fool.com/teens, and looksmart.com. Press for financial management programs at school. There are wonderful programs available on the Internet for teachers to use to develop lesson plans. Among them are thinkquest.org/ library.html and smg2000.org. The New York newspaper Newsday (newsday.com) has a stock game that is geared to 197

At 8 or 9, your child may be ready to learn about them. You can use the daily newspaper and the Internet to show her how to invest in ownership shares of a large company. Pick companies your child will enjoy reading about—the makers of the clothes she wears, the soda she drinks, and the film company associated with a favorite movie.

ward participation by schools. Maybe your local paper has a similar program. Try to encourage your school principal to incorporate those or similar programs.

There are wonderful programs available on the Internet for teachers to use to develop lesson plans.

Volunteer to help get an investment program started at school. NAIC (National Association of Investors Corporation) offers a wealth of information about investment clubs. Start at iclub.com to find out how clubs are being run around the country for children and how to get one started for your children and their friends.

Dynasty-building potential of a Roth IRA Number of Years Age 1 15 2 16 3 17 4 18 5 19 6 20 7 21 16 30 26 40 36 50 46 60 51 65 56 70 66 80 76 90 86 100

Year 2002 2003 2004 2005 2006 2007 2008 2017 2027 2037 2047 2052 2057 2067 2077 2087

Annual Roth IRA Contribution 3,000 3,000 3,000 4,000 4,000 4,000 5,000 5,000 5,000 6,000 6,000 6,000 6,000 6,000 6,000 6,000

5% Year End Balance 3,000 6,150 9,458 13,930 18,627 23,558 29,736 101,263 227,837 435,012 784,055 1,033,829 1,352,611 2,278,728 3,787,275 6,244,540

7% Year End Balance 3,000 6,210 9,645 14,320 19,322 24,675 31,402 117,621 300,461 661,135 1,383,450 1,974,865 2,804,355 5,599,490 11,097,943 21,914,232

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9% Year End Balance 3,000 6,270 9,834 14,719 20,044 25,848 33,174 137,157 400,664 1,025,482 2,518,846 3,911,466 6,054,183 14,423,611 34,237,090 81,142,801

11% Year End Balance 3,000 6,330 10,026 15,129 20,793 27,081 35,060 160,503 539,347 1,616,043 4,688,959 7,938,536 13,414,262 38,189,068 108,535,174 308,277,382

kids & money

Setting goals: targeting savings Money management needn’t be a subject for adults only

This is a disturbing and true story, but it makes a vital point. The family of a military man stationed overseas received word that he was to be transferred to California. After his wife and kids moved there, red tape blocked them from moving onto the base. Nearly all of Mom’s money paid for the move. The family ended up on welfare, living off base in a slum. When her heroic 10-year- old man of the family found that he couldn’t earn enough money collecting cans to improve the family’s financial situation, he committed suicide—so that his mother would have one less mouth to feed. That’s an extreme example, but it reminds us that money can affect a child thought to be too young to be involved with financial matters. Too many parents feel that money is adult turf. So, they won’t discuss it with children. Too often, when children do not understand money, they fill in the blanks with worry. Let your kids become part of some of the financial decisions. Children can sometimes be creative and wiser than adults credit them for being. If given an opportunity to be part of the family’s goal-setting process, your kid just may think of a way to improve the situation. Let him be a part of the financial team that works on the family’s spending plan. To begin, you might: Involve the children in planning your next vacation together. They help decide when and where to go, how to get there, and how to finance the trip. Each family member can be assigned a task. One can do research on attractions and how much they cost. Another can compare transportation costs online. A third can research lodging alternatives. Let even a very young child have a small part in the planning. Teach money goals through cooperative arrangements. Let’s say you’re willing to pay for basic jeans—but if your kid wants a more expensive pair, then she needs to set a goal: to earn the remaining money needed. Encourage her to keep a record of savings. Review it with her weekly. By staying involved and offering encouragement, become her team member for the project. That way, she won’t feel like she’s shouldering the burden all alone. If you wish, match her earnings dollar for dollar. Help your kids by suggesting ways to earn extra money. Help them make a list of money-making activities suitable for kids, 199

Too often, when children do not understand money, they fill in the blanks with worry.

and how much would be paid for them. Match each child’s abilities with jobs that need to be done. Shoveling snow, planting and weeding the garden, raking leaves, sewing on buttons, and mowing lawns are all ways for kids to earn extra money. Not every household chore should be paid for, however. Just because they are part of a family, the children should do the more repetitive chores. They shouldn’t expect to be paid for everything they do in life.

Encourage her to keep a record of savings for the goal. Review it with her weekly. By staying involved and offering encouragement, become her team member for the project. That way, she won’t feel like she’s shouldering the burden all alone. If you wish, match her earnings dollar for dollar.

Here are some Internet sites that can help kids with family travel, money goals, spending plans, and earning money: • hotellocators.com helps with the search for motel reservations. • americanparks.net helps with the search for reservations at state parks. • moneymatters.com links to financial workshops and e-books for teens and young adults. • financialplan.about.com/cs/teensandmoney. • mm4kids.org. • familyeducation.com.

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Earning money: how and where You can’t teach kids to manage what they don’t have

Encourage your children to get part-time work when they’re old enough to handle it. To test job skills, a child might first perform certain extra tasks at home for pay. An example: raking leaves. It’s not a regular household task and thus may be worthy of extra pay. Before the child begins the task, discuss job standards, how much the job is worth, and, min to max, the amount of time it should take. An evaluation could then take place after the job is done, to determine if the child is ready for hire outside the family. Other tasks may be appropriate. They may include a newspaper route, shoveling snow, baby-sitting, pet-sitting, dog walking, washing cars, and washing windows. Work shouldn’t interfere with school assignments, family activities, and sleep. A good rule of thumb is to limit employment to between 10 and 15 hours weekly when school is in session, with perhaps only two to four hours during the school days. Also: Take your kids with you when you do volunteer work. Let them see that you do things for others just for personal satisfaction. Point out that volunteering is an excellent way to learn new job skills and to obtain insights into the working world. Help your kids keep track of their money. They learn most money-management concepts by observing their parents’ behavior. Your attitude will strongly influence your child’s view of record keeping, balancing a checkbook, and following a plan for saving and spending. Teaching how to set aside money for that movie next weekend may help you create an adult who doesn’t run out of money before the electric bill is paid. Help your child categorize expenses: fixed and variable. Add ‘em up. If total expenses are greater than income, discuss ways to increase income and decrease expenses. Savings should never be eliminated from fixed expenses. Guidance can come from you, but the final decisions on how to balance the income and expenses should rest with the child. What to do about borrowing. Even with a good spending plan, there may be times when your child will need to borrow money. Use the opportunity to write a loan agreement that includes a 201

A good rule of thumb is to limit employment to between 10 and 15 hours weekly when school is in session, with perhaps only two to four hours during the school days.

repayment plan. Set up a regular payment schedule and assess a late fee if payment is not received by the designated date. When your child is 16 or older, charge interest equal to the current rate earned by certificates of deposit (bankrate.com). The point isn’t to make your child think that every dime from you comes with a string attached, but rather to understand the consequences of borrowing money because the spending plan was mismanaged.

Teaching how to set aside money for that movie next weekend may help you create an adult who doesn’t run out of money before the electric bill is paid.

Saving means nothing to young children. Their concept of time is woefully undeveloped. Older preteens may save for clothing, gifts, and special ventures, but younger middle-school students are unlikely to understand or care about long-term savings. However, saving takes on importance when there’s a compelling goal for it. Help your child find one. Pay special attention to the world of credit. You’ll face an opportunity when you hear your child say “Just write a check” or “Just use your credit card” after you’ve said you don’t have the money to buy something. Such words identify a child who has not yet learned that there must be money in the bank before a check is written or a card is used for a purchase. These suggestions may prove helpful: • Let your child help you balance your checking account each month by putting the checks in order and calling out the amounts while you mark off cancelled checks. • Let your child write out portions of your monthly checks. • Let your child cross-check individual credit-card charge slips with monthly billing statements. • Let your child see how you convert your paycheck into cash. • Let your child count out dollars into stacks for family members’ allowances and other budgeted items that you pay in cash. If any remains, discuss your spending and saving options.

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Credit cards: avoid a tragedy Example: At 18, an ignoramus with a new credit card; at 21, bankrupt

The threat of falling into credit card debt is very real. Think about how many times your kids have seen you pay for something by whipping out your credit card. The number is probably in the hundreds. But how many times have they seen the bill when it arrives? Most likely, never. If the card’s use is the only training your children have received, don’t be surprised by the buildup of a pile of consumer debt long before college graduation. Turn your consumer-driven kid into a credit-savvy kid. Show your teen an actual bill. Explain what finance charges and yearly fees are, and how interest accrues each month. Explain the dangers of carrying a balance from month to month. Explain how the debt escalates each month and how long it takes to pay off a card with just the minimum monthly balance. Later, maybe your kid will think twice before treating 10 of his closest friends to a meal away from campus food. Set some ground rules. Once 18, a teen can easily get a credit card—even without having a source of income. It may actually be prudent for you to co-sign a card for your teen before legal age. You can monitor the spending, and your kid can learn limits and repayment skills. By the 18th birthday, the novelty of having a credit card will have been replaced with the knowledge that a credit card isn’t free money but something potentially dangerous to be used with caution. Are debit cards a better idea? Not necessarily. Some companies are offering them to teens with the hype that debit cards actually teach credit skills. A specific amount of money is transferred to the card company, and the card user merely subtracts from that sum each time the card is used. It’s virtually the same thing as an ATM card. Aside from subtraction, it doesn’t teach much. Help your kids keep track of their money. They learn most money-management concepts by observing their parents’ behavior. Your attitude will strongly influence your child’s view of record keeping, balancing a checkbook, and following a plan for saving and spending. Teaching how to set aside money for that trip to the beach next weekend may help you create an adult who doesn’t run out of money before the bills are paid.

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Explain how the debt escalates each month and how long it takes to pay off a card with just the minimum monthly balance. Later, maybe your kid will think twice before treating 10 of his closest friends to a meal away from campus food.

Many teens are naïve and easily taken advantage of. There’s a world of difference between being altruistic and being a patsy.

Explain the risks of being overly generous. When my daughter’s 18-old-son informed her he had cosigned a loan for a friend, she nearly had a stroke. In his mind’s eye, it was a matter of trust. In hers, it was a matter of how was he going to pay off that loan should his friend not keep up with the payments—not to mention her astonishment that an 18-year-old with no job could be permitted to cosign anything. While steadfastly defending his friend’s reputation, it never occurred to him that, should his friend become injured, or worse, the entire loan would become his problem. Luckily, the friend paid off the loan—ahead of schedule. Your kid may not be so lucky. Fact is, many teens are naïve and easily taken advantage of. There’s a world of difference between being altruistic and being a patsy. Gambling. The new addiction. Even though the college years are known as a period of high-risk behavior, there are few studies about gambling addiction that include college-age kids. In the few studies that have been done, this finding leaps out: The number of students between 18 and 22 who attend colleges near gambling casinos and are gambling, may be as high as 91%. About 12% are doing so daily or weekly. Explain how the debt escalates each month and how long it takes to pay off a card with just the minimum monthly balance. Later, maybe your kid will think twice before treating 10 of his closest friends to a meal away from campus food.

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How to invest: Worth learning Won’t hurt to add insight into IRA and entrepreneurship

There’s a reason why people get rich. They tend to know enough about money to get that way. Not many parents, much less their children, know enough about the subject to realize there’s anything to be learned. Yet, newsstands, bookstores, and the Internet are loaded with good information on investing and every other niche and cranny of personal finances. If you’d be the one to put your child on the path to financial security, begin by learning about money and investing. You cannot count on teachers doing the job for you, not even at the college level. Few among them are financially literate. Too few achieve financial security working for others. Retirement plans provide tax-free contributions to investment accounts that accrue dividends, interest, and capital gains free of income taxes. Trouble is, fewer employers are offering plans that can build wealth; 401(k) plans give companies a way to avoid contributing much to employees’ retirement accounts. Also, relatively few employees comprehend the wealth-building potential of IRAs. Every parent and child ought to know how to use them for creating wealth for themselves and their children. Launched early in life and invested wisely, IRA alone can create millions (table, p. 32). A child with as little as $50 can convert savings to investment. Some mutual funds (and their IRAs) will open an account with an initial investment of $50. Many will do so for $500. (See Web address below.) Teach the power of compounded investment. Also, gain experience creating mutual-fund portfolios by playing our mutualfund investment game with your children. Each player chooses two funds from Column A, one from Column B, or each can select one of our four model portfolios. Check your daily newspaper (or Investor’s Business Daily, USA Today, or The Wall Street Journal) for each fund’s price per share (listed as n.a.v., or net asset value). Track your funds’ price progress daily or weekly. Each month can begin a new game; the most profitable threefund portfolio wins, and the winner gets to choose where the family will go for a Saturday lunch (or a Sunday breakfast). Get our investment course. E-mail your request ([email protected]), and I will promptly e-mail it to you. It includes a reading list and more model portfolios to follow. It’s 205

Relatively few employees comprehend the wealthbuilding potential of IRAs. Every parent and child ought to know how to use them for creating wealth for themselves and their children. Launched early in life and invested wisely, IRA alone can create millions,

suitable for you and your adult children, but it may be too much for your teenager. Follow the Investor’s Corner series in IBD (investors.com). You can copy the series from IBD’s online archives. From it, you will gain valuable insights into fundamental and technical investing alike, learning what stocks to buy, when to buy them, and when to sell them.

DRIPs are likely to help your kid develop a buy-and-hold mentality. IBD’s Investor’s Corner teaches when to hold ‘em and when to fold ‘em.

Stay with no-load mutual funds before moving up. By the time your child has accumulated, say, $10,000, the two of you should be prepared to move on to folios and ETFs. At $25,000, be prepared to move into stocks; by $100,000, add puts and calls. I don’t especially recommend DRIPs (dividend reinvestment plans); I see them as less useful learning devices and investments than the funds, stocks bought in lots of 100 shares, and derivatives. DRIPs are likely to help your kid develop a buyand-hold mentality. IBD’s Investor’s Corner teaches when to hold ‘em and when to fold ‘em. Search the Net and bookstores for useful ideas to make your own. Start here: • preteenagerstoday.com/resources is a directory of useful internal links. Click Articles; look for “Your Young Entrepreneur: Help Your Child Start a Business.” • mfea.com/InvestmentStrategies is a directory of many useful links for kids, including “The ABCs of Investing” and a list of over 100 funds that accept $50 as an initial purchase. Sponsor: Mutual Fund Education Alliance. • ustreas.gov/kids is the U.S. Treasury Department’s home page for kids, with special kids’ links to the U.S. Mint, Savings Bonds, and more. • zillions.org is the Consumer Reports section for kids. Once there, click Money Q&A. • Investment Clubs for Dummies, by Douglas Gerlach. His Q&A section tells how kids can participate in an investment club. • The Kid’s Guide to Money, by Steve Otfinoski. Bookstores. • Money Sense for Kids!, by Hollis Page Harman. Bookstores. •101 Marvelous Money-Making Ideas for Kids, by Heather Wood. Bookstores. • Wow the Dow, by Pat Smith, Lynn Roney. Bookstores.

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Chapter 12

Divorce: try not to go to war There are hard ways and easy ways to part; a civilized divorce puts the children first

Dee Balliett

I

n our 11 years on the road with the Gene Balliett Family Finances Seminar, Gene and I always avoided the D word.

We felt couples didn’t need to learn about such negative stuff from us; instead, we tried to accentuate the positive. Of late, we’ve revisited that attitude, and we do not feel good about it. It’s high time we faced up to our responsibility. We’ve seen too many client-couples part. We’ve seen way too many broken marriages among their children. We’re even seeing them now among their grandchildren. Even though the two of us have managed to work through 48 years of small and large issues, the hard truth is that not everyone can do so and not everyone should. Some months ago, we decided that, long ago, for the good of our friends and clients, we should have met the reality of divorce head on by helping them do the same. We’ve seen too little consideration of the children. We have seen children’s best interests disappear as emotional heat created by two increasingly contentious adults destroyed all hope of their achieving fair and rational decisions. We are not marriage counselors, but we do fill a niche. As friends and financial advisors to our clients, we help them gain an understanding of the financial issues involved better than some marriage counselors and attorneys. I’ve seen too many couples enter the divorce arena not knowing what to expect, what to do, or where to turn. That’s a shame. There are options available that can help reduce the trauma and expense of a divorce, or maybe save the marriage. In this chapter, let’s visit the vital issues. These are the eight we will examine together: • Before you divorce, consider alternatives. Fight for your marriage with counseling and perhaps an informal separation. • How to avoid divorce court. Divorce shortcuts can save time, money, and trauma. • Pick the right divorce lawyer. You need more than a nice guy; you need a divorce specialist. • Agree on a fair financial settlement. We outline the issues you need to consider. • Custody: Put the child first. Custody issues can be heartbreakers. 207

Even though the two of us have managed to work through 48 years of small and large issues, the hard truth is that not everyone can do so and not everyone should.

• Shoot for a tax-smart divorce. Keep IRS away from the settlement table. • Tie up the loose ends. The practical stuff you need to do during and after a divorce. • Heal the wounds. Yes, you can move on with your life.

I’ve seen too many couples enter the divorce arena not knowing what to expect, what to do, or where to turn. That’s a shame. There are options available that can help reduce the trauma and expense of a divorce, or maybe save the marriage.

70 Billion years BC I’d still live in our cave. I like it, and you, and the men, too. They’re stupid and useless, but they make good pets!

I’d move to Florida. I’ve heard it doesn’t snow there.

Florida! I’ve heard they’ve got cockroaches the size of pigeons!

Where is it? If you knew, how would you get there?

When the men finish inventing life insurance, maybe they will invent maps.

I haven’t decided if I like the idea of retirement.

CH & GB 2000

Where would you retire?

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Retirement ought to come before work!

I’d probably hate it. Mostly, I like my life the way it is.

divorce

First, consider the alternatives Fight for your marriage with counseling and perhaps an informal separation

If there’s still hope for your marriage, consider a trial separation rather than divorce. Living apart for several months, several weeks, or even just several days may give you a fresh perspective on your relationship. At a minimum, a trial separation will give you a taste of what your life would be like without your spouse. An informal separation can give a troubled couple fresh determination to repair their marriage and resolve their differences. Don’t expect miracles, though. The experts say most couples who separate end up divorced. A legal separation may create new complications. A formal separation—one that is undertaken under a court order—involves more than just a mutual agreement to live apart physically. Although they are not divorced, couples covered by a court judgment of separation have no legal obligations to each another. Formal separation is often considered the lesser of evils by married couples who are reluctant to divorce for religious reasons. In many jurisdictions, the grounds for separation are almost as rigorous as for divorce. And the time and expense of arranging a legal separation can be the same. The IRS considers legally separated taxpayers not to be married for filing purposes. Professional counseling can repair a broken marriage. Sometimes. For couples brinking on divorce but willing to fight to save their marriage, counseling by a skilled professional may repair the problems threatening their relationship. Marriage counseling can run $50 to $150 or more hourly, and there is no guarantee that you won’t end up in divorce court. However, compared to the emotional and financial cost of a divorce, successful counseling can be a bargain. There’s no shortage of marriage counselors in most parts of the country. Attorneys, CPAs, psychologists, religious groups, psychotherapists, and others have hung out shingles proclaiming themselves to be marriage or family counselors. Look for counseling from a neutral party. Marriage counseling is a largely unregulated pastime, and some practitioners have entered the field with ideological baggage that may prevent them from offering impartial advice. Women’s rights advocates who promote themselves as “feminist family therapists” are unlikely to offer evenhanded guidance to both partners, and the growing number of those offering “Christian marriage coun 209

Your best bet may be a counselor recommended by a family member or a professional group such as the American Counseling Association’s International Association of Marriage and Family Counselors.

seling” will never advise a couple to dissolve their marriage. Your best bet may be a counselor recommended by a family member or a professional group such as the American Counseling Association’s International Association of Marriage and Family Counselors.

If there’s a spark of love in your relationship and a reasonable chance that you can reconcile your differences, by all means fight to save your marriage. But if the situation is hopeless, recognize that fact and move on.

For some, an annulment is preferable to a divorce. If religious considerations make divorce problematic, the solution may be an annulment. Rather than dissolving a marriage after the fact, an annulment declares that the union was never valid to begin with. An annulment may take only a matter of weeks at a cost of less than $1,000—a fraction of the expense of a typical divorce. Annulments hold an even stronger attraction for Roman Catholics: those granted an annulment are free to remarry within the church. But an annulment does not resolve child custody issues or the division of property. Don’t kid yourself about saving an unsalvageable marriage. Divorce is emotionally difficult under the best of circumstances. Don’t compound the trauma by dragging the process out in a futile effort to fix an irreparable marriage. If there’s a spark of love in your relationship and a reasonable chance that you can reconcile your differences, by all means fight to save your marriage. But if the situation is hopeless, recognize that fact and move on. These resources may be helpful: • divorceasfriends.com takes you to lawyer Bill Ferguson. He offers articles and books on resolving disputes that lead to divorce and reducing the bitterness between couples that break up. The site offers $75-per-hour telephone consultations with Ferguson. • Annulment: The Wedding That Was: How the Church Can Declare a Marriage Null, by Michael Smith Foster, The Paulist Press, 1999, $11.95. • IAMFC.org takes you to the International Association of Marriage and Family Counselors, 5999 Stevenson Ave., Alexandria, Va. 22304, a division of the American Counseling Association composed of a diverse group of professionals. • psychotherapistsearch.com provides state-by-state listings of therapists who engage in relationship counseling.

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Avoid divorce court, if you can Divorce shortcuts can save time, money, and trauma

Do you really want your day in divorce court? In addition to the emotional torture, the expense of a divorce trial can also be excruciating. It may take years to get your case on the docket. If there’s an appeal to a higher court, you could find yourself in matrimonial limbo for years more. Even if you and your spouse are divorcing on less than amicable terms, it may be in your best interests to agree on a less contentious way to end your marriage. You may be able to avoid lawyers altogether with a do-it-yourself divorce. We’re not recommending that you take this option, but it can be done. Outfits like DivorceInfo.Com and USLegalForms.Com will provide you with all the necessary forms, paper work, and filing instructions to engineer divorce proceedings. DIY divorce packages are available in both printed and electronic versions over the Internet. They tend to work best for couples able to work out the details of a divorce agreement without the help of lawyers. A childless couple seeking an uncontested, no-fault divorce may be able to order the appropriate forms and instructions for under $50. Divorce mediation can be faster, cheaper, and less traumatic than a trial. The spouses meet with a professional mediator to reach a mutually agreeable settlement. The mediator then prepares a written version of the agreement for each spouse to review and implement. Although many mediators are attorneys or retired judges, their role as a neutral party precludes them from giving advice to either side. It is thus advisable for each spouse to retain separate legal counsel to review the final agreement. Even with that added expense, the cost of mediation is usually less than that of a full-blown divorce trial. Mediation isn’t a cure-all. It’s a process that works best for couples who are separating amicably but need some impartial outside help. Mediation is rarely successful when the spouses distrust each other and have bitter disagreements on key issues. Since the outcome of mediation is not binding on either party, it may not resolve any of the issues. Also, because mediators lack the authority of a judge, they have no power to compel either party to supply information or documents. The information disclosed is not confidential. When there’s no agreement in sight, consider arbitration. Like a judge, an arbitrator hears the case presented by both parties 211

A childless couple seeking an uncontested, no-fault divorce may be able to order the appropriate forms and instructions for under $50.

and renders a decision. Unlike a court ruling, however, the arbitrator’s decision is final. Both sides must sign away all rights to contest or appeal the ruling. Arbitration can be particularly useful in cases where the couple has resolved most issues but is unable to reach agreement in one area, such as the amount of child support to be paid.

Arbitration can be particularly useful in cases where the couple has resolved most issues but is unable to reach agreement in one area, such as the amount of child support to be paid.

If speed is important, consider a quickie offshore divorce. Many states will grant a divorce only after a one-year waiting period. Divorce may take as little as three days in an offshore divorce haven such as The Dominican Republic. Foreign divorces are generally recognized as valid in the U.S. as long as the final papers are filed in the state of residence and both spouses agree. Only one spouse needs to be present, and the cost may be less than $5,000. Here’s where to learn more about divorce court alternatives: • Association for Conflict Resolution, 1527 New Hampshire Ave. N.W., Third Floor Washington, D.C. 20036, 1-202 667-9700. • acresolution.org gets you to a group that represents family mediators and establishes training and ethical standards for its members. • The Divorce Mediation Answer Book: Save Time, Money, and Emotional Energy with a Mediated Separation or Divorce, by Carol A. Butler and Dolores Deane Walker, Kodansha America, Inc., December 1998, $16.00. • divorceinfo.com provides nuts and bolts information about the practical considerations in divorce. Markets do-it-yourself divorce kits for all 50 states, including the necessary forms and filing instructions to secure an uncontested dissolution of marriage. • uslegalforms.com is another resource for obtaining the forms required for a divorce. • Affordable Justice: How to Settle Any Dispute, Including Divorce, Out of Court, by Elizabeth L. Allen and Donald D. Mohr, West Coast Press, 1997, $19.95.

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Choose the right attorney You need more than a nice guy; you need a divorce specialist

The wrong lawyer could make your divorce a nightmare. An inexperienced, incompetent, or unconcerned divorce lawyer could leave your life in tatters. You could lose marital assets that are rightfully yours; you could be saddled with unfairly steep alimony or support payments; and you could lose custody or visitation rights to your children. Find an impartial divorce lawyer to represent your interests. Resist the temptation to use your family lawyer; you need more than a nice guy. Look for a practitioner with experience in divorce cases, and keep looking until you find one you feel comfortable with. Solicit referrals from friends or family members who have been divorced. Clergymen, lawyers, and judges who handle matrimonial cases may also be good resources. Yes, you can price-shop for divorce attorneys. In many parts of the country, it’s not unusual for veteran divorce attorneys to demand a five-figure retainer before taking on a client. A complicated, contested divorce proceeding billed out at $150 an hour can chew up the initial retainer quickly, and leave you digging for more. Ask about fees, retainers, and other expenses during your first consultation with an attorney. Hold down legal expenses. Find out whether (and how much) your lawyer will bill you for telephone calls. Some charge a minimum fee of 15 minutes ($25 to $50) for every call they take from a client. Try to concentrate your communications to five or six issues during one call rather than one issue during five or six calls. Also, consider using written correspondence, including fax and e-mail messages. Ask your attorney to try resolving disputes with your spouse informally; filing motions with the court or taking depositions of witnesses are ways to run up big legal bills to secure outcomes that could have been obtained at much less cost through a phone call or a meeting. You could be ordered to pay your ex-spouse’s legal costs. If you’re wealthy but your spouse has few resources, the court may order you to pay the full freight of the legal expenses on both sides of the litigation. If that happens, expect a stiff bill from your spouse’s attorney and look closely for evidence of expense padding or unnecessary charges. If the judge suspects that your spouse’s lawyer overlitigated the case, he may excuse you from paying much of the charges. Be suspicious of 213

A complicated, contested divorce proceeding billed out at $150 an hour can chew up the initial retainer quickly, and leave you digging for more. Ask about fees, retainers, and other expenses during your first consultation with an attorney

lawyers who assure you that their fees will be paid by your spouse. Run if an attorney proposes a contingency fee arrangement; that’s considered unethical.

Be suspicious of lawyers who assure you that their fees will be paid by your spouse. Run if an attorney proposes a contingency fee arrangement; that’s considered unethical.

Take an active role in your divorce proceedings. Your attorney may know the law, but you know how your spouse will react. Put the knowledge to work by helping your lawyer plan strategies for the proceedings. Also, you can assemble documentary information about your family’s finances, including copies of past tax returns and insurance policies, records of the income of each spouse, the value and location of all assets, the cost of running the family home, and the balance of every bank account and retirement plan. Gather copies of the documents early on; if the divorce proceedings turn ugly and your spouse becomes uncooperative, locating the information later may be impossible. If your attorney must go to court to compel disclosure of information about family finances, you’ll pay through the nose. Learn more about choosing a divorce lawyer from these resources: • aaml.org gets you to the American Academy of Matrimonial Lawyers, 150 N. Michigan Ave. (2040), Chicago 60601, 1-312 2636477. • martindale.com is an interactive Web site allowing searches for lawyers by location and specialty using the Martindale Hubble directory of attorneys. • Best Lawyers in America, 2001-2002, by Steven Naifeh and Gregory White Smith, Woodward/White, Inc., 2000, $200. • Divorce for Dummies, by John Ventura and Mary Reed, Hungry Minds, Inc., 1998, $19.99. A beginner’s guide to divorce with a section on choosing the right matrimony attorney. • divorceonline.com has articles on the financial aspects of divorce and general advice on selecting a matrimonial attorney.

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Agree on a fair financial settlement We outline the issues you need to consider

Agreement on a financial settlement can be a win-win for both spouses. An uncontested divorce tends to sail through the legal system expeditiously with a minimum of legal costs. But a contested divorce—one involving disagreements between the spouses on one or more aspects of the settlement—can be a protracted and costly undertaking. Ultimately, it could come down to a lawsuit, a court trial, a judicial ruling, and one or more appeals of that decision. A bitterly contested divorce can take years to complete, and the expense of the process may consume much of the couple’s wealth. Avoid barriers to a quick settlement by addressing issues head on. The most common areas of disagreement among divorcing couples include the major financial issues: the division of assets, child-support payments, and sometimes alimony. But you and your spouse will also need to reach an understanding about the payment of family debts, contributions toward the educational expenses of the children, health insurance coverage for the dependent spouse, real-estate disposal, retirement-plan assets, income-tax structuring, and other issues. How much child support is enough? That’s an issue for each couple to decide based on their own circumstances. If they can’t reach an agreement, the court will do it for them. Most states require the noncustodial parent to pay a fixed percentage of his or her income in child support. Some jurisdictions may require additional payments depending on the child’s lifestyle prior to the divorce. In some states the obligation to make support payments continues until the child reaches 18 or becomes “emancipated,” while others require child support to continue until age 21. Must you pay alimony to your ex-spouse? Maybe, maybe not. Laws governing alimony (also known as spousal support or maintenance) vary from state to state. When a court orders alimony payments as part of a divorce case, it generally does so based on such factors as the economic status of the couple, their ages, health, education, and the ability of the dependent spouse to become self-supporting. The couple’s previous standard of living, and whether one spouse made sacrifices during the marriage to advance the other’s career or to raise their children, may also play a determining role in the amount and duration of alimony. 215

In some states the obligation to make support payments continues until the child reaches 18 or becomes “emancipated,” while others require child support to continue until age 21.

What’s equitable under the law depends on a number of variables, including the length of the marriage, the amount of assets, the contributions each party made to the acquisition of the assets, and who has custody of the children.

Your property settlement in a divorce may depend on where you live. In community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, Wisconsin) all the property acquired during a marriage by either spouse must be split 50%-50%. In other states, assets acquired during the marriage are divided “equitably” between the parties. What’s equitable under the law depends on a number of variables, including the length of the marriage, the amount of assets, the contributions each party made to the acquisition of the assets, and who has custody of the children. Don’t try to tax-deduct your property settlement by calling it alimony. Unlike alimony, the property settlement arising from a divorce is not tax-deductible. That doesn’t stop some couples from structuring a front-loaded alimony payment schedule that is actually a thinly disguised property settlement. IRS is on the lookout for that maneuver, and Federal tax law allows the agency to recapture excess alimony that is concentrated too heavily in the first two years after divorce. Tax auditors may smell a tax dodge if your alimony agreement with your ex-spouse provides for payments that decrease by more than $10,000 during any one of the first three years. Here’s where to learn more about settlements: • Bankruptcy and Divorce: Support and Property Division, by Judith K. Fitzgerald and Ramona M. Arena, Family Law Library, 1994, $135.00. • divorceinfo.com is an online resource with practical information about property settlement, alimony, and child support issues. • divorcenet.com is a Web site hosting interactive bulletin board discussion groups that enable divorced parents to share information and advice on alimony, child support payments, and other issues. • The Financial Guide to Divorce Settlement, by Carol Ann Wilson, Marketplace Books, 2000, $39.95.

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Custody: put the child first Custody issues can be heart-breakers

Child custody decisions are too important to leave to the courts. The most contentious negotiations in many divorces take place when both parents want to retain custody of the children. If a stalemate develops, it is often a good idea to bring in a professional divorce mediator to help hammer out an agreement. If a couple can’t resolve their differences, a judge will do it for them. When the final decision is left to the court, there’s a real possibility that the arrangement imposed will not satisfy either parent. Studies show that 95% of divorcing parents do agree on custody issues without going to court. You can, too. Don’t divorce your kids. After bitter and prolonged divorce proceedings, the non-custodial parent too often becomes alienated from the children as well as from the ex-spouse. Don’t let that happen to you—or to your children. Does the wife always get custody of the children? The parent who has been the child’s primary caretaker —that’s usually the mother—has a clear advantage. Other factors include statutory and case law, the work schedules of the two parents, the child’s age, gender, and, sometimes, the child’s preference. Fighting for a change in custody can be an uphill battle. Once a court has ordered a formal child custody arrangement or the parents have agreed to one, any unilateral effort to reverse that agreement will be extremely difficult. In many states, a successful petition for change of custody must demonstrate that the custodial parent is unfit or that the children are at risk. Even if you can make that case, the court may not grant you custody unless you can show that the change would be in the child’s best interest. The proceedings in such a case can be just as prolonged and expensive as a full-blown divorce trial. What about joint custody, and is it for you? So-called joint custody arrangements between divorcing parents are becoming increasingly popular. More often than not, such agreements do not involve shuttling the children back and forth from one parent’s home to the other’s on a roughly 50%-50% basis. In most cases, children subject to joint custody agreements make their primary residence with one parent, but both spouses share responsibility for key decisions in such major areas as education and healthcare. Since there is no legal definition of joint custody, the terms of the arrangement must be spelled out in 217

In most cases, children subject to joint custody agreements make their primary residence with one parent, but both spouses share responsibility for key decisions in such major areas as education and healthcare.

detail in the written agreement. Be aware, however, that in some states the term joint custody gives both parents an equal right to have the children with them, regardless of the provisions of any written custody agreement. In such cases, law enforcement agencies may be reluctant to intervene if the nonresidential parent refuses to return the children to the custodial parent.

Every state has some kind of law giving grandparents a legal right to spend time with their grandchildren. Some allow grandparents to seek formal visitation rights from the courts if they are denied access to the children by a divorced custodial parent.

Grandparents’ rights: Do your parents and former in-laws have a right to your kids? Every state has some kind of law giving grandparents a legal right to spend time with their grandchildren. Some allow grandparents to seek formal visitation rights from the courts if they are denied access to the children by a divorced custodial parent. In extreme cases, grandparents have won custody of grandchildren by demonstrating that the parents are unfit. Here’s where to find more on custody issues: • The Child Custody Book: How to Protect Your Children and Win Your Case, by James W. Stewart and Terry Johnston, Impact Publishers, May 2000, $16.95. • What Every Woman Should Know About Divorce and Custody: Judges, Lawyers, and Therapists Share Winning Strategies on How to Keep the Kids, the Cash, by Gayle Rosenwald Smith and Sally Abrahms, Perigee, 1998, $26.95. • childcustody.net provides free information on custody issues from Michigan attorney James Whalen. • dadsrights.org gets you to Fathers’ Rights and Equality Exchange, 701 Welch Road (323), Palo Alto, Calif. 94304,1-415 8536877, an international support group for fathers. • divorcecare.com gets you to DivorceCare, P.O. Box 1739, Wake Forest, NC 27588-1739, 1-800-489-7778. Provides online seminars and other support for divorcing couples. Also a state-by-state database of local divorce support groups.

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Think about a tax-smart divorce Keep IRS away from the settlement table

The timing of your divorce can be critical for tax purposes. For tax purposes, your filing status depends on whether or not you are married on Dec. 31. If you divorce on New Year’s Eve, you forfeit the right to file taxes jointly for that entire year, and each of you will be hit with higher tax rates as single or head of household filers. When there are children, be careful who claims the exemption. IRS assumes that the parent with custody of the children is entitled to the tax exemptions for those dependents, but parents are allowed to transfer the exemptions to the other spouse by filing IRS Form 8332. The tax-smart strategy is to shift the exemptions to the parent in the higher tax bracket while providing appropriate compensation to the other. The parent claiming the $3,000-per-child exemption also gets the right to use the child credit, the Hope Scholarship, and the Lifetime Learning Credit for that child.) The rules are different for the child care credit. Unlike personal exemptions for children, the annual child care tax credit allowed by IRS may not be transferred from one parent to the other. The credit may be claimed only by the custodial parent. Here’s why alimony may be preferable to child support. Periodic alimony (or “spousal support”) payments are tax-deductible for the payer but treated as taxable income for the spouse who receives them. It’s the other way around for child support payments. The spouse who pays child support gets no deduction, but the income is not taxable for the custodial parent. If the payer’s income is significantly higher than the recipient’s, the tax-smart strategy is to reduce the amount of child support and increase alimony payments. However: Watch out for these alimony tax traps. IRS is aware that many divorced couples can benefit by disguising child support as taxdeductible alimony, and the agency has placed restrictions on the practice. Under a test designed to identify “alimony fixed as child support,” bells and whistles go off at IRS if alimony payments are eliminated or reduced when one or more of the couple’s dependent children reach certain age milestones (i.e., within six months of an 18th or 21st birthday). An alimony agreement that provides spousal support payments “until junior graduates from college” would also face a challenge from IRS. 219

The tax-smart strategy is to shift the exemptions to the parent in the higher tax bracket while providing appropriate compensation to the other.

Under a test designed to identify “alimony fixed as child support,” bells and whistles go off at IRS if alimony payments are eliminated or reduced when one or more of the couple’s dependent children reach certain age milestones (i.e., within six months of an 18th or 21st birthday).

Don’t let divorce erase the capital gains tax exclusion on your home. Under the 1997 tax law, a married couple may exclude from taxable income up to $500,000 of the gain on the sale of their home. For single taxpayers, that exclusion drops to $250,000. But too many couples lose all of their capital gains exclusion by waiting too long to sell the house after moving out. The exclusion is available only on the sale of a house that has been your principal residence for two out of the past five years. If the house isn’t sold within three years, there could be a hefty tax bill on the gain when it does sell. Fortunately, there’s a loophole for divorcing couples: If you move out but your spouse continues to live in the house under a formal divorce or separation agreement, the home will continue to be considered your principal residence for purposes of the two-year residency requirement. Need more help sifting through the tax consequences of divorce? Check out these sources: • J.K. Lasser Pro Guide to Tax and Financial Issues in Divorce, by Bruce L. Richman, John Wiley & Sons, 2002, $49.95. A detailed reference for divorce attorneys, mediators, marriage counselors, and individuals involved in a divorce. • divorcemoney.com offers information on tax consequences of divorce, including the IRS alimony recapture rule and the provisions governing innocent spouse tax status. • financialplan.about.com provides information on tax-deductibility of divorce-related expenses and information on other tax considerations for couples considering divorce. • divorcesource.com gets you to Larry J. Kasper, CPA. His book, Tax Aspects of Divorce, is $74.95 if ordered online. He says it provides a “thorough reference for every Internal Revenue Code Section that is likely to be encountered in the divorce process.”

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Tie up the loose ends The practical stuff you need to do during and after a divorce

Purge your financial accounts when you divorce. Make sure your soon-to-be ex-spouse is removed from your bank and brokerage accounts, and freeze or cancel any lines of credit or credit cards used jointly during the marriage. Check the fine print on your credit-card agreements for special breaks available to divorcing account holders. Make sure debts from the marriage are paid off. If your divorce settlement obligates your ex-spouse to pay off some or all of the outstanding family debts that are in your name, notify your creditors of the fact and ask that the debts be transferred to your spouse’s name alone in order to relieve you of responsibility for them. If your settlement requires the transfer of real property to your ex-spouse in return for periodic payments compensating you for your equity, you will be in a strong position to collect one way or the other. If your former spouse defaults, you can secure a lien on the house that will prevent your ex from selling, transferring, or borrowing against it. Regain your own identity after a divorce. If your phone was listed in both names, change the listing as soon as possible. Women must decide whether to revert to their maiden names (those who do should promptly notify the Social Security Administration, state motor vehicles department, banks, and credit card issuers to avoid errors down the road). If you shared a home Internet service with your ex-spouse, close the old account and open a new one on your own. Also, consider changing your e-mail screen name and passwords. Rethink your estate-planning strategy. You will probably want to revise your will and revocable trust to select new beneficiaries. If you don’t yet have a will and a trust document, this is a good time to get them. At Balliett Financial, we can help design a plan that will ensure that your kids (or grandkids) can go to college, have a nestegg when starting out, or look forward to a comfortable retirement. Make sure you don’t lose your health insurance. If the family’s health insurance had been provided through your spouse’s employer, Federal COBRA rules entitle you to continue that group coverage for up to three full years following the final divorce judgment. You must pay the premiums for continued coverage, and you must notify your ex’s employer within 60 days 221

If your divorce settlement obligates your ex-spouse to pay off some or all of the outstanding family debts that are in your name, notify your creditors of the fact and ask that the debts be transferred to your spouse’s name alone in order to relieve you of responsibility for them.

of the divorce decree. If your former spouse has agreed to pay your premiums, insist on proof of payment to make sure coverage doesn’t lapse. Do the same if the divorce decree requires your ex to maintain life insurance.

If your former spouse has agreed to pay your premiums, insist on proof of payment to make sure coverage doesn’t lapse. Do the same if the divorce decree requires your ex to maintain life insurance.

Don’t let divorce derail your retirement plans. In most states, the retirement benefits that your spouse or you have earned during a long-term marriage are considered marital assets, even when only one spouse earned the benefits. The assets of an IRA are relatively easy to transfer from one spouse to the other. Expect legal rigmarole if your retirement funds are in a 401(k), Keogh, SEP, profit-sharing account, or other defined-contribution plan; they require a Qualified Domestic Relations Order (QDRO) to divide the assets. Splitting a defined-benefit pension is even more complicated. Divorced individuals who were married for at least 10 years, have not remarried, and are at least 62 may be entitled to Social Security retirement and survivor’s benefits based on the former spouse’s work history. Here’s where to find more help for tying up loose ends: • Divorce Common Sense Handbook: 180+ Things To Do and 8+ Things Not To Do Before Your Divorce, by Judy Colbert, Tuff Turtle Publishing, 1999, $9.95. • divorcecentral.com provides online help with the brass-tack issues of divorce, including a state-by-state rundown of divorce laws. • divorcesource.com provides online network of divorce-related information, bulletin boards, chat rooms, and other resources to help couples through the process. • www.splitup.com markets downloadable computer software to help with divorce finances, reduce lawyer fees, and negotiate financial settlements. Split-Up.com, Inc., 831 Beacon St. Suite (2900), Newton Centre, Mass. 02459, 1-877 477-5488. • Assigning Retirement Benefits in Divorce: A Practical Guide to Negotiating and Drafting QDROs, by Gale S. Finley, American Bar Association Section of Family Law, 1995, $74.95.

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Heal the inevitable wounds Yes, you can move on with your life

There is life after divorce—but it’s a different life. Forty million Americans have gone through the divorce process, and 200,000 more figure to do the same each month. Some encouraging news to chew on: 6 of every 10 divorced men told researchers they are happier divorced than married. A whopping 85% of the women said they are, too. Don’t be surprised if you lose some friends after the divorce. It’s not unusual for friends to gravitate to one spouse and remain effectively estranged from the other. Sometimes one ex inherits all of the friends from the marriage—a situation that increases the feelings of isolation for the other spouse at a time when extra support is needed. Find a support group to help you readjust to single life. Whether your marriage ends after 5 or 50 years, the transition to life after divorce is likely to be bumpy. Fortunately, there are literally thousands of organizations in cities, towns, and hamlets across the country that provide support for individuals who are rebuilding their lives after divorce. The groups range from organizations that offer counseling to abused spouses to social clubs that serve as a meeting ground for divorced singles. Help your children survive and thrive despite your divorce. It may not take a whole village to raise a child, but it is a big advantage when both parents remain actively involved. As a newly divorced, non custodial parent, you may be busy building a new life, enjoying a newfound sense of freedom, or licking your emotional wounds. But don’t be so preoccupied with your recovery from divorce that you neglect your responsibilities to your children. Show your kids that you still love them, honor your visitation agreement, and continue to be a significant, positive force in their lives. One way to heal the scars from divorce: Start all over again. The end of a marriage may create opportunities for a fresh start on other aspects of your life. Depending on your economic situation and family responsibilities, you may want to consider a new job or business enterprise, a career change, or perhaps relocation to a different part of the country. The transition from married to single life may also be a good time to return to school and continue your education. Another option is to focus your energies on a new hobby or to commit yourself to a new cause. 223

There are literally thousands of organizations in cities, towns, and hamlets across the country that provide support for individuals who are rebuilding their lives after divorce.

Become active in local politics, join a bridge club, or volunteer at an area library, nursing home, or hospital.

Don’t be so preoccupied with your recovery from divorce that you neglect your responsibilities to your children. Show your kids that you still love them, honor your visitation agreement, and continue to be a significant, positive force in their lives.

The second time around: Have you learned any lessons? Most divorced women remarry within three years of the breakup, and men are even more likely to give marriage another shot. If you find yourself considering a second marriage, take an inventory of the problems that contributed to the destruction of your first marriage and work to overcome them this time. Consider pre-marriage counseling to help you and your second spouseto-be establish workable ground rules for your relationship before you walk down the aisle. If your first marriage ended in what you regard as an unfair financial settlement, consider obtaining a prenuptial agreement the second time around. More sources for help in recovering from divorce: • divorcecare.com takes you to an outfit that organizes local support groups throughout the country and sponsors seminars to help separated and divorced individuals deal with one of “life’s most difficult and painful experiences.” DivorceCare, P.O. Box 1739, Wake Forest, N.C., 27588-1739, • divorcemagazine.com is an online e-magazine featuring articles on divorce, plus state-by-state listings of divorce support groups throughout the U.S. and Canada. • Coping With Divorce, Single Parenting, and Remarriage: A Risk and Resiliency Perspective, by E. Mavis Hetherington (Editor), Lawrence Erlbaum Assoc., 1999, $79.95. • The New Creative Divorce: How to Create a Happier, More Rewarding Life During and After Your Divorce, by Mel Krantzler and Patricia B. Krantzler, Adams Media Corporation, 1999, $10.95. • divorcereform.org gets you to a group pressing for legislative changes in the ground rules governing divorce. Americans for Divorce Reform, 1-703 528-6700, 1300 N. Utah St., Arlington, VA 22201.

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Chapter 13

Career tips for 35 & younger Avoid dead ends, blind alleys, and wrong turns

Dee Balliett

F

inding work that you’re good at is only part of attaining career success, and it isn’t necessarily the most impor-

tant part. That’s finding something to do that you’re not only good at but also passionate about. You may be a highly skilled doctor, lawyer, or merchant chief, but, if you’re not excited about work when you come in on Monday morning, you are in the wrong field. If you look forward to retirement, you’re either in the wrong career or in the right career field but the wrong niche. You cannot be more happily retired than doing what you love to be doing. Career success is more about happiness than making the big bucks. Those who draw little satisfaction from their work can hardly be considered successful. Individuals in their 20s or early 30s have an opportunity not easily available later in life. That’s the ability to build the foundation of a lifelong career around an activity, skill, or talent that is satisfying and rewarding. With a bit of soul-searching, imagination, and planning, a young adult can steer toward the ultimate life: living the dream career. Begin by examining what fascinates you. Do you love your present job? Did you ever have work you enjoyed more? Did you ever agonize because you passed up a career or study opportunity that fascinated you? Do you envy someone who makes a living doing something you’d love doing? Think about where your career choice could take you. It may prove to be the first of two or more learning experiences that will in time create something even more rewarding than now envisioned. My career serves as an example. When working for my bachelor’s degree, I trained to be a physical education teacher and coach in the public school system—never dreaming that 15 years later I’d gain twice the satisfaction and four times the income by teaching tennis to both children and adults. Years later, after two hip repacements, I broadened my teaching skills by earning a master’s in mental health counseling and also completing the most recognized financial planning curriculum. All that, plus work experience and plenty of continuing education, made it possible for me to counsel adults and couples. Now, I work with men and women new to marriage, business and professional people at the top of their careers, 225

With a bit of soul-searching, imagination, and planning, a young adult can steer toward the ultimate life: living the dream career.

retired couples, and widows in their 80s and 90s. I am still a teacher—but at a level not foreseen way back when, when I was building my educational foundation.

Treat every job as a learning experience. Treat every project as an opportunity to demonstrate that you can be relied on to get things done. Along the way, develop the habit (and skill) of taking a sincere interest in people.

Never overlook the possibility of working for yourself. Treat every job as a learning experience. Treat every project as an opportunity to demonstrate that you can be relied on to get things done. Along the way, develop the habit (and skill) of genuinely taking an interest in people. In the pages to follow, let’s explore a few more ideas on getting on with our dream: • First, set your career goals. It’s time to decide—not to drift. • Design a roadmap for career success. Discovering what you most want to do is only a starting point. • Enhance your employability. Know how to take a first step up the career ladder. • Get paid what you’re worth. Know how to convince your employer to sweeten the pot. • Climb the organizational ladder. Know how to break out from the pack. • Cope with the inevitable setbacks. Prepare for potholes in your career path. • Use the military as a training ground. Consider using the armed services as your starting point. • Start your own business. Consider working for yourself.

70 Billion years BC I could still live in the cave, and someone else puts the food on the table? Wow! I’m not sure what I’d do!

I’d die of boredom.

Boredom beats being mauled by a panther while we’re hunting out here in the woods!

I’d find a way to make summer clothing, so I could stop wearing mink year round.

I’d eat less, so I could work less. But I’d still hunt and gather—when the weather is nice!

If you get sick, what then?

CH & GB 2000

If you did retire, what would you do with your time?

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I’d take care of her. I’d be the first nurse!

Good thing there’s no such thing as retirement. The very idea is becoming too complicated!

career: 35 & under

First, set your career goals It’s time to decide-not to drift

The key to a successful career is preparation. The sooner you envision your dream, the sooner you can set goals and prepare for success. Admittedly, some seem able to find fulfillment easily. I am one, and my best friend (I’m married to him) is another. We love what we’re doing, and we cannot imagine not living our dream job together. We have always felt that way. I loved teaching, motherhood, and home management (which included the purchase and sale of four houses), and he was in hog heaven as an editor for two big daily newspapers (in Cincinnati and Long Island, N.Y.) and as the editor of Physician’s Management magazine in New York. But there were two severe problems: Our jobs would never pay enough, and by working for others we had too little control. There’s a name for people who feel like that: entrepreneurs. As it turned out, everything we did in those early years helped to prepare us for what we do now. We learned much of what we needed to know on someone else’s nickel, and we figured out the rest on our own with the help of lots of excellent continuing education. If you’re not yet sure of your life’s direction, focus on where the jobs are. Develop an enjoyable, employable skill that’s likely to be in demand. Those with technological aptitude can expect to see continued strong demand for software engineers, systems analysts, and database administrators. The U.S. Labor Department’s Occupational Outlook Handbook ranks those jobs among the fastest growing employment categories for the coming decade. Other promising categories include desktop publishing specialists, physical and occupational therapists, urban planners, financial managers, registered nurses, and ancillary health-care personnel. For the perplexed, career testing might provide the answer. There are dozens of career assessment tools (or “inventories”), including freebies administered by high school guidance counselors and college placement offices, $150 and up personalized tests available from career assessment specialists, and $25-$50 do-it-yourself systems available online at a variety of sites. Don’t expect definitive answers from tests; the best they can do is point you in a promising direction. The more popular include: • Career Ability Placement Survey, one that actually has right and wrong answers. • Myers-Briggs Type Indicator, a psychological assessment that attempts to link career success with personality type. 227

As it turned out, everything we did in those early years helped to prepare us for what we do now. We learned much of what we needed to know on someone else’s nickel, and we figured out the rest on our own, with the help of lots of excellent continuing education.

• SII (Strong Interest Inventory), which tries to point test-takers to appropriate occupational interests, including social, investigative, enterprising. • SDI (Self-Directed Search), a shorter variation of the SII. • Campbell Interest & Skill Survey, which measures your attraction to specific occupational areas and compares the rating with results from people employed in each field.

You need to look to positives rather than negatives. You need to stop whining and to focus on being the person others rely on to get the job done. You need to discover the joy of knowing how.

Tailor your education to advance your career goals. A strong liberal arts education can help to enrich your life, make you a more interesting person, and serve as foundation for success in many occupational fields. But if you wait until your senior year in college to decide that you want to become a marine biologist, all those English lit courses won’t help you launch your career. That’s not to say that an engineering student can’t shift gears and go on to business school, or that anthropology major can’t end up as a systems analyst. However, if you can avoid the detours and use your education to advance your career goals, you will be ahead of the pack from the start. Don’t rule out the family business. Far too often, the children of successful parents arbitrarily reject careers that are the same or similar to those of Mom or Dad. More likely than not, the decision turns out to be a mistake. If others in your family are successful in a particular line of endeavor, they may be able to help you to succeed in that same activity or something similar. There’s a natural urge to strike out on one’s own, but your choice might properly be an out-of-the-box extension of the parental activity or a niche they have overlooked. If your parents are physicians but you hate cutting up frogs, you might consider being a business consultant to physicians. If your parents are regional distributors of office furniture, you might consider office-furniture design, manufacturing, or retailing. Be honest with yourself. If your career choice represents nothing more insightful than rebellion from parental authority, you may not luck into any career that’s successful or satisfying to you. You need to look to positives rather than negatives. You need to stop whining and to focus on being the person others rely on to get the job done. You need to discover the joy of knowing how. For more thoughts on building a foundation for lifelong career satisfaction, try: • act.org provides educational and career planning services to all ages. • assessment.com offers assistance to career seekers. • careeresumes.com offers free consultation as well as preparation of resumes, cover letters, and customized mailings. • careerlab.com specializes in career management for executives and physicians. • phoenix.edu takes you to University of Phoenix, which offers online courses and satellite campuses for working adults. 228

career: 35 & under

Design a roadmap for career success Knowing what you want to do is only the starting point

Develop a strategic plan to jump-start your career. It’s never too early to begin preparing for success in the job market. As soon as you identify your career goal, start to work sifting through your options and choosing the best course for achieving your own satisfaction and success. If your career objectives are clear to you while you’re in high school, all the better. For many, though, career plans don’t begin to snap into focus until after they have finished college and have been in the workforce. For them, developing a solid plan for achieving a fulfilling career is even more important. Realize that you won’t get where you’re going in one step. If you set lofty career goals—and you should—you must recognize that you won’t achieve them overnight. Sit down with pen and paper and list the steps you need to take to realize your career objectives. They are likely to include educational requirements, work experience, financial resources, and the contacts and allies you will need to make to support your efforts. Then, develop a realistic time frame for each stage in the process. When you’re done, you’ll have a detailed roadmap showing each step you need to take to achieve your goals. Close the gaps in your education. Careers in medicine, law, and other professional fields require extensive and highly specialized postgraduate education. For others, such as engineering, business administration, and teaching, the absence of a master’s degree will eventually serve as a stumbling block to career development. The time to close the educational gaps that could slow your career progress is ideally while you are in your 20s or early 30s. Don’t wait to address education deficiencies until mid-life, when the financial and emotional pressures of supporting a family will make a return to school doubly difficult. Consider starting off in the minor leagues. Your ultimate goal may be to review Broadway shows for The New York Times, but don’t count on landing such a plum job right out of the starting gate. The Times and other big-city dailies may not be interested in untested talent, even as a copyboy. So, consider starting off as a cub reporter for a small-town newspaper or a neighborhood weekly. Use your time there to sharpen your skills and garner experience as preparation for moving up to prime time. When you’ve established yourself as a general-assignment 229

Sit down with pen and paper and list the steps you need to take to realize your career objectives. These are likely to include educational requirements, work experience, financial resources, and the contacts and allies you will need to make to support your efforts. Then, develop a realistic time frame for each stage in the process.

reporter, ask your editor for a chance to add to your usual work the writing of stage reviews of local productions, or film reviews of movies soon to be featured locally, or videos soon to be released. With some hard work, patience, and a little luck, you’ll enjoy preparing for the major leagues.

The time to close the educational gaps that could slow your career progress is ideally while you are in your 20s or early 30s.

Serve an internship to gain insight into your career path. As an alternative to starting your career at a third-tier company in the backwaters of your chosen profession, you can consider seeking out an internship at a leading company. While you may lack the experience to land a dream job at a top public corporation, a powerful government agency, or a glamorous Hollywood studio, you may well be able to score an internship there. Don’t expect much in the way of compensation; in fact, many internships are unpaid. But do look for some invaluable real-world experience that may improve your employment prospects later on, provide you with key contacts in your career field, and (just maybe) give you a foot in the door for a job with the company sponsoring your internship. Be prepared to relocate in order to advance your career. Most careers can be pursued in or near any major metropolitan area, but for others geography may be a key factor. If your career objective is in the entertainment field, at one point or another you may find it necessary to be based in New York, Hollywood, Orlando, or Nashville. If government service or politics is your dream, expect to serve some time in Washington, D.C. It may be helpful to relocate within striking distance of Wall Street or Chicago if your career goal involves high finance. Make geography a key element of your long-term career roadmap, and try to remain flexible. If you find your career stuck in neutral, the solution may involve a change of scenery to an area where employment opportunities in your field are more plentiful. For more guidance, try: • appliedinsight.com combines self-assessment with career matching to determine which careers best suit an individual’s personality. • analyzemycareer.com claims to be a leader in aptitude, personality, occupational, and entrepreneurial assessments. • myskillsprofile.com offers a menu testing along with assistance in choosing and changing careers.

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career: 35 & under

Enhance your employability Here’s how to start up the career ladder

Landing your first job could be the biggest challenge of your career. You will never be on track to achieve your career goals until you take that first victory: an entry-level position that may ultimately lead you to your objective. The higher your career aspirations, the more competition you will face in the contest for the job that will open the door to your goals. Your qualifications for the position will play an important role in whether you are offered a job, but they won’t be the only factor. Let’s talk about what you can do to enhance your prospects. Create a resume that positions you as a contender. Few applicants secure employment solely on the strength of their resume, but many are rejected because of a poor resume. Keep it to one page. Employers tend to spend only about 20 seconds skimming each resume, so make yours concise, well-organized, and easy to read. There’s no official way to organize and write a resume, but the best ones include a statement of the applicant’s career objective, educational achievements, the details of professional experience, a discussion of the skills or qualifications gained from those jobs, and one bold, clear statement of a strong attribute likely to impress your new boss. Don’t fudge one little bit. If you have no special record of reliability, don’t put the words I am reliable! on your resume in large type. Don’t exaggerate your experience or other qualifications. You needn’t include details of previous employment that are not relevant to the position you are applying for. Include a cover letter requesting an interview for the job, and address that letter to the individual who will be conducting the interviews. If you don’t know who that’s likely to be, better do some homework. Prepare for your most critical career test: the job interview. Learn as much as you can about the company, the people who will be conducting the interview, and the position being discussed. Anticipate the questions that you are likely to be asked (Why do you want to work here? Why should we consider you for this job? What’s your strong suit? What’s your weakest?). Create responses that are informative, succinct, and sincere. And remember: You need to interview the interviewer. The point is to ask questions concerning the qualities the company is seeking in 231

Include a cover letter requesting an interview for the job, and address that letter to the individual who will be conducting the interviews. If you don’t know who that’s likely to be, better do some homework.

Your goal should be to come across as a personable team player willing and able to carry his own weight—not a slacker or a dope who will likely cause more work for them or a know-it-all who will be irritating.

its employees, the training and advancement opportunities available to successful applicants, and even the employer’s corporate culture. Plan to arrive for the interview 10 to 15 minutes early, and make a good impression by dressing appropriately. (Somewhere, those two factors will be enough to move you to the top of the interviewer’s list.) A firm handshake and eye contact with the interviewer are important. Follow up with a personal thank you note, expressing your continued interest in the position. Adopt the image of a man on a mission to be the reliable one who gets it done. Learn how by watching and listening to colleagues and bosses who are that way. Get your future co-workers on your side. Applicants who survive the initial interview screening are likely to be called back for interviews with employees in the department with the vacancy. If you find yourself in that situation, remember this: All your potential co-workers want to know is how well you will fit in as a member of their team. Your goal should be to come across as a personable team player willing and able to carry his own weight—not a slacker or a dope who will likely cause more work for them or a know-it-all who will be irritating. Don’t come across as too gung ho, or you may be viewed as a ruthless, corporate back-stabber rather than a reliable member of their team who listens carefully, follows instructions, and figures it out. Look for ways to help a colleague, and be the first to do so. Line up references and recommendations to improve your prospects. If you’re asked for references, you have probably scored well on the job interview. Solid recommendations from past employers and others can be the clincher that leads to a job offer. When leaving an employer, it’s a good idea to ask your supervisor for a letter of recommendation that you can take with you. Don’t stop there, though. References from business acquaintances, professors, academic advisors, and family friends can also be helpful. Recommendations from successful individuals, especially those in the same industry as your prospective employer, can be particularly valuable. Here’s the secret weapon to launch your career: persistence. Here’s one way you can stand out from the crowd: Be more persistent and show more interest than the other contenders. If an employer senses that you want the job more than the others, that could be the deciding factor in your favor. For more suggestions, try: • flipdog.com is designed for job-hunters, offering info on thousands of employers and an automated online job-hunting process. • careerbuilder.com offers assistance by specific employment categories and fields of interest (English and Spanish spoken). • christiancareercenter.com offers free consultation as well as career guidance, job-search assistance, and a Christian job fair. 232

career: 35 & under

Get paid what you’re worth Here’s how to convince your employer to sweeten the pot

Prepare to negotiate your compensation package. Don’t underprice yourself just to land a job. The salary you start at becomes the salary upon which your future compensation will be based. Most employers want to pay fair wages to their people. They recognize that they need to do more than just recruit good employees. Also, they need to keep them on the payroll. To do so, they must offer competitive compensation. Even so, you must recognize that few businesses are likely to offer significantly more than they believe is necessary to attract and retain you. So, the first offer may not be their best offer. Knowledge is power: Start by doing your homework. For openers, it’s important to know what’s going on in your specific career field. If your choice is undergoing a manpower shortage, you may have considerable bargaining leverage. If there’s an oversupply, you’ll be facing a completely different situation. Recognize, too, that fluctuations in supply and demand may be regional or even local. There may be an abundance of engineers, librarians, or paralegals in your immediate area but a real shortage of people with those skills in nearby job markets. In addition to the potential demand for your chosen profession, get a clear idea of the prevailing wages paid for your skills in your neck of the woods. Next, check out your potential employer. Make an effort to find out what the company normally pays people employed in your job classification. If you’re a member of a professional society or an occupational support group, network with others in the industry to learn as much as possible about the company’s reputation and economic stability. If it’s a public company, your job is that much easier. The firm’s Form 10-K (annual report) is on file with the Securities and Exchange Commission and is available online at sec.gov. Remember, money isn’t everything. If the job represents your first step up the career ladder, starting salary probably ought to take a back seat to the potential for advancement, the quality of the training, or the company’s reputation. An employer offering the highest salary scale may do so out of necessity because of abysmal working conditions or a bad reputation. Don’t overlook the value of employer-paid benefits. If you’re focused solely on salary, you may be ignoring a big part of the 233

If it’s a public company, the firm’s Form 10-K (annual report) is on file with the Securities and Exchange Commission and is available online.

If you’re in your 20s, retirement seems like a lifetime away—so think wealth-building plan when you encounter the words retirement plan.

total compensation package that a prospective employer has placed on the table. For many employers, 30% of total payroll costs go into such benefits as health insurance, educational assistance, annual leave, life insurance, disability protection, and retirement-plan contributions. Also factor in the value of employer-provided perquisites such as a family-friendly flextime arrangements, free parking or company assistance with commuting expenses, or a liberal travel or expense-account policy. Make sure your package includes a retirement plan. If you’re in your 20s, retirement seems like a lifetime away—so think wealth-building plan when you encounter the words retirement plan. A solid employer-sponsored, tax-sheltered retirement plan can be far more valuable to you than to a coworker who joins the company in her 50s. With 40 or more years of growth down the road, even modest contributions to a 401(k) plan can produce seven figures. The more your employer contributes to the plan, the stronger your financial security may become. View zero contribution as a big negative. Give the company a reason to sweeten the pot. List factors that demonstrate how you bring extra value to the organization. Those may include customers, clients, contacts, skills, or potential leadership that you bring with you to the company. If you can cite studies that indicate the salary and benefits are less than the prevailing level for your field, you might find an appropriate moment to offer the information—but cautiously. For more advice and information, try: • monster.com has salary data, industry information, and probably all the other job help you can mention, including interview coaching. • sec.gov is the site to visit for detailed information on public companies. • U.S. Occupational Outlook Handbook is a basic career text; found in libraries everywhere.

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Climb the organizational ladder Here’s how to break out from the pack

Doing your job well is essential for success. But it’s not the only essential. People usually learn about office politics after they’ve become a victim of it. When some underling is responsible for reminding key people to attend important staff meetings, conferences, or presentations, and you’re not reminded, the reason may be office politics rather than a dissatisfied supervisor. Maybe the promotion you deserve went instead to the idiot down the hall who plays golf with the boss. The best protection is to insulate yourself by becoming more powerful within the organization. Power flows from influence, so strive to position yourself as an influential force within your group, your company, and your industry. Find a mentor. Seek the advice of an influential individual in a senior leadership on a specific project you are handling. If the individual provides some useful guidance, you have a potential mentor. Follow up by explaining how helpful the advice was in completing your project successfully. Continue to seek guidance from that individual, and in time you may both feel comfortable with the mentoring relationship. To get noticed, you’ll have to raise your visibility. Speak up at meetings, make suggestions, agree to take on extra work or difficult customers, volunteer for special assignments or projects—particularly the unpleasant or nonglamorous activities that others may avoid. Get quoted in articles about your industry, or write them. Volunteer to speak at meetings of trade or professional groups. Never pass up an opportunity to attend a social gathering hosted by a co-worker or a superior. Send memos explaining how your recently completed business trip or project has created new opportunities for the company. Through experience, learn to toot your own horn without being an annoyance. Network your way up the ladder. Develop an ever-expanding network of contacts throughout your field. Maintain contact with former co-workers, ex-employers, and other business acquaintances. Keep an ear cocked for job opportunities throughout your industry, and pass on the word to those who may be considering a career move. Go to industry conventions and conferences where you can make contact with a wide spectrum of individuals outside your organization. Get to know key executives and decision-makers at companies that are your cus 235

Get quoted in articles about your industry, or write them. Volunteer to speak at meetings of trade or professional groups. Never pass up an opportunity to attend a social gathering hosted by a co-worker or a superior.

tomers, vendors, and competitors. Join alumni groups and other organizations to broaden your stable of contacts even more.

High risk behavior to avoid: false or fraudulent assertions about your background, professional experience, or academic credentials; workplace humor or overt behavior that may be considered racially, ethnically, or sexually offensive; a secret office romance; and chronically allowing your domestic problems to interfere with your job performance.

Don’t get knocked off the ladder by these career-killers. Avoid behavior that could cost you your job, ruin your reputation, or destroy your career. High risk behavior to avoid: false or fraudulent assertions about your background, professional experience, or academic credentials; workplace humor or overt behavior that may be considered racially, ethnically, or sexually offensive; a secret office romance; and chronically allowing your domestic problems to interfere with your job performance. When you’re on the job, focus on it by keeping the personal stuff out of your head. That means few or no personal phone calls at work. Demonstrate that your head is entirely into the job while you’re on the job. Ask for a promotion rather than a raise. If you ask for a promotion and get turned down, you can still ask for a raise. In fact, your chances of success may actually improve because the boss may be reluctant to disappoint you twice. Changing jobs may be necessary to keep your career plans on track. According to the U.S. Department of Labor, the average American worker will change jobs seven times, and three will involve career changes. While frequent job-hopping was considered a career killer a generation ago, it is no longer the curse it was. In fact, overstaying your welcome may be a far more serious career mistake today. Some career advisors recommend using the five-year rule: If you haven’t advanced in job title or responsibilities over a five-year period, it’s probably time to bail out. For more suggestions: • careerkey.org offers comprehensive help in choosing a career, changing it, and career planning.

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Cope with the inevitable setbacks Be prepared for a pothole in your career path

Every career plan has its setbacks. Don’t expect yours to be different. Employers can find plenty of reasons to reduce their payrolls. Just because you’re doing well in your job, don’t assume that you are immune from a layoff. Losing your job can be emotionally stressful and financially debilitating, but it need not be a disaster for you and your family, or depressing. The key: preparation. Before it happens, try to insulate yourself. While you can’t preclude the possibility of a layoff, there are ways to reduce the risk that you will be among the casualties. At the first sign staff reductions may be in the works, take inventory of your job skills and abilities—the factors that make you valuable to your company. Then, determine whether there are any additional responsibilities or duties that you could legitimately assume. An offer to take on a heavier load “while the company is recovering from these tough times” could increase your job security. Developing skills or expertise through cross-training can also be a lifesaver. Always plan ahead. When the ax falls, try to negotiate a severance package. Although employers are under no obligation to offer compensation to discharged workers, many do so in order to avoid ill will or lawsuits or simply to be fair and compassionate. At the first opportunity, quietly ask your boss if you qualify for a severance package. When offered, the amount of compensation tends to reflect salary level and tenure with the company. It might include severance pay, a consulting contract, a freelance agreement, or continued access to certain company perks and benefits. If the end is inevitable, don’t go down with the ship. If your employer is in such serious trouble that the company appears unlikely to survive, hanging on until the bitter end may be hazardous to your career. In return for your loyalty, your reward may be nothing better than a tougher job market because those who bailed out from your sinking company early snapped up most of the jobs available in your industry. As the last employees to leave Enron discovered, the ones who departed early received comfortable severance packages that were no longer available to those who remained until the end of the financial collapse. By then, the company’s resources were depleted.

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An offer to take on a heavier load “while the company is recovering from these tough times” could increase your job security. Developing skills or expertise through cross-training can also be a lifesaver.

Continue your health insurance coverage under COBRA. If your employer provided health benefits while you were on the job, you may have a right to continue that coverage under a Federal law known as COBRA. It’s costly, but less than the price of comparable individual (non-group) health insurance. However, COBRA benefits will continue not more than 18 months for you, 36 months for your dependents.

Your first line of defense: money in the bank. Ideally, you should try to stash away a rainy-day fund that’s the equivalent of three months’ take-home pay if your reemployment outlook is quite good; if not, six months’.

Anticipate minimal help from unemployment insurance. Whether or not you receive any severance compensation from your employer, you may be eligible for unemployment insurance payments if you lose your job—though not a nickel if you left it voluntarily or were fired for cause. The formula for benefits varies from state to state, but even under the best scenario you are likely to receive only a fraction of your former salary and then for not more than 26 weeks. Adding insult to injury, our friends in the Congress will be taxing your unemployment benefits just when you most need an income stream. Your first line of defense: money in the bank. Ideally, you should try to stash away a rainy-day fund that’s the equivalent of three months’ take-home pay if your reemployment outlook is quite good; if not, six months’. Career priority number one: Get back in the hunt. Even if you have the resources to sit out a lengthy period of unemployment, doing so may not be wise. The longer you remain on the sidelines, the longer your career remains in neutral. Worse yet, if you wait months to begin looking for a new job, prospective employers may question your work ethic and career commitment. Use networking strategies to uncover employment opportunities, distribute your resume electronically over the Internet, contact headhunters to let them know you’re available, and begin lining up job interviews as soon as you can. For additional detail, try: • careerjournal.com is strong in career management, visiting such subjects as crisis management, dealing with chaos, and job change. It’s a sister of The Wall Street Journal.

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Use the military as a training ground The armed services can be a strong starting point

A hitch in the service could supercharge your employment prospects. Every year the U.S. armed services recruit and train more than 200,000 young Americans in marketable occupational skills. In many cases, military volunteers are offered a choice of training specialties before they sign up. It’s no longer necessary to choose between military service and higher education. Recruits are offered a smorgasbord of career opportunities. Also, they are encouraged to take college courses while on active duty, with the military paying up to 75% of tuition costs. Some are sent to college to earn one or more degrees. For techies, the military may be doubly attractive. If your career goal is one that relies heavily on technology, military training could provide an invaluable edge in the civilian job market. In many cases, you will be working with the most advanced technology with cutting-edge systems and equipment that may not yet be available for nonmilitary applications. Some careers all but require a military background. If you dream of becoming an airline pilot, the surest (and often the shortest) route to that objective is the military. The majority of pilots employed by commercial airlines today earned their wings in the Air Force. Many of the rest learned to fly in the Navy or Marines. Also, scores of other careers draw heavily from the ranks of the armed services. Career results can be both surprising and rewarding. A tennis friend of Gene’s was promptly hired as a weapons consultant by a defense contractor when he retired after 25 years in the U.S. Marines. Soon after he retired from that job 20 years later, he was promptly lured back to work by a management consulting firm that has a contract assisting Navy Seals with training in new weapons systems. He says his three-part career has been a dream. Our foster daughter is making a career of the military. We were proud of Lee when she finished high school after her family moved to another town in her freshman year. We still think she made a mistake at l8 when she rejected a four-year college scholarship. But she made up for it three years later when she enlisted in the Navy, hoping to find some career direction and training. She had previously given no thought to health care, so she was surprised to find herself being prepared for a career 239

In many cases, you will be working with the most advanced technology with cutting-edge systems and equipment that may not yet be available for nonmilitary applications.

Recruits who join the service after attending college can qualify for as much as $65,000 to repay college loans.

in military medical administration. She was promoted to Chief Petty Officer in record time. As such, she was in charge of all medical supplies for the Marine Corps coming into Operation Desert Storm. After the shooting stopped, the Navy sent her to Officers Indoctrination Course. In her 23-year career, she has earned one bachelor’s degree and two master’s, with 75% paid for by the U.S. Navy. Now a lieutenant commander, she is at Pensacola, heading up the resource management activities of the Naval Aerospace Medical Research Laboratory. She may retire while still in her 40s, with more than enough years remaining to build wealth in a private sector profit-sharing plan. After all these years, we are still proud of her. There’s an up-front payoff, too, from military service. No one joins the armed forces for monetary gain, but the compensation for those who serve in today’s all-volunteer military is far better than it was a generation ago. In addition to salary, room, and board, active-duty members of the armed services receive full medical and dental benefits, 30 days paid leave each year, free travel services, and up-front cash enlistment bonuses of up to $20,000. Also, the there’s the GI Bill. Upon returning to civilian life, active-duty military personnel can qualify for as much as $28,800 in government educational support under the Montgomery GI Bill. Part-time reservists can get up to $9,400. Even more aid is available to those who also sign up for the Army College Fund— a total of up to $50,000 for tuition and other higher-education expenses. What’s more, recruits who join the service after attending college can qualify for as much as $65,000 to repay college loans. For more info: • militarycareers.com specializes in career options within the U.S. armed forces. Given the facts, you may decide the military is an excellent place to start your career. • www.asvab.com discusses education options, career alternatives, and career planning, using tools developed by the U.S. Department of Defense.

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Start your own business Forget the rat race; work for yourself

Success can be even sweeter when it comes with your own business. Climbing the corporate ladder to achieve your career goals can be an enriching experience. But when success comes to you as a result of your efforts to launch and build a business of your own, the rewards can be just as meaningful, or even more. Self-employment is hard work, and it’s risky. Half of all new businesses fail within the first two years. But you can increase the odds for success. The people most likely to succeed with a new business are the ones who have already experienced success working for others in that same field. If you start an advertising agency after 10 years of learning the ropes on Madison Avenue, you figure to have the technical competence to put out a competitive product. What’s just as important, you’re likely to have made valuable contacts, potential clients as well as friends in a position to steer business your way. The biggest mistake made by prospective entrepreneurs is to start a business they think they will enjoy rather than one for which they are prepared. Raise enough start up capital to give your business a fighting chance. Many new businesses are started virtually on a shoestring—a fact that helps to explain the high rate of failure. Don’t expect much help from banks or other traditional lenders; they know the risks. Dig into your own savings, mortgage your real estate, and borrow from family and friends. Look into the possibility of a loan from the Small Business Administration (for up to $150,000) or a venture capitalist (who may demand as much as 40% equity in your company in return for financing). Choose the best organizational structure for your business. The simplest type of business to launch is a sole proprietorship. The downside, however, is that any debts incurred carry over to the personal assets of the owner. An LLC (limited liability company) is safer. Like a corporation, it can insulate the owner or owners from personal liability while avoiding corporate income taxes. Here’s the prize that can make you rich. As owner-employee, you can qualify for participation in the company profit-sharing plan. If the venture is successful enough, you may be able to divide its profits into enough fringe benefits to eliminate cor 241

The people most likely to succeed with a new business are the ones who have already experienced success working for others in that same field.

Your company incurs expenses attached to fringe benefits, but they are just as deductible as its contributions to the retirement-plan, healthinsurance premiums, and other costs—and some, most, or all of them are offset by the tax savings.

porate income taxes. I mean the benefits that are tax-deductible to your company but tax-free to you and other participating employees. The company’s contribution to your profit-sharing investment account can be a sum equal to 25% of the total of your IRS Form W-2 income (salary and bonuses), to a maximum contribution of $40,000 yearly ($3,333 monthly). At, say, 11%, monthly additions of $3,333 to your account can accumulate free of income taxes to $1,000,000 in under 13 years, $2,000,000 in a tad more than 17, and $3,000,000 in less than 21. Your company incurs expenses attached to fringe benefits, but they are just as deductible as its contributions to the retirement-plan, health-insurance premiums, and other costs—and some, most, or all of them are offset by the tax savings. Such contributions may continue to an owner-employee’s account beyond age 70. That fact makes an entrepreneurial venture of special interest as a retirement activity. A franchised business can be a ticket to success. If you are hell-bent on pursuing a business opportunity in a field where you lack experience or expertise, buying a franchise may be the right move. Most franchisers offer a turnkey operation that includes training in the operation of the business and expert help with site selection, financing, personnel recruiting, payroll administration, and advertising. You will be part of a respected, nationally-known network of businesses offering products and services that enjoy proven consumer demand. Trouble is, the cost of a franchise is likely to be high. In addition to all of the normal expenses associated with starting and operating a business, you can expect to be hit with a stiff upfront franchise fee as well as monthly royalties on sales. What’s more, you will be required to give up much of your business independence. You will be required to operate your business the company’s way, charge prices that the franchiser sets, and buy only from vendors approved by headquarters. For more information, try: • entrepreneur.com walk you through all the steps you’d need to take as a successful owner of a business. A companion of Entrepreneur Magazine, its services include some personal consultation but are largely informational, including a big menu of start-up guides covering different businesses, downloadable e-books, and courses from Entrepreneur University. • jobsandmoms.com consults on careers with “working moms, stay-at-home moms, and women in transition.

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Chapter 14

Career tips for those over 35 Soul-searching may lead to a career change and a better life

Gene Balliett

E

very year hundreds of thousands of Americans in their

40s, 50s, and 60s do make successful mid-life career changes—adjustments meant to pay emotional and ma-

terial dividends on the job and in their personal lives. Over the years, we’ve helped a number of our clients make changes that gave new purpose to their lives. In a few cases, the adjustments may have saved their marriage or even their sanity. If inertia is the only thing keeping you in an unfulfilling career, it’s time to begin moving toward a fresh start. Don’t confuse workplace discontent with career burnout. Many of those who are unhappy at work because of unpleasant relationships there. Others chafe at unresponsive or incompetent management. Some suffer an arduous commute or hate that part of the country. Issues like those do not necessarily indicate need for a career change. They may or may not suggest moving elsewhere or scrapping all the time and effort that went into creating the career you’ve got. Before taking such a drastic step, reassess your situation as objectively as you can. Consider seeking appropriate advice. A great deal of help is available, much of it by way of the Internet. Make no mistake: A mid-life career change can require severe sacrifices. Before changing your career, be sure you need more than a new environment. A new occupation may require additional education or training as well as starting over at the bottom. Even the process of searching for a new job may involve a steep learning curve. Be sure such issues are small compared to the potential for rewards you are likely to reap when you cross the threshold to a new career. For some, career change requires a relatively small adjustment. A tennis friend, a gregarious individual and a widely respected opthalmologist, injured fingers on his racquet (and operating) hand in a painful woodworking accident. In time, he found a way to hit the ball as hard and accurately as ever, so once again he was winning his way into the finals of sanctioned weekend tournaments. But the dexterity to perform surgery was gone forever. Office practice, however, presented no special problem. Without the distraction of the hospital, he discovered unexpected enjoyment from working only in the office with 243

Before taking such a drastic step, reassess your situation as objectively as you can. Consider seeking appropriate advice. A great deal of help is available, much of it by way of the Internet.

patients. He continued to keep his weekend schedule, including Fridays, open for tournament competition. Also, he now kept Mondays open for his frequent appearances in tournament finals. Working three days each week reduced his income less than he’d previously had any reason to imagine. All seven days of the week became an unexpected, greater joy.

A new occupation may require additional education or training as well as starting over at the bottom. Even the process of searching for a new job may involve a steep learning curve. Be sure such issues are small compared to the potential for rewards

Not all of the advice on the pages in this chapter will apply to everyone. Some serious soul searching may well take you to a different course of action than those covered. Even so, at least some of what’s said here may help you. Here’s what’s covered: • Decide what to be the rest of your life. Evaluate your career options. • Update your job-hunting skills. There’s a new world out there. • Learn 21st century job-hunting strategies. Get comfortable with today’s employment marketplace. • Morph to your dream job. It’s out there, and you deserve it. • Make it a career with financial security. A satisfying career deserves a decent lifestyle. • Build on what you know. Reshape your interests and skills. • Turn your hobby into a career. For some, that’s a direct path to job satisfaction. • Consider a government career. Uncle Sam does offer some advantages.

70 Billion years BC But you say you don’t know what to think of it, and Granny says the idea is too complicated!

Maybe we just haven’t thought about it long enough.

The men have nothing better to do. Let’s let them invent retirement!

No! If we let them We ought to invent invent everything, something to wear they will still be besides furs, what hanging out in the to do when people cave while we’re out get sick, and here catching fish something useful for and hunting. men to do.

I may be as old as you by the time I decide what to do about retirement.

CH & GB 2000

Sounds to me like we’re inventing retirement.

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There’s more to think about than what to do, where to do it, and when to begin.

First, let’s try to understand retirement. Is it about finding a way to stop doing work we hate? Or something to do that’s different, useful, and fun?

career: 35 and over

Decide what to be the rest of your life Evaluate your career options

Review your skills, talents, training, education, and aptitude. You may dream of becoming a diplomat, an actress, or an acrobat. But if you have no real hope of success in any such endeavor, you’re not likely to find happiness in your failure. Make a realistic assessment of what you are able to do with the abilities you have now—and with those you can reasonably expect to acquire through education, training, and/or on-the-job experience. Knowing what you don’t want is only half the battle. In fact, it’s probably less than half. The harder and more important part is deciding where to go from here. Resources are waiting to help you make the right decision. Clients who have discussed changing careers with us were nudged onto the wrong occupation long ago by well-intentioned parents, teachers, or peers. I think you ought to figure out for yourself what you want to do while there’s still time to do something about it. List what makes you unhappy in your present occupation. Do you hate having to deal with patients, customers, colleagues, or clients? Do long hours, tough working conditions, or the pressure to avoid mistakes on the job contribute to your dissatisfaction? Do you resent having to spend time in activities you hate? Does your daily commute contribute to your dissatisfaction? Keep going until you’ve listed all your complaints or run out of paper. Then, make a list of what you like about your work. Even if you are miserable in your career, you may really appreciate the fact that you’re able to work a flexible schedule, travel to interesting meetings or conventions, or earn a comfortable income. When you’re done writing this list, compare it with the other and decide whether or not your present career can be restructured to eliminate the negative and latch on to the positive. If the answer is No, use your two lists as a guide to potential new career paths. Try self assessment techniques to determine your best new career path. Occupational aptitude tests are supposed to help us reach correct life decisions by allowing us to a better understanding of ourselves. How well the tests work—or whether they work at all—has been debated for over 50 years. If one or more works for you, that’s all the evidence you need. The Internet 245

I think you ought to figure out for yourself what you want to do while there’s still time to do something about it.

Decide whether or not your present career can be restructured to eliminate the negative and latch on to the positive.

grows bigger and better daily, so you can probably find a better site, but meanwhile here’s our list of testing sites: • discoveryourpersonality.com takes you to the Myers-Briggs Type Indicator (MBTI). It purports to offer an accurate, detailed assessment of personality strengths. The 93-question test can be taken online in about 15-20 minutes at for a $55 fee that includes a seven-page interpretive report on your results. • advisorteam.com takes you to the Keirsey Temperament Sorter II. It is a personality assessment test used in career development programs at Fortune 500 companies and major universities. After taking the test free, you will be asked to pay for a 10-page analysis. • ncsu.edu/careerkey ncsu.edu/careerkey takes you to Career Key. It is a free site offering a read-out on your preferences linked to particular fields profiled in the U.S. Department of Labor’s online Occupational Outlook Handbook. • career-design.com/merchant/CareerChange.html provides, for $175, a battery of self-assessment and career-aptitude tests, including the MBTI, plus a 95-page Career Design report. • www.adm.uwaterloo.ca/infocecs/CRC takes you to University of Waterloo Self-Assessment. It provides a series of free selfassessment tests covering personality and attitudes as well as skills and achievements, knowledge and learning style, values, interests, and entrepreneurial aptitude. • myfuture.com/career/interest.html takes you to Industrial Strength Career Planner, a spinoff of the armed services career aptitude test. It provides help in sifting through military as well as civilian fields. • rockportinstitute.com takes you to the Rockport Institute Career Testing Program. Its extensive self-assessment option combines career, aptitude, and interest testing. It involves over three hours of self-testing at home, using tapes and other materials. The $450 fee includes an extensive written report and an hour-long telephone consultation.

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Update your job-hunting skills That’s a new world out there

Bring your resume up to date. Out of necessity, younger and less-experienced job applicants tend to stress their educational achievements. You’re beyond that point. Now, emphasize the skills and know-how you acquired during your first career and how they will foster success in your second. Be ruthless in editing your resume to wring out irrelevant information. Don’t hesitate to leave some work-related experience out; the last thing you want is to be labeled overqualified for a position that could serve as a springboard. Sharpen your employment-interview skills. Good grooming and appropriate business attire are still a must, as is promptness. Arrive at least 15 minutes early for any employment interview. Be prepared for the questions interviewers are likely to ask: Why do you want to work here? and What makes you qualified for this position? Don’t be bashful about responding with examples of your strengths, skills, and know-how. At the same time, be ready with questions of your own about the company, its position in the industry, and the skills or abilities needed for success in the position at issue. Be prepared to talk money; not to do so may be a mistake. If you are asked for your minimum starting salary requirements, be ready with the right answer. Do your homework first by researching the company and the salary structure for positions of the type for which you are applying. The Internet as well as discussions with your contacts at the company and in the industry can be helpful in establishing reasonable salary expectations. In a moment, I will suggest some e-sites to visit. Don’t underestimate the value of non-cash job benefits. At major employers, benefits tend to represent 30% to even 40% of the total compensation package. A lower-than-expected salary can be more than offset by generous health benefits, company-paid insurance coverage, and a qualified retirement plan. A 100% employer-contributed plan could put a sum equal to 25% of your year’s gross taxable compensation into a tax-deferred, well-invested retirement account—to a maximum of $40,000 per year for a money-purchase plan. Even more could go into a defined-benefit pension, but don’t expect to find that kind; it has become a rarity. A 401(k) retirement plan requires employee contributions, and any matching employer contributions can be tiny (and often are). Key employees may be of 247

A lower-than-expected salary can be more than offset by generous health benefits, company-paid insurance coverage, and a qualified retirement plan.

fered any one of several kinds of deferred-compensation plans. Those can become worthless if the company falls on hard times but valuable if all goes well. Judge the plan by evaluating the company.

Key employees may be offered any one of several kinds of deferredcompensation plans. Those can become worthless if the company falls on hard times but valuable if all goes well. Judge the plan by evaluating the company.

Don’t neglect the importance of networking. What you know is an important factor in launching your second career. But who you know—or perhaps more importantly, who knows you—can be more critical. If you haven’t been seriously involved in the job market since college, chances are you are not up to speed in the networking department. Ideally, you should launch an aggressive campaign of contact-making well before you decide to make your move. Increase your visibility among potential employers, clients, and other resources by attending industry meetings or professional conferences. Become active in trade or professional associations. Maintain contact with former coworkers, ex-employers, business colleagues, and others who may in time be in position to provide information and support for your transition. Don’t burn bridges on your way to a second career. You may be leaving a job you hate, an industry you detest, and an employer you despise, but resist the urge if you are tempted to tell off your boss on the way out the door. Extract your revenge simply by leaving with a smile. At some point, you may need the former employer as a reference or as a client. Develop the heart of a lion and the skin of a rhino. You are not likely to find the ideal career opportunity on your first try. Chances are, you will have a good number of strikeouts and foul balls before you hit one out of the park. Don’t be discouraged by a string of rejections; they’re part of the process. Look at the situation this way: 9 of every 10 job applicants don’t even get an interview for a given job. There’s no shortage of online help with job-hunting skills. In the accompanying pages, we identify a sizable sampling of them.

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career: 35 and over

Learn 21st century job-hunting strategies Get comfortable with today’s employment marketplace

Use the Internet to supercharge your career search. More and more people are finding their jobs electronically on the Net. Monster.com boasts a searchable database of more than a million job openings across the country, organized by occupational category, geographic location, and company. But instant access to available opportunities is just one way the Internet can help you launch your second career. Research prospective employers on the Net. If your prospective employer is a publicly traded company, the Securities and Exchange Commission’s site (sec.gov) offers instant access to the corporation’s 10-K form and other SEC filings. The documents can provide a wealth of background information on a company’s products and services and even details of the compensation paid to top corporate execs. Commercial sites such as CareerBuilder (careerbuilder.com) and HotJobs (hotjobs.com) also offer such information. Don’t overlook the employer’s own Web site. Many companies include online job-application forms and instructions for e-mailing resumes to the appropriate company personnel. Yes, you can e-mail resumes to get your foot in the door electronically. Forget the old notion that job applicants risk rejection if their resumes are submitted in anything less than first class condition on crisp, new bond paper. Speed trumps appearance in today’s job market, and recruiters are increasingly asking applicants to send resumes via fax or (preferably) by e-mail. With a few mouse clicks, an applicant can fire off e-resumes with cover letters to a virtually unlimited number of prospective employers in a fraction of the time required to do so with paper resumes—and at no cost. An option: for less than $50, Resume Zapper (resumezapper.com) will e-mail your resume and cover letter to thousands of recruiters and headhunters. If you do send resumes via e-mail, be aware of the proper online etiquette. Because of concerns for computer viruses, many employers don’t want (and won’t open) resumes or cover letters sent as attachments to e-mails. Instead of attaching a file, copy your resume and paste it as plain text into the body of the e-mail message. Stretch your second career by preparing for e-tirement. Thousands of Americans in their 60s and 70s are employing an excit 249

The documents can provide a wealth of background information on a company’s products and services and even details of the compensation paid to top corporate execs.

Because of concerns for computer viruses, many employers don’t want (and won’t open) resumes or cover letters sent as attachments to e-mails.

ing new strategy to ease their way into retired life and sharply reduce the bankroll they will need as a cushion after 65. After amassing a treasure of expertise and experience during their careers, innovative seniors are launching retirement careers that generate freelance income at home by using the Internet and other 21st century technologies. The approach was popularized by author Daniel Pink in his book, “Free Agent Nation: How America’s New Independent Workers Are Transforming the Way We Live.” Pink defines e-tirement as a new stage in American working life; working as a free agent after age 65—and using the global communications network as the platform for obtaining and completing work.” Check these top online career search sites. They offer a wealth of information and assistance for individuals hoping to launch a successful second career: • careerbuilder.com provides listings for over 300,000 jobs, offers job leads by e-mail, and includes a “resume builder” to help you prepare a killer CV (curriculum vitae). • hotjobs.com offers a job bank listing thousands of career openings in fields ranging from accounting and finance to transportation and logistics. Special features include a “salary wizard” that compares compensation between your old and new jobs. • monster.com boasts a humongous searchable database of over a million job openings, and it allows job seekers to post their resumes electronically. • dice.com provides online job leads for information technology professionals and other high-tech specialists. The site includes detailed assistance for technology consultants and contractors. • brassring.com is another site tilted toward techies. In addition to job listings, it offers advice on compensation, resumes, interviewing, and certification of specialists. • job.com is a job bank that offers a variety of career advice as well as a free resume posting service. • careerexchange.com provides job search and resume posting services, plus a People Match system that sends e-mail notices of new openings that meet your requirements.

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Morph to your dream job It’s out there, and you deserve it

Figure out what went wrong with your present career. To select the right successor career, you need to understand why you’re miserable at work now. If you don’t, you just might make the same mistakes again. Many are unhappy because they are too successful. Pressure to continue performing well has taken over their lives. Too many have become strangers to their family, their personal lives are non-existent, and they feel they have paid too high a price for career success. Focus on careers rated high for job satisfaction. Ready to trade in your high-pressure, nerve wracking, depressing, or even dangerous job for one that’s more rewarding? A recent national survey rated dozens of careers for over-all job satisfaction based on such factors as income, stress level, physical demand, security, and work environment. Among the top-rated occupations: urban planner, actuary, audiologist, dietitian, hospital administrator, sociologist, systems analyst, paralegal, mathematician, parole officer, and statistician. Consider a career change that allows you to work at home. Working at home rather than out of an office is not a viable option for everyone, and for some it can be an outright disaster. But others find that working at home allows them to strike a better balance between career and family. Also, a work-athome arrangement may resolve issues that contribute to an unsatisfactory employment situation or career burnout. For some, eliminating the daily commute alone may be enough to turn a negative employment arrangement into a positive one. For others, working at home might eliminate the need for a career change altogether. If the root of your career dissatisfaction involves conflict with co-workers or others at your employer’s facility, for example, working at home could provide a fresh perspective on your existing job. Consider a ‘mom and pop’ career. Would it work for you to make your life partner your business partner? The long, hard hours needed to operate a successful small business is destructive to some relationships. To others, working together may reduce the stress level. Career partnering is not an arrangement that works for every couple, but if a large dose of your current career dissatisfaction stems from not having enough 251

A work-at-home arrangement also may resolve many of the issues that contribute to an unsatisfactory employment situation or career burnout.

time with your spouse, working together might be the ideal solution. Most married couples have different but complementary skills and aptitudes and thus may find more success as a team than individually. Many career paths offer opportunities for partnering with a spouse. The possibilities include a bed and breakfast, a newsletter or desktop publishing operation, a real-estate agency, a restaurant, or almost any type of retail establishment.

Most married couples have different but complementary skills and aptitudes and thus may find more success as a team than individually. Many career paths offer opportunities for partnering with a spouse.

Check these for help with expatriate or travel careers: • globalgateway.monster.com gets you to Monster.Com’s portal to international employment opportunities, featuring a searchable job bank organized by country. • workingtraveler.com is supplemented by a book, Work Abroad 2001: The Complete Guide to Finding a Job Overseas, $19.95. Together, the two are comprehensive guides to working abroad, including work permits, short-term jobs, teaching English, volunteer opportunities, planning an international career, and starting your own business. • jobxchange.com/seafarer gets you listings for a variety of cruise ship industry jobs, from deck hands to ship doctors, blackjack dealers to photographers. • hoovers.com gets you to detailed profiles of major international companies. Also, it provides links to business directories for Australia, Canada, China, Europe and the United Kingdom, along with searches at major portals, like AltaVista, HotBot and Yahoo! • www.eurobase.com gets you to a marketing database with information on more than 2,000,000 companies based in the countries of the European Union, 30 European countries outside the EU, and several countries bordering Europe. • The Complete Guide To Conducting Seminars At Sea, by Mary Long, Athina Press, 1999, $29.95. How to launch a business that lets you cruise the world.

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Make it a career with financial security A satisfying career deserves a decent lifestyle

Money won’t buy happiness, but neither will poverty. A highpaying job won’t guarantee career happiness, but one offering your family little or no financial security may put you under more pressure than the career you’re trying to escape. According to the U.S. Department of Labor’s latest Occupational Outlook Handbook, 5 of the 10 best-paying careers anticipated for the decade ended 2010 involve computers, the Internet, or other high-tech applications. If technology is not your forte, don’t despair. A Resume Magic (resumemagic.com) analysis of the fastest growing and bestpaying jobs for the 21st Century listed such decidedly non-high tech occupations as financial services advisor, health-care practitioner, retirement counselor, and relocation consultant. Also, commissioned sales can be the ticket to virtually unlimited earnings—for those few with the drive, know-how, and determination to succeed. Don’t hesitate to negotiate a sweeter compensation package. Be prepared with a realistic counteroffer when a potential employer comes up short. If the job pays less than you need to make ends meet, don’t accept it with the hope that you will be able to negotiate a higher salary in a month or two. Chances are, your bargaining power is stronger now than it will be then. If the employer is unable or unwilling to meet your demands, try for performance incentives down the road. Don’t overlook the value of employee benefits. Family health coverage, life insurance, and a tax-sheltered retirement plan take on added importance for those of us on the shady side of 35. At many companies, employee benefits constitute 30%-40% of the compensation package. Over time, a generous, employer-contributed qualified retirement plan can create wealth into seven or even eight figures. Look at stock options as a lottery ticket. Forget the stories you’ve heard about millionaire dot-com file clerks and secretaries who retired in luxury after cashing in their company stock options. Most stock options are never exercised. That’s a reason to think long and hard before accepting a job offer requiring you to forego significant compensation in exchange for them. Their value is uncertain because they are linked to a number of variables, including the strike price (market price) of the 253

Commissioned sales can be the ticket to virtually unlimited earnings—for those few with the drive, know-how, and determination to succeed.

If the job pays less than you need to make ends meet, don’t accept it with the hope that you will be able to negotiate a higher salary in a month or two. Chances are, your bargaining power is stronger now than it will be then.

company’s stock at which the option may be exercised—and whether or not the company and you are together long enough for full vesting. Typically, stock options require four years to be fully vested, and employees who leave the company before then tend to lose all rights to their options. Moreover, as some Enron employees discovered, there may be restrictions on exercising company stock options even if vesting is complete. When the options do pay off—as when a company receives an injection of venture capital, completes a successful IPO (initial public offering), or experiences some other jolt that drives up share prices—the result can be a bonanza for employees holding them. Be aware that second-career income may impact your Social Security payout. If you’re under 62, returning to the workforce for the beginning of a new career will likely lead to an increased monthly benefit when you apply for Social Security. Benefits are calculated based on a complex formula involving the best 35 of your 40 highest earning years of employment. If you’ve planned adequately for your retirement, a few hundred additional dollars each month in Social Security benefits may not be a factor in your second-career decision. But if you’re between 62 and 65 and are already receiving Social Security benefits, be aware that if you return to work your monthly benefit check will be reduced by $1 for every $2 you earn above a certain annual threshold ($11,680 in 2002). On the other hand, if your second career allows you to postpone filing for Social Security benefits until age 70, your monthly check will be 81% greater than if you had started collecting at age 62. For a working couple filing for Social Security benefits at 70 after both making the maximum FICA payments, the payoff is a not-too-shabby lifetime annuity from Social Security of $59,688, indexed for inflation. (That number is correct!) For more information, try: • monster.com satisfies its mission: to be the premier resource for those seeking jobs and better careers (and for those who would hire them). Also, it has wage and salary data, including a personalized salary report ($40) designed to ease the jobseeker’s negotiation. • careerjournal.com claims to be “the premier career site for executives, managers, and professionals,” with over 35,000 job listings, salary information by job classification, and advice on job hunting and career advancement. The service is affiliated with The Wall Street Journal. • wsj.com gives you to the Journal’s online edition, which offers an online Career and Workplace section.

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Build on what you know Reshape your interests and skills

Explore second-career opportunities in an allied field. Years ago, one of Gene’s early medical practice management clients was a clinically depressed physician whose emotional problems, we discovered, were due to deep unhappiness with his practice. Gene worked with him to sell the practice after encouraging him to set aside his reluctance and to accept a dream job that had been offered unexpectedly by a major pharmaceutical manufacturer. His assignment was to attend clinical meetings around the world and to use his superb medical education and training to evaluate developments that might lead to a research breakthrough—or even to his employer’s acquisition of another promising small company. Our doctor loved his new work, and his depression disappeared as if by the wave of a magic wand. A year or so after we had met, his wife told me Gene had “pulled my husband’s head out of the oven.” She had arranged their first meeting. The experience helped all four of us to understand the importance of finding the right career. If you’ve found yours—or when you find yours—you will be among the 1% in the world fortunate enough to love the way you make your living. Consider launching your own business. Be realistic about the bankroll you will need. Small-business management consultants recommend that a fledgling entrepreneur bank enough cash to cover living costs for at least the first year of operation, in addition to start-up expenses over that time. Consider becoming a teacher. Many burned-out business executives, physicians, attorneys, and other professionals have discovered a way to escape from their high-pressure careers but while still making good use of their valuable skills and training. They teach. Professionals and skilled practitioners from a wide range of career fields are in heavy demand at short-staffed colleges, universities, and professional schools across the country. At the pre-college level, career opportunities for secondcareer teachers have never been more plentiful. Consider being a free agent. Thirty years ago, opportunities for experienced individuals to leave the traditional employment scene and to offer their services on a freelance basis were limited to a handful of occupations such as writers, artists, speakers on the lecture circuit, and people in the construction trades. It’s a different story today. Computers, the Internet, fax ma 255

Small-business management consultants recommend that a fledgling entrepreneur bank enough cash to cover living costs for at least the first year of operation, in addition to start-up expenses over that time.

chines, and other affordable telecommunication technologies have enabled millions of Americans to work at home as free agents in fields that were previously closed to them. Private studies suggest that between one-fourth and one-third of the total U.S. workforce—as many as 40 million Americans—now earn all or part of their income through self-employment.

Private studies suggest that between one-fourth and onethird of the total U.S. workforce—as many as 40 million Americans—now earn all or part of their income through selfemployment.

Consider becoming a consultant. Consulting opportunities are available today for virtually every skilled occupational group. The physician who leaves a successful, well-managed medical practice may find that he is in heavy demand as an advisor to other doctors on practice management—especially to those in his same specialty. The building contractor who hangs up his hammer may develop a lucrative new career as a consultant to venture capitalists, helping them to evaluate projects. A human resource specialist who leaves a Fortune 500 firm may find herself helping smaller companies decide among sophisticated employee profit-sharing, deferred-compensation, and incentive stock-option programs. These resources could ease your transition. The following books, Web sites, and organizations offer information and guidance on launching a freelance career: • workingtoday.org takes you to a nonprofit organization offering advocacy, information, and benefit packages for our growing workforce of freelancers, consultants, independent contractors, temps, and self-employed individuals. • Free Agent Nation: How America’s New Independent Workers Are Transforming the Way We Live, by Daniel H. Pink, is must reading for career changers hoping to ride the Internet to greater independence and employment satisfaction. • aahbb.org is a membership organization for home-office types. It offers advice on everything from local zoning considerations to tax implications for home-based businesses. • hboa.com offers health and business insurance plans for members. • aafd.org is the site of a group offering information and guidance on legal, financial, and operation issues to franchise business owners and prospective franchisees. • Working Solo: The Real Guide to Freedom & Financial Success With Your Own Business, by Terri Lonier, John Wiley & Sons, is a road map for aspiring free agents.

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Turn your hobby into a career For some, that’s a direct path to job satisfaction

If work were fun, they’d still have to pay us to do it. Everybody eats, and almost everybody likes to live under a roof. Trouble is, most people spend their working lives doing something other than what they’d rather do. Even among those of us who like our jobs, some would prefer to spend their time sailing or fishing. That’s why we have hobbies—pastimes that are so enjoyable that we’d do them for nothing if we didn’t wish to sleep indoors or eat. In retirement, some even pay for the privilege of doing what they most like doing, whether that’s a hobby or a way to extend one’s life’s work. Two of our retired clients travel the globe to work, and they pay their own expenses. Faythe is a surgical nurse and a supervisor. She still works at the side of her husband, Lowell, a surgeon. When the Furmans are not at home in Boone, N.C., they tend to be wherever the headlines identify the latest hot spot. In recent years, their quest for action has taken them to Eastern Europe, Africa, the Mideast, and Asia. We don’t know anyone who enjoys retirement more than they do. Find a way to make your leisure interest pay. The stay-at-homemom with a passion for decorating or baking cookies puts her talent to work on a part-time basis and, before long, she’s the family’s primary breadwinner. The avid gardener finds that he can earn fees by designing landscaping projects for developers and industrial clients. There are as many ways to generate income from hobbies as there are hobbies. Maybe more. You’re into antiques or collectibles? Robin Bassett’s hobby of collecting antique postcards provided the foundation for a successful electronic greeting card and stationery business that she started on a shoestring out of her home in Lebanon, N.H. Her company, Absolute Victorian Greetings (www.robinsplace.com), offers e-greeting cards for free over the Internet while generating income from sales of stationery, advertising space, and consulting services. Robin boasts a million-dollar inventory of art and graphics. His high-flying hobby became a cash cow. Amateur pilot Leo Harkin owned a one-quarter interest in the Cessna he flew for recreation on weekends, but maintenance, hanger fees, and operating costs were eating him alive. When a restaurateurfriend suggested that he use the plane to transport live lob 257

There are as many ways to generate income from hobbies as there are hobbies. Maybe more.

sters from Maine to seafood houses back home in Washington, D.C., he gave it a try. Now he flies to Maine every weekend for lobsters and the sideline business not only pays for his flying hobby but also generates $1,000 a week in profits.

Charlotte marketed her crafts on the Web. Today, her Baby Cakes are sold by 30 Internet Sites and 50 retail outlets.

Arts and crafts can bring financial independence. Charlotte Fowkes, a working mother of three, spent her spare time creating gift packages for neighborhood baby showers that were made to look like fancy layered cakes, but they were actually assembled from diapers, bottles, toys, and other infant needs. Charlotte marketed her crafts on the Web (baby-cakes.com). Today, her Baby Cakes are sold by 30 Internet Sites and 50 retail outlets. Traveling is your passion? Then generate income as a travel writer, a guidebook contributor, or by operating your own import-export business. If you’re a handyman who enjoys puttering around the house, put your home-repair skills to work by buying and renovating fixer-upper residential real estate. Amateur photographers can shoot weddings, portraits, or aerial photos for land developers and local governments. Need more ideas? Check out these resources: • powerhomebiz.com has success stories of hobbyists who parlayed their pastimes into profitable new careers. • You Can Make Money from Your Hobby: Building a Business Doing What You Love, by Martha Campbell Pullen, Lilly Walters (Contributor), and Lillet Walters, $12.99. • score.org takes you to a group sponsored by the U.S. Small Business Administration, Service Corps of Retired Executives. Its members help budding entrepreneurs turn their hobbies into successful businesses. • Complete Idiot’s Guide to Making Money with Your Hobby, by Barbara Arena & Phillip L. Reed, 2001, $10.95. A primer on strategies. • inc.com takes you to the Internet version of Inc magazine, a widely read small-business publication that offers information and advice on writing business plans, obtaining seed capital, and other concerns of fledgling entrepreneurs. Also, it offers start-up kits for dozens of small business.

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Consider a government career Uncle Sam does offer some advantages

Don’t believe those stories about grossly underpaid public servants. Entry-level Civil Service positions offer base salaries ranging from $22,000 to $39,000, but experienced individuals and those in professional or scientific positions command base salaries ranging from $107,658 to $138,200. Senior government officials are paid up to $166,700 annually. Rank-and-file federal personnel subject to the government’s GS (General Schedule) pay plan are also eligible for locality-pay increases ranging from 8.64% to 19.04%, depending on living costs, while federal pay rates outside the continental U.S. are 10% to 25% higher than at home. Hard-to-fill jobs in scientific, technical, and medical fields offer specially increased starting salaries. For job security, you can’t beat the government. Civil Service rules protect most of our public servants from the downsizing and arbitrary dismissals that are common in the private sector. Top federal managers enjoy an extra measure of job security because of the constant and growing manpower needs of the government. Federal, state, and local agencies struggle to staff 21 million positions. Employment benefits in the Federal workplace are second to none. Among the fringe benefits that sweeten the pot for federal employees: • Full health-care coverage for workers and their families—with no waiting period, required medical exam, or age or physicalcondition restrictions. • Annual leave benefits that include 13 to 26 days of vacation time annually, 10 paid holidays, and 13 days of sick leave each year. • Cash recruitment and relocation bonuses. • Incentive awards and retention allowances up to 25% of annual salary. • Family-friendly work policies that allow for flex-time work schedules, telecommuting, on-site day care, job sharing, and part-time scheduling. • Tuition assistance and student loan repayment programs. • LTC (long term care) insurance coverage. You can triple dip for retirement security. Almost all new employees are automatically enrolled in the Federal Employees Retirement System. It’s a three-tiered pension program that includes a basic retirement benefit plan (offering an annuity based 259

Civil Service rules protect most of our public servants from the downsizing and arbitrary dismissals that are common in the private sector.

on income and length of service), Social Security benefits, and a Thrift Savings Plan similar to 401(k) plans. The government contributes 1% of each employee’s basic pay and allows participants to make tax-deferral additions.

It’s not at all unusual to encounter scientists working at the National Institutes of Health into their 70s, doctors serving at Veterans Administration hospitals in their 80s, and lawyers at the Labor Department as old as 90.

Another bonus: no mandatory retirement age. Federal employees enjoy job security for as long as they are able to perform their duties. It’s not at all unusual to encounter scientists working at the National Institutes of Health into their 70s, doctors serving at Veterans Administration hospitals in their 80s, and lawyers at the Labor Department as old as 90. Here’s where to start your search for a government job: • www.usajobs.opm.gov takes you to an official database of thousands of current federal job openings, searchable by occupational specialty, geographic location, or government agency. Includes an online application. • www.fedworld.gov/jobs/jobsearch.html takes you to a job bank operated by the U.S. Department of Commerce. It is updated daily. • govtjobs.com takes you to a commercial database offering listings of federal, state, and local government job openings. It also lists executive search firms that recruit for government agencies. • gpo.gov gives you the U.S. Government Printing Office, where you can search for publications and CD-ROM materials on government employment and many other topics. • The Book of U.S. Government Jobs: Where They Are, What’s Available, and How to Get One, 7th Edition, by Dennis V. Damp & Samuel Concialdi; $19.95. Bookstores.

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Chapter 15

An objective look at employee benefits Retirement plans, flex and education benefits, insurance, paid time off

Kathleen Stevens

W

hen seeking someone knowledgeable to help with employee benefit plans, an owner-manager of a small business or a professional practice faces three problems early on. First: Where to get information and guidance. Most often, that’s an accountant, since accountants are widely thought to be experts on everything that has anything to do with money. Trouble is, few are. Their basic training is bookkeeping. Many of them go much further with their studies, but then many others do not. Of those who do, a very few public accountants and CPAs (Certified Public Accountants) develop expertise in the more challenging small-business issues, notably including employee benefits. A certified employee benefits specialist can be a less-expensive and more-knowledgeable choice. A second common resource for benefits: insurance agents. That’s mostly because they are so very available and offer pension services described as free (or nearly so)—provided the employer restricts the investment selections to the company’s insurance, mutual funds, annuities, or other pooled investment and savings accounts. Trouble is, your guy may not know enough about employee benefit plans (or investments) to make an objective comparison between theirs and competitors’. They’re salesmen.

A third all-too-likely resource is a peer. Typically, that would be an older, more experienced colleague. Among themselves, physicians make jokes about how naive they tend to be in the financial jungle, and yet they mostly turn to one another for financial information and advice. As an objective consultant, it’s my job to know more than a little about employee benefits. The subject is huge, and it’s constantly changing. I am the house specialist on employee benefits at Balliett Financial, and I have resources at my fingertips on the eight important employee benefits discussed in this chapter. Where else to turn for consultation on benefits? For retirement plan selection and ongoing administration, a consulting firm that provides recordkeeping and compliance services can be a lower-cost, higher-quality answer than the accountant who oversees the company’s books and does the company’s tax re 261

Among themselves, physicians make jokes about how naive they tend to be in the financial jungle, and yet they mostly turn to one another for financial information and advice.

turns. For employee instruction on retirement issues, investing, and personal finances, consider a fee-only financial advisor. To find a consultant on personal finances who won’t try to sell financial products to you or your employees, try www.napfa.com (1-800 366-2732).

The subject is huge, and it’s constantly changing.

These are the benefits discussed in this special issue: • Most popular employee benefit: 401(k). It may be your company’s lowest-cost retirement-plan option. • Retirement plans benefit everyone. Don’t let the costs blind you to your own wealth-creation potential. • Health insurance: top priority benefit. Without first-class health benefits, you won’t attract first-rate employees. • Insurance coverage is a key component. To employees and their families, life and disability insurance can be a blessing. • Education benefits help them and you. No payroll tax to pay for educational perks. • Lifestyle perks can be inexpensive. Some of the most appreciated perquisites are free. • Smarter scheduling is burnout insurance. For many employees, time is more valuable than money. • Flex benefits stretch a benefits budget. A ‘cafeteria plan’ packs nifty tax breaks for employees, too.

THE MONEY DOCTOR$ I don’t know anyone who has a financial advisor. Is there any reason for me to pay for financial advice?

Most Americans have life savings of less than $100,000. Lots less.

I’m 50. I’d retire at 55 on $50,000. I’ve saved $125,000. Isn’t that enough?

You’d be broke in six years. We can find a way for you to retire, but something’s got to give.

CH & GB 2001

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employee benefits

Most popular employee benefit: 401(k) It may be your company’s lowest-cost pension option

Score a tax break now—and give your employees financial security in retirement. A Section 401(k) plan can do both, allowing your employees to exclude as much as $10,500 from 2001 taxable income by contributing that much into a tax-deferred retirement account which will continue to grow tax-free until it’s tapped in retirement. True enough, not all employees may be able to make the maximum contribution ($10,500 in 2001, $12,000 in 2003, $13,000 in 2004, and scheduled to continue increasing by $1,000 yearly to $15,000 by 2006). The ceiling on employee contributions to traditional 401(k) plans is the lesser of $15,000 or 15% of the worker’s annual income. The ceiling was waived in 2002. Even so, almost anyone entering a wellmanaged 401(k) program early in the working career can look forward to a seven-figure, tax-deferred nestegg . This is one employee retirement benefit plan you may not have to pay for. Unlike other qualified employee pension plans, a Section 401(k) can be set up to be totally funded by the plan participants with no contributions from the employer. However, such a plan won’t be without cost. Your company must foot the bill for plan installation and ongoing administration. But those expenses may be partially or totally offset as a result of lower state or local (but not Federal) payroll taxes. Bottom line: for a business struggling to attract and retain quality employees while operating on a shoestring, a 401(k) retirement plan can be a no-brainer. Don’t be reluctant to make your employer contributions to the 401(k). Employers who match some or all of the contributions made by employees significantly increase the effectiveness of the 401(k) plan’s power to attract and keep good people. Another benefit: an employer who satisfies minimum funding requirements for rank-and-file workers may be able to maximize company contributions for the owner-employee and other key employees without having to undergo annual ADP (“annual deferral percentage”) nondiscrimination testing. A 401(k) pension plan may be particularly valuable if your target workforce is the young and the restless. Today’s relatively young and more mobile workforce is particularly attracted to 401(k) plans because of their portability. Since every dollar that the individual contributes to the plan becomes 100% vested immediately, it’s easier for workers to take their retirement benefits from one job to another. 263

Your company must foot the bill for plan installation and ongoing administration. But those expenses may be partially or totally offset as a result of lower state or local (but not Federal) payroll taxes.

Older workers find 401(k) sweeter now, thanks to the new catch-up provisions. The 2001tax law allows older employees (age 50 and up) to make up for missed retirement-plan contributions by placing an extra $1,000 in 401(k) accounts in 2002. That threshold will rise by $1,000 each year until reaching $5,000 in 2006.

employers may offer a 401(k) as a supplement to another company retirement program, such as a profitsharing arrangement.

Another reason for the popularity of 401(k) plans: flexibility. An employee can make the maximum contribution one year, put in somewhat less in another, or skip a year altogether if circumstances dictate. Unlike qualified pension plans, a 401(k) allows employees to make in-service withdrawals for certain hardships. For their part, employers may offer a 401(k) as a supplement to another company retirement program, such as a profit-sharing arrangement. Many do so in order to provide savings-motivated employees with a double-barreled opportunity to create a secure retirement. There are some drawbacks to 401(k) plans. Compared to other types of employee retirement benefit instruments, these can be relatively costly to administer. That’s because of the complexity and expense of the testing requirement which is designed to prevent employers from tilting the lion’s share of the 401(k) benefits to highly compensated employees. To sidestep the requirements, an employer can structure the plan as a “safe harbor” 401(k), but those require company contributions that the employer may not wish to make. Also, be careful about choosing your provider. Some providers may penalize you for moving your plan assets to another provider within a stated number of years (commonly 7 to 10). Here’s where to find more help with your 401(k) plan: • www.401khelpcenter.com provides news and guidance for employees and the employers who sponsor the retirement plans. • Standard & Poor’s 401k Planning Guide, by Alan J. Miller, McGraw-Hill Trade, 1995, $12.95.

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Retirement plans benefit everyone Don’t let the costs blind you to your own wealth-creation potential

What’s in it for the boss? Well, in 2002, a well-paid owner-employee can cut her own taxable salary to $160,000 from $200,000, thereby rescuing $40,000 so the company can make a maximum tax-deductible contribution to her retirement investment account. If invested till retirement in monthly increments of $3,333.33 at, say, 10%, the balance would grow to seven figures in 13 years or to eight in 33. That much wealth potential could allow a solo practitioner to be unconcerned about taking in partners or selling the practice. What’s more: A good retirement plan can help to create a quality control program. The first line of liability defense is quality of work. A good way for the boss to achieve and maintain high quality is to surround herself with a proficient, dedicated staff that can be trained to recognize errors and oversights while there’s still time to take corrective action. To recruit and keep such people, you’d better offer an outstanding package of employee benefits. A sevenfigure retirement plan can serve as your cornerstone. Career employees demand and deserve career-targeted compensation. If you are 40 or younger, a defined-contribution plan is probably best for you. Contributions are calculated as a sum equal to a certain percentage (up to 25%) of each eligible employee’s salary (to $200,000), to a maximum of $40,000 (to be indexed for inflation year over year). With investment growth of 9%-11%, $40,000 yearly translates into $8,628,000 to $16,437,000 over a 35-year career. If you are 60 or older, a defined-benefit plan may be an even better choice. Pension payments vary by an employee’s salary level and length of service, but those who stay till retirement are assured a lifetime income guaranteed by both the employer and, in the event of the company’s bankruptcy, the Federal Pension Benefit Guarantee Corporation. Distributions to retirees can equal as much as 100% of average compensation, maximum $160,000 annually, adjusted for inflation. The company’s maximum tax-deductible yearly contribution to an older owner-employee’s account sometimes exceeds $150,000. Later, the vested capital balance can be rolled into a qualified profit-sharing plan or an IRA—where it can gain the advantage of unlimited investment growth. Be wary of the commitment required by defined-benefit plan rules. The employer-sponsor of a defined-benefit pension plan 265

With investment growth of 9%-11%, $40,000 yearly translates into $8,628,000 to $16,427,000 over a 35-year career.

The company’s maximum tax-deductible yearly contribution to an older owner-employee’s account could exceed $150,000.

is subject to recurring annual funding requirements. Those must be made in quarterly (or even more frequent) installments whether or not the company is thriving. The contribution required may be even higher during chilly economic times, when investment performance of the fund is likely to suffer. Also, defined-benefit plans tend to be more challenging to design and more costly to administer than defined-contribution plans. So, many small and mid-size businesses have shifted from definedbenefit plans to profit-sharing, money-purchase, or 401(k) defined-contribution programs. Even so, the defined-benefit option ought to be considered when the goal is to maximize benefits to one or more key employees 60 and older. Use a profit-sharing plan to add flexibility to your retirement benefits. If your business or practice tends to be boom or bust and your ability to contribute to an employee retirement plan is likely to vary greatly from year to year, a so-called profit-sharing plan may be your best bet. That kind is funded solely by the employer, and contributions in any given year vary from $0 to 25% of each participating employee’s annual taxable compensation (to a maximum of $200,000). A company may forego contributions when business is down. Because profit-sharing arrangements are so flexible, they are often used in combination with money-purchase pension plans or other employer-sponsored retirement benefits. Got a money-purchase pension? You may not need it anymore. Many employers have both a profit-sharing plan and a moneypurchase pension plan. That means the expense of administering two plans rather than one. An employer’s contributions can (since 2001) go into a profit-sharing plan alone. So, many employers have merged their money-purchase plans into their profit-sharing plans and revised the latter to accept the max. For more information: • www.aspa.org takes you to the American Society of Pension Actuaries. Originally founded as an actuarial organization, its membership has been expanded to include pension professionals and salespeople of all kinds—administrators, accountants, attorneys, chartered life underwriters, consultants, financial planners, insurance agents, stockbrokers, and trust officers, among others. • www.ifebp.org takes you to the International Foundation of Employee Benefit Plans. It’s the largest educational association serving the employee benefits field. Its membership includes 35,000 individuals representing 8,400 multi-employer trust funds, corporations, public employee groups, and professional advisory firms. • Employee Benefits, Sixth Edition, by Burton T. Beam, Jr. and John J. McFadden; $76.95. A thorough discussion of profit-sharing and pension plans and many other benefits. Available from www.ifebp.org/bookstore. 266

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Health insurance: top priority benefit Without first-class health benefits, you won’t attract first-rate employees

Employee health coverage could be your company’s strongest recruiting tool. A business that fails to provide at least rudimentary health insurance coverage is at a severe disadvantage in recruiting the best employees. But the reverse is also true: Employers providing superior health benefits are more likely to attract the cream of the manpower crop. Look for ways to stretch your health insurance dollar. The main reason that health insurance outranks other job benefits in the minds of most employees is that the cost of medical and hospital coverage has become unaffordable for many individuals seeking coverage on their own. That’s not to say that the group health policies available to employers are cheap. They aren’t, and premiums for employer-paid health insurance are rising at a disturbing rate. Companies in many parts of the country reported premium increases of 20% or more for 2002, and they may rise even more in 2003. Despite cost hikes, group coverage remains considerably more affordable than individual health insurance. Just how affordable it will be for your business depends on several variables, including the size of your company. The bigger your group, the less you’re likely to pay for health benefits. Just as groups pay less for health insurance than individual purchasers, large groups pay substantially less than small ones do. One strategy available to small businesses in some parts of the country is to join with other employers to form health insurance purchasing pools for better bargaining power. Check with your local Chamber of Commerce, your state’s department of insurance, or the National Federation of Independent Business (202-554-9000) for information on such groups in your area. If there is no collective purchasing pool in your neck of the woods, Congress may soon come to the rescue. A key provision of the Patient’s Bill of Rights passed by the House in summer 2001 permits small businesses to band together to purchase health insurance through association health plans organized by industry groups or professional societies. If the Senate goes along with the provision, health insurance could become considerably more affordable for smaller companies. Choose the plan that works for your business. HMOs (Health Maintenance Organizations) are in some places the most affordable options, but they tend to place significant restrictions on 267

One strategy available to small businesses is to join with other employers to form health insurance purchasing pools for better bargaining power.

choice of provider and treatment options. PPOs (Preferred Provider Organizations) and traditional fee-for-service indemnity plans offer more flexibility, but generally at higher cost. Health insurance premiums will also vary depending on the amount of cost-sharing required of employees. Higher annual deductibles, coinsurance, or out-of-pocket co-pay requirements lower premiums by shifting costs to employees.

The better major medical policies provide long-term nursing home or home health care benefits in addition to covering catastrophic hospital, medical, and surgical costs.

Major medical coverage may be a live option. If the cost of traditional benefits is beyond your company’s reach, you may still be able to afford a major medical plan covering your employees for the expense of a catastrophic illness. Employees are expected to meet ordinary health-care costs out of pocket before coverage clicks in. Once the annual deductible is met, the insurance pays benefits of up to $1 million, $2 million, or even more. The better major medical policies provide long-term nursing home or home health care benefits in addition to covering catastrophic hospital, medical, and surgical costs. The smartest approach may be the Medical Savings Account. If you employ fewer than 50 workers, you may be able to sidestep much of the cost of providing health insurance benefits by helping your employees set up an MSA. It combines a tax-deferred savings account with a low-premium, high-deductible catastrophic health-insurance policy. These relatively low-cost policies typically carry annual deductibles of $3,200 to $4,800 for family coverage, with an out-of-pocket maximum of less than $6,000, including the deductible and coinsurance payments. Funds that have been contributed to the MSA may be withdrawn tax-free to pay out-of-pocket costs until the insurance coverage clicks in. Funds not used to satisfy the out-of-pocket annual deductible in one year remain in the account for future use and, like an IRA, continue to grow tax-free until needed. For more information: • www.nipa.org takes you to a national association representing the administrators of retirement and other employee-benefit plans. • Health Care Purchasing: A Value-Based Model by Laird L. Miller and Joanne E. Miller, $47. This book provides practical information to help employers get their money’s worth in healthcare benefits. Available from www.ifebp.org/bookstore. • Dental Benefits: A Guide to Dental PPOs, HMOs and Other Managed Plans, Revised Edition, by Donald S. Mayes, $53. Available from www.ifebp.org/bookstore. • Managing Pharmacy Benefits by F. Randy Vogenberg, editor and contributor, and Joanne M. Sica, $42. Available from www.ifebp.org/bookstore. • Controlling Costs in Prescription Drug Plans, International Foundation, $19. Available from www.ifebp.org/bookstore.

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Insurance coverage is a key component To employees and their families, life and disability coverages can be a blessing

Group life insurance is inexpensive for employers and a good deal for employees. Group policies are typically written on a guaranteed issue basis (i.e. no medical exam required), so it can be a valuable benefit for older employees and any employee with chronic health problems. Premiums vary, but it’s not unusual for monthly premiums to average about 25 cents per $1,000 in coverage per employee. Watch out for the tax ceiling on group term life. Typically, coverage ranges from as little as $10,000 per employee to an amount equal to several years’ salary for key employees. Unlike pension benefits, there’s no Federal discrimination rule to worry about, so managers can be offered higher levels of protection than rank-and-file employees. Group life with death benefits of $50,000 or less may be provided as a tax-free benefit. Any premium the employer pays for coverage above $50,000 becomes taxable income to the employee. Don’t overlook short-term disability (STD) coverage. Almost one in three Americans will suffer a serious disability between the ages of 35 and 65, yet millions of workers lack the savings to cover their basic living expenses if sickness or injury keeps them out of work for even two or three months. A typical STD policy provides an employee with half to two-thirds of regular weekly salary for13 to 26 weeks. Benefits normally begin after a seven-day waiting period. Most group STD policies are written on a guaranteed issue basis (no medical exam needed), and premiums may run to about $150 or more yearly per worker. Long-term disability (LTD) insurance may be even more important. Losing a salary for years would be a disaster for almost any family. If your company has the resources to provide only one type of disability benefit, I’d say it should be longterm coverage. LTD picks up where STD expires (normally after an elimination period of three to six months). LTD pays a percentage of employees’ regular salary for periods of two to five years, and in some cases until retirement. Costs are higher for companies with fewer employees and for those with an older workforce, but on average researchers at John Hewitt & Associates found long-term disability insurance premiums averaging $180 yearly per worker. When disability premiums are paid by an individual with after-tax dollars, any benefits received are tax-free. When the premiums are paid by the employer as a 269

If your company has the resources to provide only one type of disability benefit, I’d say it should be long-term coverage.

tax-free fringe benefit, the employee must pay tax on benefits collected from the policy.

Specialized employee insurance benefits can be a low-cost way of keeping your best people on the reservation.

Long Term Care (LTC) insurance is an increasingly popular benefit. With American life expectancy on the rise and the average cost of nursing home care averaging nearly $50,000 a year in 2001, LTC is being included in more company benefit packages every year. LTC insurance isn’t cheap, but, compared to the cost of individual coverage, employer-provided policies can be bargains. A survey by the Employee Benefit Research Institute found that in 2000 the average annual premium in the employment-based LTC insurance market was $446. The lower cost of group LTC coverage comes at a price: skimpier benefits than available under individual policies. Use specialized insurance benefits to build employee loyalty. When you consider the cost of attracting, screening, and training employees, and then add in the effects of reduced productivity during the newcomer’s learning curve, compensation researchers contend that it costs American business an average of $36,000 to replace a veteran employee. Specialized employee insurance benefits can be a low-cost way of keeping your best people on the reservation. Among the options that are gaining popularity with companies and workers: • Pre-paid legal services (a hedge against the $150 to $250 per hour fees charged by many law firms today). • Group homeowners insurance (31% of the companies responding to a recent survey said they planned to add this benefit within the next three years). • Pet insurance (no laughing matter for dog and cat owners who have been hit with thousands of dollars in unexpected vet bills). For more information: • Benefits Facts 2002-2003, Deborah Price Rambo, Frank J. Bitzer, CEBS, April K. Caudill, Nicholas W. Ferrigno, Jr. and Sonya E. King; $50. A roundup of employee benefits and the questions often asked about them. • 2003 Multistate Guide to Benefits Law, by John F. Buckley, $199. Available from www.ifebp.org/bookstore.

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Educational benefits help the company, too There’s no payroll tax on money that pays for educational perks

Educational assistance benefits can pay dividends for your company as well as for your workers. Tax-free tuition reimbursement programs and other forms of employer-provided education assistance are becoming an increasingly popular fringe benefit among companies large and small. The latest Labor Department surveys indicate 65% of the nation’s large and medium-size employers now offer some type of job-related educational assistance to their workers, and that 38% of smaller employees also provide the benefits. While it’s true that only a minority of employees take advantage of employer-provided educational benefits, the ones who do tend to be more motivated and advancement-oriented—exactly the type of people an employer should be trying to attract. As an added bonus: By providing educational opportunities, you help employees to work smarter and more effectively for you. Educational job benefits are even sweeter, thanks to the 2001 tax law. It expands the existing tax exemption for employerprovided educational assistance by allowing education-assistance funds to be used for graduate-level courses as well as undergraduate studies. Under the new provisions, employers are able to offer each employee up to $5,250 in tuition assistance, tax-free to the worker, even if the course work is unrelated to current duties. The original provisions allowing taxdeductible educational assistance for employees had been scheduled to expire at the end of 2001. The new law made employer-provided educational benefits a permanent part of the Federal tax code. Claim an even bigger tax deduction if the education assistance is job-related. If you reimburse employees for the expense of educational activities undertaken as a condition of employment, or to “maintain or improve skills required by the individual’s employment,” there’s no limit to the amount of educational assistance your company may provide tax free to employees. Eligibility may be confined to a limited class of employees, but to qualify for the tax exemption the reimbursed education expense must not be designed to qualify the employee for a “new trade or business.” Under this standard, you won’t be able to send the company mail clerk to law school tax-free. But if you promote the clerk to a management position, you may be able provide tax-free tuition for an MBA degree. Remember, though, that while tuition reimbursement may be provided 271

While tuition reimbursement may be provided as a taxfree employee benefit, the cost of related travel, meals, or lodging may not be.

as a tax-free employee benefit, the cost of related travel, meals, or lodging may not be.

Another educational benefit being offered by a number of businesses today: in-house lectures and course work to help employees sharpen their personal financial management skills.

Be flexible—even creative—when designing educational assistance benefits. You can mix and match job-related educational assistance to provide customized benefits for employees. Theoretically, you could offer your company’s information technology specialist $5,250 in tax-free tuition assistance to study English literature, plus virtually unlimited additional funds to pay for job-related computer courses. Don’t be afraid to think out of the box when fashioning benefits for your employees. Formal schooling isn’t the only way to provide educational assistance. On-the-job training is often the most valuable form of education that an employer can offer. Take a fresh look at your company’s OJT training efforts to determine whether you’re doing everything you can to help your workers develop strong skills. Another educational benefit being offered by a number of businesses today: in-house lectures and course work to help employees sharpen their personal financial management skills. The theory: What good are sophisticated benefits if employees don’t understand them enough to participate and appreciate? Set high standards to squeeze more mileage out of your employee education benefits. Since you’re paying the freight, there’s no reason why you shouldn’t expect employees to study hard and do well in their courses. Most employer-sponsored education benefits are provided in the form of cash reimbursement for courses taken and successfully completed. It’s not uncommon for employers to link the level of reimbursement to academic performance: 100% for an A, 75% for a B, and so on. Many businesses require workers to be on the job for a minimum time (typically one year) before qualifying for educational benefits. Many others require workers to repay part or all of the educational assistance they received if they leave the company within three years. For more information: • The Tools & Techniques of Employee Benefit and Retirement Planning, Seventh Edition, by Stephan R. Leimberg and John J. McFadden; $49.95. A comprehensive look at employee benefits, including educational assistance and disability plans. Available from www.ifebp.org/bookstore.

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Lifestyle perks can be inexpensive Some of the most appreciated perquisites are free

Some of the most valuable employment benefits may cost little or nothing. Less-traditional employment benefits—I mean perquisites and company policies designed to promote a more satisfying lifestyle—can produce surprisingly attractive perks for employers. Family-friendly company policies such as flexible work schedules, compensating time off, telecommuting opportunities, and the offbeat employee scheduling practices are prime examples of the kind of low-cost or no-cost work benefits that businesses can offer their employees. Here are some more: Offer company-sponsored day care. When a small magazine publisher based on Long Island realized it couldn’t match the salary and benefit packages being offered by competitors, company officials tried a different approach. They established an on-site, full-service child-care center as a magnet. The center is operated on a break-even basis, so no profits are generated— but there are no costs to the company, either. Employees using the company’s on-premises facility saved an average of 20% on day-care costs. The company was able to attract key employees from its higher-paying competitors as well as others who would not otherwise have been in the job market. Broaden your company’s prospective talent pool with jobsharing strategies. Plenty of motivated people would jump at the opportunity to put their skills to work on a part-time basis. Job-sharing is an increasingly popular strategy that partners two part-time workers to fill one full-time position. Employers who have tried the approach say job-sharing pairs tend to have superior skills, more experience, and greater dedication than the full-timer they replaced. Added bonus: Employee absenteeism tends to decline; job-sharing partners cover for each other. Offer services to raise your employees’ financial IQ. Many companies provide strong compensation packages that include valuable retirement plans and other financial benefits only to discover that many employees fail to take full advantage of them. The reason: the disturbing lack of basic financial savvy on the part of their employees. Increasingly, employers are stepping in to address this problem by offering financial services and guidance directly to their workers. One recent survey of businesses across the country found that 29% now offer group fi 273

One recent survey of businesses across the country found that 29% now offer group financial planning services to their employees, up from just 2% in 1994.

nancial planning services to their employees, up from just 2% in 1994.

It doesn’t cost much to encourage traveling employees to tack on a day or two of vacation time at the end of an out-of-town business trip or convention.

Above all, avoid petty company policies that antagonize employees and drain morale. If work were all fun, we wouldn’t have to pay people to do it. But when employees are frustrated or demoralized by unnecessary company rules, restrictions, or requirements, chances are it’s the boss who needs an attitude adjustment. The employer who sends his people on business trips, then requires them to turn over their frequent flyer benefits to the company, is unlikely to instill much goodwill among his employees. Instead: Look for ways to make people want to work for your company. Free or subsidized parking arranged by the employer is an exceedingly popular perk where nearby parking is hard to find or expensive. A relaxed dress code or a casual Friday policy can boost employee morale and help workers stretch their wardrobe budgets. And it doesn’t cost much to encourage traveling employees to tack on a day or two of vacation time at the end of an out-of-town business trip or convention. It can’t hurt to report the price tag on total compensation. There can be a big difference between the take-home pay an employee sees and the money the employer also pays the employee in both taxable and nontaxable compensation. The taxfree part includes gross salary or wages, paid time off, healthcare benefits, the employer’s contribution to retirement benefits, and other perks. Chances are, a valuable employee who’s entirely aware of the total value of the compensation package you provide will be less likely to be fooled by an inferior offer that includes a higher salary. See if your bookkeeper, accountant, or payroll service can’t help you design an all-inclusive annual compensation report to each key employee. For more information: • 2002 U.S. Master™ Employee Benefits Guide, by Linda Panszczyk, CEBS; $57. A comprehensive look at employee benefits, including dependents’ daycare. At www.ifebp.org/bookstore.

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A smarter schedule is burnout insurance For many employees, time off is more valuable than money

A paid vacation is the cornerstone of your company’s employee benefits program. It’s the one job benefit that everyone expects. But that’s not the only reason that a competitive policy of paid time off is important. The most motivated employee needs an occasional break to spend with family and friends. Without periodic rest and relaxation, any of us will show measurable signs of reduced productivity. Two weeks of annual leave is the bare bones minimum for newly hired employees, and most employers offer four to six weeks a year for employees with longer tenure. Make sure your people actually take time off. New research suggests that 25% of all American workers do not take all their vacation time. The study found that they are twice as likely to consider themselves overworked as colleagues who made full use of their vacation benefits. We think it’s a cardinal sin to let your best people burn out. Use flex-time scheduling to help employees balance work and family. Families with two working parents are now the rule, not the exception, and employers who tweak their operating policies to provide a bit of scheduling flexibility for their workers are likely to be rewarded with a more loyal, more productive workforce. One in five businesses today provide added flexibility by offering employees the option of adopting flex-time work schedules. For example, an employee may opt to work nine hours a day rather than the normal eight in exchange for every other Monday off. Another may choose to work seven hours on Monday through Friday, plus a half-day during the weekend. True, flex-time arrangements don’t work for all companies nor for all employees. But where both employer and employee can agree on an off-kilter schedule, the result is likely to be less stress in the workforce and greater productivity for the company. Adopt flexible scheduling that pays off on the bottom line. Although flexibility in designing work schedules can translate into more satisfied employees, lower personnel turnover, and greater productivity, it can also have a positive effect on your organization’s profits. Example: offering your non-hourly wage personnel the option of comp time (compensatory time off in lieu of extra pay for overtime worked) may increase employee satisfaction and reduce payroll costs. Another strategy: Allow 275

Where both employer and employee can agree on an off-kilter schedule, the result is likely to be less stress in the workforce and greater productivity for the company.

key employees the flexibility to telecommute several days each week or month. Admittedly, many job responsibilities don’t lend themselves to telecommuting, and some individuals simply aren’t suited to work at home. But businesses that have found ways to design successful telecommuting programs report a sharp increase in employee retention rates as well as major savings by avoiding the need for expanded office space.

Businesses that have found ways to design successful telecommuting programs report a sharp increase in employee retention rates as well as major savings by avoiding the need for expanded office space.

Let your employees design their own vacation schedule. At Balliett Financial, we combine all of our employee paid time off benefits—vacation, sick leave, family emergencies, and goof time—into one package. Each of us receives one day of paid time off for each completed month on the job. Days off can be taken in a single block or a day or two at a time, or they can be carried over to the next year as a hedge against lost income due to an extended illness. I can opt for long weekends all summer or take two weeks of vacation after 10 months. For the company, the advantages include less squabbling about sick leave and an easy way to identify job-hoppers who don’t plan to be around long. P.S.: In addition to those 12 paid days off each year, we get nine more: Our paid holidays are the same as those observed by the New York Stock Exchange. For more information: • The Handbook of Employee Benefits: Design, Funding and Administration, Fifth Edition, Edited by Jerry S. Rosenbloom; $115. This book covers time-off benefits, among most other kinds. Available from www.ifebp.org/bookstore.

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Flexible perks stretch a benefits budget A ‘cafeteria plan’ packs nifty tax breaks for employees, too

Tap into IRS Code Section 125 to get the most value out of your benefit dollar. Even the best employee-benefit package isn’t going to satisfy everyone in your organization. Mary the bookkeeper has no need for the health insurance; she’s covered by her husband’s plan. She wants day-care benefits. Charlie the lab tech has no need for day-care; he’d like dental coverage. Others want prescription drug insurance, disability benefits, adoption assistance, or vision coverage. There’s not enough budget to provide all such benefits. That’s where Section 125 becomes interesting. A Section 125 cafeteria plan lets your people design their own menu of job benefits. A cafeteria plan can supplement your company’s existing employee benefit program by offering a wider range of options. Rather than provide predetermined benefits, each employee is given an amount of benefit dollars to spend. Each then chooses from the options OK’d by the boss. A Section 125 plan can yield tax savings for both employer and employees. Your cafeteria plan—as well as related Section 125 plans known as a “flexible savings accounts,” or “flexible benefit plans”—can be funded by the employee to pay for a variety of different expenses with before-tax income. As a result, the cost of day-care for children, dental or vision benefits, group term life insurance (up to $50,000 worth), and other expenditures that otherwise might not be deductible can be excluded from employees’ income, saving FICA, federal, and sometimes state income taxes. Actual savings vary with the individual tax situation, but on average a worker figures to receive at least 25 cents in tax savings for every dollar spent on a cafeteria plan. There are benefits for the employer, as well. For every payroll dollar set aside in a cafeteria plan or a Flexible Savings Account, the employer avoids FICA, FUTA, and workers compensation taxes. The savings are typically enough to offset much of the administrative expense. The real bonus for employers, however, is in employee satisfaction. This is a way to enhance your benefit package at little additional cost, if any. Use a Flexible Savings Account to close the gaps in your employees’ health coverage. With the cost of health insurance rising at a double-digit clip in many parts of the country, businesses are under pressure to control expenses by shifting some 277

For every payroll dollar set aside in a cafeteria plan or a Flexible Savings Account, the employer avoids FICA, FUTA, and workers compensation taxes.

of the costs to employees. A Section 125 Flexible Savings Account program can ease the burden for employees by letting them pay health-insurance deductibles, coinsurance requirements, co-pays, and other out-of-pocket health costs with pretax dollars. Tax-exempt funds from the accounts can also be used for a wide range of other services that may not be covered by insurance, including ambulance charges, skilled nursing fees, and speech therapy.

Starting in 2001, employees have been allowed to modify their cafeteria plan over the course of the plan year, not just at the beginning.

Restrictions limit the use of Section 125 funds. Cosmetic surgery, over-the-counter drugs, weight-loss products, hair transplants, and certain other elective procedures may not be funded. Also, contributions to an employee’s Medical Savings Account (page 270) are off limits. Even so, pre-tax funds may be used to pay for the high-deductible health insurance that is used in conjunction with Medical Savings Accounts. Another drawback: bureaucratic red tape. IRS rules set restrictions not only on the expenses that may be covered but also on the timing of when employees may elect to use the funds. Those who made an election to have $3,000 deducted for medical expenses during the course of the year used to be at risk of losing that money if the funds went unused by the end of the year. But IRS has adopted final new rules to make cafeteria plans and flexible savings accounts a bit more user friendly. Starting in 2001, employees have been allowed to modify their cafeteria plan over the course of the plan year, not just at the beginning. Also, the new rules permit employees to make mid-year changes in coverage levels if there is a significant decrease or increase in cost or a marked improvement in the level of coverage provided, or if the boss adds a new benefit to the plan. For more information: • Flexible Benefits: A How-To Guide, Sixth Edition, by Richard E. Johnson, $53. Available from www.ifebp.org/bookstore.

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Chapter 16

Don’t let retirement be a trap Too many who retired young are finding life to be empty and unrewarding.

Dee & Gene Balliett

I

f you’re nearing retirement age, or if you retired not so terribly long ago, consider this: Medical advances combined with a better understanding of the effect of lifestyle choices on

the aging process may mean that you can look forward to many productive years after retirement. Much of the medical research under way is focusing not simply on adding years to our lives but on adding life to our years. Advanced age won’t necessarily mean living our final years enfeebled and bedridden. While that’s positive news, it also raises some important new questions that we will all need to answer. The most pressing: What are we going to do with the rest of our lives? Some of the retired doctors Gene and I have known over the years thought they had the answer to that question before they retired but lived to believe they were mistaken. I’ll illustrate with a true-to-life composite picture drawn from our relationships with doctor-clients since 1967: Dr. Fred Miller worked 12-hour days, six days a week. He did so for nearly 30 years at his busy and stressful solo medical practice. At age 62, he packed it in. He told friends he’d sold his practice, but the price was equal to the fair value of his twophysician office building. He bought a new set of golf clubs, and he and his wife moved to Florida. He was healthy, fit, financially secure, and living the kind of retirement that his doctorcolleagues back home could only dream about. Malpractice attorneys didn’t exist, unqualified snoops were a distant memory, and his most stressful decision of the day involved scheduling tee times for his favorite foursome. At the beginning, retirement life was just swell. In only six months, Fred Miller was climbing the walls. It wasn’t that he missed the daily grind of a busy medical practice, but something important was definitely missing from his life. He had come to realize that, despite the hard work, the long hours, and the aggravations of his life before retirement, there had been compensating rewards. One day, in an unscheduled visit to our offices, he confided to us that retirement had become merely an opportunity to begin drinking earlier in the day. He had seen that sad situation before he retired, but he never 279

He said it had never occurred to him how satisfying it had been to get out of bed each morning with someplace to go and something important to do.

thought he’d eventually be caught up in it. He said it had never occurred to him how satisfying it had been to get out of bed each morning with someplace to go and something important to do. Our composite Dr. Miller is a big part of the reason for this late development:

“Too many doctors approach retirement with unrealistic expectations,” Dr. Boehning told us. “They look forward to a life of leisure as a reward for their hard work, but when the time comes they just aren’t ready to let go of their active lifestyles.”

Support groups are springing up all across the country. Their mission is to help physicians make the transition into retirement. Harold Boehning, M.D., heads up one of those groups in Dallas. (He’s not a composite; he’s real, as are the others I’m about to mention). Boehning is a retired anesthesiologist. He says that for many doctors the change is overwhelming. “Too many doctors approach retirement with unrealistic expectations,” Dr. Boehning told us. “They look forward to a life of leisure as a reward for their hard work, but when the time comes they just aren’t ready to let go of their active lifestyles.” Longevity, too, is something you need to consider. The need for a realistic game plan for the so-called golden years is underscored by the fact that life expectancy just may move higher because of biogenetics, stem-cell research, new medical procedures, and who knows what else. Longer lives are all but certain to create serious emotional implications, as well as financial. The yardstick traditionally (and currently) used by most financial planners in mapping out retirement security for their clients is to find a way to stretch their resources for only 20 years after reaching age 65. Planning to die broke at age 85 could be a tragically flawed strategy for those who live longer. Here are snapshots of what’s covered in this chapter: • What if you live beyond your nestegg? Smaller portfolios and increasing longevity are a big, growing concern • Work for Uncle Sam. The government pays a living wage, and retirement is an option. • Work for the Peace Corps. It’s not just for 20-somethings. • Work in the private sector. Take the trouble to look, and you may see where you’re needed • Travel the world. You can work almost anywhere on Earth for pay or satisfaction. • Make a difference at home. Increasingly, retired physicians are staffing hometown free clinics. • Get into politics. Run for local, state, or national office—or work behind the scene. • Take the witness stand. You can help see that justice is done.

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What if you live beyond your nestegg? Smaller portfolios and increasing longevity are a big, growing concern

More are living beyond what is still considered the norm. Those who run out of retirement funds at, say, age 85, may well find themselves with at least 5, 10, or 15 years of life remaining after their savings are depleted. Five years from now, those figures may seem laughably understated. According to the U.S. Bureau of the Census, at birth the average American male born in 1950 had a life expectancy of just 66 years. Today, a Baby Boomer who makes it to 83, as traditionally expected, will then be able to look forward to still another 7.9 years. Suddenly, a life span of 90 to 100 doesn’t seem farfetched. Indeed, the U.S. Commerce Department predicted in 2000 that Americans over age 85 will be the fastest-growing segment of the nation’s population through 2020. In1970, 14% of Americans were over the age of 60. But by 2030: probably 25%. The social and financial implications are staggering. America is a land of spenders, not savers. Even at its beginning, Social Security was meant to make it possible for old people to live indoors, not to serve them as a substitute for saving, investing, and thinking. Even now, Medicare and Medicaid are increasingly being seen as failed programs. MSAs (medical savings accounts) are seen in some circles as the salvation. We view them as only part of the solution. Also, we see a need for new and vastly improved and expanded public health-care program for those unable or unwilling to underwrite their MSA or to pay the going rate for private medical and dental services provided by traditional practitioners. Life insurance policies mature at 100, except for those lapsed sooner. Major corporations are increasingly nearing default on their defined-benefit pension benefits. Since 1990, smaller employers have increasingly dropped or cut back on their definedcontribution retirement benefits. No longer an agrarian and small-town society, many of our families are geographically scattered and for other reasons in no position to take in aging parents, grandparents, and siblings. Since 1973, breadwinners have devoted increasingly more time and effort to making a living, and two-parent breadwinners have become the norm. Even so, at this writing debt is at record highs—personal debt, family debt, young-adult debt, college debt, employer debt, and government debt (state and federal).

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We see a need for new and vastly improved and expanded public health-care program for those unable or unwilling to underwrite their MSA or to pay the going rate for private medical and dental services provided by traditional practitioners.

How long a retirement are you looking at? Could you beat the odds and live to 90? Or 95? Even 100? Never mind what government statisticians say. Each time someone lives to celebrate another birth anniversary, a new actuarial projection clicks into place. The tables are not designed to apply to any specific individual. They’re drawn from a count of deaths among people who were born in each given year of its study.

We’re not quite ready to accept Chicken Little economics, and we’ve got to guess you aren’t ready at all. But we do advise practicing to live within your means and to get out of debt while there’s still time to maintain control over your family’s financial security.

So, they do not give you or me a useful view our future. However, they do give insurance companies, the U.S. Labor Department, and the Social Security administrators, among others, a beginning point for making such necessary decisions as how much to charge for life-insurance premiums, how many people are likely to leave the workforce in a given year, and how many figure to apply for retirement benefits year over year. Also, the tables probably help the funeral-home chains and cemeteries to project their staffing requirements. Want a more reasoned estimate of your potential longevity? www.msnbc.com/modules/quizzes/lifex.asp has a free 10minute quiz that does consider race, weight, tobacco, booze, and the like when it guesses how long you will live. If nothing else, the answer makes a discussion topic for you. Financial preparedness requires long view. If you’re well enough and interested enough to be reading these words, you just may live into the retirement years 30 years or more. That may be a chilling thought to a husband and wife who have lost half or more of their life savings in the Millenium stock-market collapse—and remain invested in stocks that have been hammered on the advice of colleagues, friends, and stockbrokers who continue to advise staying put and being patient in the expectation that the portfolio will recover. There’s a growing realization that recovery could come slowly. That stock indexes may fall lots further—from the Dow’s 8341.63 at the last trade of 2002 to 6000, 5000, or even lower in 2003 or 2004—from the Nasdaq’s 2002 closing 1335.51 to 170. That unemployment may escalate from 6% to 16% to 26%. That most spenders may stop spending and start saving. That the dollar may plunge while gold rises into a bubble. That the present credit bubble may continue to give way to a rising tide of bankruptcies among individuals, companies, and municipalities. For ourselves, we’re not quite ready to accept Chicken Little economics, and we’ve got to guess you aren’t ready at all. But we do advise practicing to live within your means and to get out of debt while there’s still time to maintain control over your family’s financial security.

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Work for Uncle Sam The government pays a living wage, and retirement is an option

Here’s the story of a doctor who left retirement for salaried employment. He’s a friend and client of ours, Will Page, M.D., of Sarasota, Fla. Four years ago, after 26 years practicing cardiology and general internal medicine, he opted to retire early. When financial considerations forced him to cut his retirement short, he reluctantly answered a newspaper ad seeking physicians at a nearby Veterans Administration hospital. So, today he is on the medical staff of the V.A. Primary Care Clinic in Sarasota, and his initial reluctance vanished long ago. He calls his decision one of the smartest moves of his life. “The work is stimulating and rewarding, the stress factor is much lower than in private practice, and the hours are terrific,” he told us. “I work five days a week, from 8:00 to 4:30, and no weekends or holidays.” A doctor’s pay in federal service? Six figures. Although his VA salary is well below the income he earned in private practice, Will says it’s a more than adequate trade-off. He says physicians who sign on with the V.A. can expect to start at about $100,000 per year in salary and bonuses—not bad when you consider that V.A. doctors don’t pay malpractice or other insurance premiums and enjoy an array of benefits, including full medical coverage. Also, there’s a generous Federal retirement program, though that’s one benefit Dr. Page doesn’t plan to capture, at least not anytime soon. The retirement age? None specified. “One big advantage to working for the V.A. is that the Federal Government has no mandatory retirement age,” said Dr. Page. “Conceivably, I could continue working here for the rest of my life.” The locations? Pretty much everywhere. Traditionally, the heaviest concentration of V.A. medical-care facilities has been in the northeastern U.S., but Will says there are “opportunities for physicians to work at Veterans Administration locations in every region of the country.” He points out that, as more veterans retire to the sunbelt, the demand for doctors at V.A. facilities in Florida are on the upswing. Full time? Part time? Will Page says he prefers working a 40hour week at his V.A. clinic, but he notes that there are opportunities for physicians to work part-time schedules. “At our fa 283

Dr. Page says physicians who sign on with the V.A. can expect to start at about $100,000 per year in salary and bonuses—not bad when you consider that V.A. doctors don’t pay malpractice or other insurance premiums and enjoy an array of benefits, including full medical coverage.

cility in Sarasota, we have a psychiatrist who comes in one day a week, and there are a number of retired doctors who have arranged part-time schedules.”

Will Page says he prefers working a 40-hour week at his V.A. clinic, but he notes that there are opportunities for physicians to work parttime schedules. “At our facility in Sarasota, we have a psychiatrist who comes in one day a week, and there are a number of retired doctors who have arranged part-time schedules.”

You don’t need a medical degree to find a rewarding second career with Uncle Sam. The Federal government is in constant need of personnel with a wide range of skills from engineers and plumbers to accountants and statisticians. Although base pay scales are often a notch below the private sector, government employees often make up the difference with extra locality pay and occupational bonuses for skills that are in the greatest demand. Fact is, the average annual income among full-time Federal workers is more than $51,000. Look for the hot areas of government recruiting. While virtually all Federal agencies will be hiring staff in the coming year, post 9/11 security concerns and the corporate financial reporting scandals have created some special priorities. The new Homeland Security Department is actively recruiting tens of thousands of workers, with job opportunities ranging from research epidemiologists (a typical GS-13 will pull down $71,461) to in-flight air marshals (who can earn up to $80,800 and qualify for full retirement benefits at age 50 with 20 years of service). Your starting point for a career (or second career) with the Federal government is the U.S. Office of Personnel Management, which maintains a useful Web site (www.usajobs.opm.gov) for anyone who would like to work for Uncle Sam. In addition to a constantly updated database listing more than 12,000 job openings with the Federal government, the site offers information and assistance in submitting your resume to hundreds of offices, agencies, and bureaus, ranging from the Arctic Research Commission to the White House West Wing. Check it out. For more information, try these resources: • www.federaljobs.net offers information on civil service exams, hiring preferences for veterans, minorities and the disabled, and overseas job opportunities with the government. • www.fedjobs.com presents leads to Federal employment opportunities; sign the online “guest book” and the sponsor will mail you a listing of over 3,000 new Federal job openings. • www.govexec.com offers timely, authoritative articles on Federal recruiting activities, detailed reports on government pay scales, and information on Federal retirement benefits. • An Insider’s Guide to Political Jobs in Washington, by Bill Endicott, John Wiley & Sons, $19.95. • The Book of U.S. Government Jobs: Where They Are, What’s Available and How to Get One (8th Edition), by Dennis V. Damp, Samuel Concialdi (Photographer), Brookhaven Press, 2002, $21.95.

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Work for the Peace Corps It’s not just for 20-somethings

Yes, the Peace Corps welcomes retirees with open arms. If your image of the Peace Corps is a band of idealistic 22-year olds fresh from college with a backpack filled with enthusiasm, think again. There’s no upper age limit for Peace Corps volunteers; at this writing, 7% of the group is over age 50, and many of the 165,000 Peace Corps alumni have served well into their 80s. “You may actually find your age is an asset,” Peace Corps officials tell older applicants. “You will have the opportunity to share a lifetime of work and wisdom with people of developing nations who respect and appreciate age.” Everyone talks about world peace. Here’s your chance to do something about it. It’s hard to imagine a more proactive way to make the world a better place than to serve a hitch with the Peace Corps. Today, 7,000 volunteers are making a difference in the lives of people in 70 different countries by teaching children to read, improving medical care, encouraging the launch of small businesses, bringing clean water and sanitation to rural communities, and helping families to grow their own food. The more than 165,000 Americans who have served in the Peace Corps over the past 40 years have helped millions of people in developing countries to take charge of their own futures. In the process, they’ve forged friendships that have crossed borders and endured for generations. And in today’s world, America needs all the friends she can get. Medical personnel are in particular demand by the Peace Corps. Physicians, dentists, nurses, pharmacists, paramedics, and others with training in health care are in position to make an especially important contribution through service with the Peace Corps. In addition to volunteering for assignments in developing countries, health care professionals also have the option of applying for paid tours of duty with the Peace Corps, either as “medical contractors” to the program or as direct employees of the agency. Like volunteers, a Peace Corps Medical Officer (PCMO) signs on for a two-year hitch abroad but is paid an annual salary starting in the “upper $50,000s.” PCMO posts are often filled by nurse- practitioners and physician-assistants. Physicians and nurses are normally hired by the Peace Corps as government employees (base salaries range from $92,060 to $119,682), and are offered posts in Washington, D.C., and certain foreign countries.

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Today, 7,000 volunteers are making a difference in the lives of people in 70 different countries by teaching children to read, improving medical care, encouraging the launch of small businesses, bringing clean water and sanitation to rural communities, and helping families to grow their own food.

Peace Corps members receive intensive language and cross-cultural training that will continue to enrich their lives and provide them with valuable skills long after they return.

Not everyone can qualify for the Peace Corps. Volunteers must be U.S. citizens age 18 or over, and most assignments require a four-year college degree (although the educational requirement may be waived for applicants experienced in business management or a skilled trade). Good health is also a prerequisite, and applicants must undergo complete physical and dental exams before being accepted into the program. Additionally, volunteers must be able to commit to a two-year hitch overseas— plus a three-month training period in the host country. If you make the cut, here’s what to expect: All Peace Corps volunteers receive government-paid travel to and from their foreign assignment, monthly living allowances, and accommodations that program officials describe as “modest but comfortable.” The government assumes the cost of all medical expenses for volunteers working abroad, and it will provide medical evacuation if appropriate care is not available to treat a condition in the country of assignment. Family members are encouraged to visit Peace Corps members while they are serving abroad, and volunteers receive 24-days of annual leave during each year of their tour of duty. When they return from their overseas assignment, volunteers receive job placement assistance plus a payment $6,075 to ease their transition back to civilian life. Here’s more payback for Peace Corps volunteers: before they’re sent out on assignment, Peace Corps members receive intensive language and cross-cultural training that will continue to enrich their lives and provide them with valuable skills long after they return. While they’re abroad, volunteers gain new insights that can change their view of the world, and of themselves. Peace Corps officials tell older volunteers to expect to come home from their assignments changed for the better: “You will be in an environment where life is measured by your achievements, not your earning power.” The real payoff, though, is the satisfaction that comes from making a hands-on contribution to improve the lives of disadvantaged people in other lands. For more information, try: • globalpeacemakers.org provides short-term opportunities for volunteer service abroad for those who pay their own way. • peacecorps.gov offers detailed information about the program, information about overseas assignments, and an online application kit for would-be volunteers. • peacecorpswriters.org presents an online directory of articles, books, and essays written by Peace Corps volunteers to describe their experiences abroad. • Alternatives to the Peace Corps: A Directory of Third World and U.S. Volunteer Opportunities (9th Ed.), by Joan Powell (Editor), Food First Books, 2001, $9.95. • So You Want to Join the Peace Corps: What to Know Before You Go, by Dillon Banerjee, Ten Speed Press, 2000, $12.95. 286

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Work in the private sector Take the trouble to look, and you can see where you’re needed

Government work isn’t your cup of tea? There are plentiful opportunities for part-time or temporary locum tenens physician positions in virtually every part of the country today. “There’s a strong demand for doctors to work temporary duty in hospitals, HMOs, and group practices, filling in for staff physicians who are on vacation or otherwise unable to work,” said Dennis Bottomley, executive director of the Physicians Placement Service of America, in Franklin, Tenn. His organization lists hundreds of opportunities. At last check, more than 1,400 openings were beckoning to doctors at some 250 big medical groups, hospitals, HMOs, and smaller private practices across the country. Retired physicians interested in reentering the workforce can make strong candidates for the positions, said Dennis Bottomley, provided they have maintained board certification in their specialties. Interested in a limited work schedule? It’s widely available with the help of specialized locum tenens placement firms that have cropped up across the country. Linde Healthcare in St. Louis offers doctors locum tenens assignments over the short term or long, with “paid expenses including travel, lodging, malpractice insurance, and licensure fees” at locations across the country. What about credentials? An Internet placement service (Locumtenens.com) operated by retired surgeon and former AMA President Harrison L. Rogers, Jr., M.D., promises “hasslefree credentialing,” specifically including assistance in securing a new state license, and even help for doctors in sharpening up the old curriculum vitae. The pay scale for locum tenens physicians? As you’d guess, they vary by specialty and from place to place, “but the hourly rate is generally higher than the doctor would command in a permanent, full-time position,” Dennis Bottomley said. Opportunities for other retired professionals, too. Engineers, architects, social workers, specialists in information technology, dietitians, pharmacists, and other professionals seeking to rejoin the workforce after retirement often find a strong demand for their skills and experience in the private sector. Many CPAs are able to supplement their retirement income hand 287

Retired physicians interested in reentering the workforce can make strong candidates for the positions, said Dennis Bottomley, provided they have maintained board certification in their specialties.

somely by signing on for a temporary stint with a tax preparation service or accounting firm during the annual tax-filing season. Retired teachers may find their skills in demand as employee-training specialists at large corporations. Nurses are able to put their training and education to use after retirement as part-time patient care coordinators for health insurers.

Linde Healthcare in St. Louis offers doctors locum tenens assignments over the short term or long, with “paid expenses including travel, lodging, malpractice insurance, and licensure fees” at locations across t he country.

Retired attorneys may find the grass is greener as a contract legal services provider. It’s not at all unusual for successful lawyers to burn out at the peak of their careers, opt for an early retirement, and then find themselves itching to return to the action. Increasingly, retired attorneys are scratching that itch— without rejoining the rat race—by signing on as contract employees at law firms and corporate legal offices across the country. Legal recruitment firms like Shelton, Connecticut-based CounselHounds (www.counselhounds.com) specialize in both temporary and permanent placement of attorneys and other legal professionals as contract employees. Let the Internet jump start your transition from retirement to the workforce. Regardless of your employment background and job skills, you’re likely to find the Internet a major help in rekindling your career after retirement. Online communications have opened up telecommuting opportunities for millions of Americans, including many retired or disabled individuals who would never have been able to resume their careers without the Internet. Also, job placement sites like Monster.Com (with online listings for over a million employment opportunities) have made it possible to shop for a new career without leaving home. For more information, try: • www.jobhuntersbible.com is Dick Bolles’ online supplement to the 2003 edition of his What Color is Your Parachute? offers links to various job opportunity databases, plus salary information, resume assistance, and more. • lindehc.com takes you to Linde Healthcare, 1-800 588-4343. • www.physician-placement takes you to Physician Placement Service of America: 1-800 539-7421. • Available Jones, 573-446-3138 ([email protected]), is a personnel recruitment service that specializes in finding career opportunities for retirees and older workers. • Second Careers: New Ways to Work After 50, by Caroline Bird, Little Brown & Co., 2000, $19.95.

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Travel the world You can work almost anywhere on Earth for pay or satisfaction

Locum tenens assignments aren’t limited to the United States. Retired physicians, as well as those still actively practicing, are being recruited to sign on for working holidays in Australia, New Zealand, and other English-speaking countries in the South Pacific, the Caribbean, and occasionally the United Kingdom. One recruit: Jack I. Paap, M.D., a Colorado Springs family practitioner. He signed on for a six-month assignment in Australia, filling in for vacationing Aussie physicians at a series of Queensland medical groups. He cautions fellow doctors not to enter such arrangements expecting hefty financial rewards. The pay scales are low—the equivalent of about $18 per hour, U.S.— but the experience of practicing in such a radically different system, he said, was priceless. Another recruit: Rob Bradley, another Colorado M.D. “My wife and I knew we were going to have an adventure and were prepared for anything, good or bad,” he said. He had arranged a similar working visit to Australia. “I worked with Aboriginal people in the tropical north of Australia,” he said, “and I saw an astonishing array of things, like Hansen’s Disease, Donovanosis, and scabies—things you rarely see in North America.” If you’re merely bored, consider volunteering. Over the last 60 years and more, a growing number of American physicians have been opting to make meaningful contributions to improving healthcare in medically underserved areas around the world—some during vacation periods, others as a retirement opportunity. One is Lowell Furman, MD, another client and friend. Lowell retired early from a group practice in Boone, N.C., in order to lead medical missions in remote areas that are desperately in need of health care services. Over the past 20 years, Dr. Furman has personally led missions to over 20 third world countries. The organization he founded with his brother, Richard Furman, M.D.—the World Medical Mission—has sent more than 160 physician-volunteers on lifesaving crusades. You don’t need medical training to find opportunities abroad. United Nations Development Programme (UNDP) seeks volunteers with a variety of skills and backgrounds. One of them is Zoran Hosic, a Wisconsin social worker who is now a UN volunteer in the Caribbean. For the past three years, he worked as a United Nations drug prevention counselor in St. Vincent and 289

“I worked with Aboriginal people in the tropical north of Australia,” Dr. Rob Bradley said, “and I saw an astonishing array of things, like Hansen’s Disease, Donovanosis, and scabies— things you rarely see in North America.”

the Grenadines, a job he describes as both “exhausting and exhilarating.”

Over the past 20 years, Dr. Furman has personally led missions to over 20 third world countries. The organization he founded with his brother, Richard Furman, M.D.—the World Medical Mission—has sent more than 160 physician-volunteers on lifesaving crusades to every corner of the globe.

Attorneys are in demand for pro bono work and salaried assignments. U.S. lawyers experienced in international practice can land interesting short-term assignments abroad through a variety of governmental and business organizations. The UN Secretariat’s Department of Peacekeeping Operations, for one, hires attorneys from the U.S. to assist with rebuilding national judicial systems and prosecuting war criminals. Lawyers with no international experience can get a taste of practice abroad through the American Bar Association’s International Legal Exchange Program, an arrangement that enables U.S. and foreign attorneys to temporarily swap jobs. Teachers can find a wealth of career opportunities abroad. U.S. military bases from Europe to the Far East are actively recruiting teachers at schools for the hundreds of thousands of dependents of active duty personnel stationed abroad. Foreign schools and universities offer even more options for U.S. teachers. “I am definitely spoiled by the small class sizes, relaxed student rules, diligent student body, and incredible parent involvement” in Germany, says Allison Myers, a teacher who landed her foreign teaching job on the Internet through JoyJobs.Com, reports tangible benefits to teaching abroad. For more information, try: • www.gmedical.com takes you to Global Medical Staffing, Ltd. • www.locumtenens.com takes you to an agency that helps physicians and registered nurses find locum tenens assignments in the U.S. and elsewhere. • www.samaritan.org takes you to World Medical Mission. • www.teacherswithoutborders.com seeks volunteers to provide educational opportunities for the children of displaced families and refugees around the world. • The Global Resume and CV Guide, by Mary Anne Thompson, John Wiley & Sons, 2000, $17.95. • Work Abroad: The Complete Guide to Finding a Job Overseas, by Clayton A. Hubbs (Editor), Transitions Abroad Publishing, 2002, $15.95.

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Make a difference at home Increasingly, retired physicians are staffing hometown free clinics.

You needn’t trot the globe to find interesting ways to volunteer. Hundreds of retired physicians all across the U.S. have found opportunities to contribute time, energy, experience, and skills in their own communities. Some, like Racine, Wis., physician William Little, Jr., M.D., have gone a step further by creating such opportunities. He retired from practice more than a decade ago, but he continued to feel the urge to contribute. A year into his retirement, he helped to found a free clinic for low-income and uninsured patients in Racine. Your own backyard can be a nice place to be. The free clinic “looked like a great activity for me, because I missed practicing medicine and was looking for volunteer things to do in other parts of the country or the world—and this opportunity arose right in my own community,” Dr. Little said. He serves as medical director of the free clinic and spends one day each week there. Other retired doctors also work at the clinic on a volunteer basis. At recent count, the facility was treating 1,000 patients yearly. Free clinics are in operation elsewhere. The efforts of Dr. Little are being duplicated across the country, often with the assistance of medical associations. The North Carolina Medical Society Foundation, for one, has launched a program aimed at encouraging more retired doctors to contribute services in their communities. A spokesperson said the main reason more retired doctors aren’t volunteering is that no one asked them to do so. By serving as a clearinghouse for information, the program is helping to keep that state’s volunteer medical clinics fully staffed. Another option: AmeriCorps*VISTA. This updated incarnation of the 1960s-era Volunteers In Service To America program offers opportunities for people from all walks of life to make a real difference. Each year, more than 5,000 AmeriCorps volunteers tutor and mentor young people, build housing for the homeless, clean up the environment, teach computer skills to the underprivileged, or help communities respond to disasters. One AmeriCorps*VISTA volunteer is Joan Heron. A retired university teacher from Idyllwild, Calif., Joan signed on with the program to work with the families of young children in Moscow, Idaho. “After I retired from teaching at the university in 291

The free clinic “looked like a great activity for me, because I missed practicing medicine and was looking for volunteer things to do in other parts of the country or the world—and this opportunity arose right in my own community,” Dr. Little said.

1994, I began looking for ways to provide service,” she explained. Retirement “was a good life, but felt I wasn’t being as fully used as I could be.” Volunteering to help rural families build a better life for their children filled a void in her life, she said. “It is so satisfying to be able to use the skills and wisdom I have developed over a lifetime.”

The North Carolina Medical Society Foundation, for one, has launched a senior physician program aimed at encouraging more of the state’s retired doctors to contribute medical services in their communities on a volunteer basis.

You won’t get rich volunteering to help people or communities in need. At most, full-time volunteers at AmeriCorps*VISTA can count on receiving a modest annual living allowance of about $9,300, along with health insurance for the duration of their typical service hitch of 10 to 12 months. Part-timers get even less—usually only a small educational assistance grant after their tour is finished. But the nonmonetary rewards available to volunteer poverty fighters can be considerable. Find your own way to lend a helping hand in your community. Volunteers are needed at libraries, soup kitchens, homeless shelters, and animal rescue stations in every city, town, and village in America. If you can read a book to child, deliver a meal to a shut-in, slap a stamp on a fund-raising letter, or spend a few hours each week visiting lonely nursing-home residents, you can make an important and rewarding contribution to your community. What are you waiting for? For more information, try: • www.americorps.org includes information about the AmeriCorps*VISTA program, opportunities for service in communities across the country, and volunteer application information. • www.ncmedsoc.org takes you to North Carolina Medical Society Foundation’s Senior Physicians Program. • www.volunteermatch.org offers listings of volunteer opportunities throughout the U.S., arranged geographically. • Volunteer Vacations: Short-Term Adventures That Will Benefit You and Others (7th Ed.), by Bill McMillon, Edward Asner, Chicago Review Press, 1999, $16.95.

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Get into politics Run for local, state, or national office—or work behind the scene

How best to make a contribution? Harold Boehning, the retired anesthesiologist who heads up the Dallas support group for retired physicians, says the most direct way “for a retired doctor to make an important contribution is by getting into politics.” His view must have lots of support. Every two years, hundreds of physicians, dentists and other health-care professionals run for elective office at the state or national levels, and many of them are successful. One recent nose count told us more than 400 doctors were currently serving in Congress, state legislatures, city councils, local planning boards, and other elected offices throughout the country. Some work behind the scene. Dr. Boehning worked diligently to help elect others. He said: “Years ago, I was the chairman of our state’s physicians political action committee—the group responsible for raising campaign funds to support worthwhile candidates. Since I retired, I’ve had the time to become even more involved in these activities, and I currently chair our state’s Republican Senatorial Platform Committee.” Don’t feel you need a legal background to run for office. While it’s true that lawyers make up a disproportionate share of the members of Congress as well as state and local legislative bodies across the country, a law degree is no prerequisite to running for elective office. Some of our more effective lawmakers come from backgrounds that are far removed from the legal profession. Legislatures are truly representative only when people from all walks of life seek and hold elective office. Harry Truman, our 33rd President, was elected to Congress after starting adult life as a haberdasher. Current Senate majority leader Bill Frist is a highly regarded surgeon. House majority leader Tom DeLay was a bug exterminator in Texas. And Congressional health-care reformer Charlie Norwood practiced dentistry in Augusta, Ga. Expect to start at the bottom of the political ladder and work your way up. Don’t count on making a serious run for statewide or national office as a political newcomer. Most people get their first taste of politics as a volunteer for someone else’s campaign. Often, that’s enough to satisfy their craving for political involvement. But sometimes volunteer work becomes a steppingstone to public office. Many of today’s successful leg 293

One recent nose count told us more than 400 doctors were currently serving in Congress, state legislatures, city councils, local planning boards, and other elected offices throughout the country.

islators spent years toiling in the backwaters of politics before emerging as political stars in their own rights.

Many of today’s successful legislators spent years toiling in the backwaters of politics before emerging as political stars in their own rights.

What if you have the itch to seek elective office yourself? Your best bet is to start locally with a run for the town council or the school board. Win or lose, you’ll learn a lot about the political process. And if the experience doesn’t sour you on politics altogether, it will make you an even stronger candidate in future campaigns. Some of America’s most able political leaders started out by seeking local offices. They wound up making a positive impact on their communities, and then moved on to seek broader responsibilities in state and national elections. What if you don’t have the stomach for political campaigning? At least half the candidates for public office are turned down by the voters—a fact of life that makes politics a poor career choice for anyone who has difficulty handling rejection. If you lack the stomach, consider hitching your wagon to someone else’s political star. If you work tirelessly on behalf of a candidate you believe in—and are foresighted enough to pick a successful candidate—you may pluck a prime political post when the new Administration takes office. Up for grabs in Washington every four to eight years: everything from sensitive diplomatic posts to seats on powerful regulatory commissions. A detailed listing of these highly sought after appointments, known as “The Plum Book,” is published and made available to the public whenever a new President is elected. For more information, try: • www.completecampaigns.com offers a variety of political campaign management tools, including software to manage fundraising lists and campaign-finance reporting programs. • www.politixgroup.com offers listings of current political campaign job opportunities. • www.thomas.loc.gov is the official Web site of the U.S. Congress. It provides information about all 100 Senators and 425 House members. • How to Run for Local Office: A Complete, Step-By-Step Guide that Will Take You Through the Entire Process of Running and Winning a Local Election, by Robert J. Thomas, Doug Gowen, and Joseph M. Marshall, R&T Enterprises, Inc., 1999, $19.95.

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Take the witness stand You can help see that justice is done

Here’s an opportunity you may never have considered. Serve as an expert witness in court cases involving medical litigation. At first response, some doctors might object from siding with malpractice lawyers, but others might argue that physicians who provide expert testimony help ensure that court verdicts are fair to all sides—including medical practitioners. “It’s an important service, the work is interesting, and the pay is good,” says Pat Iyer, president of Med League Support Services, a Flemington, N.J., organization that acts as a referral service for physicians and other health professionals seeking assignments as expert witnesses. Others agree: Justice is the issue. Also, American Medical Forensic Specialists, another organization that recruits doctors to assist in medical litigation, says the role of physician expert witnesses is to ensure justice in the review of such cases. “We oppose the use of ‘hired guns’ as expert witnesses,” AMFS says in its doctor-recruiting materials. “Your participation will help assure that all physicians and hospitals faced with medical malpractice suits get an objective, nonbiased hearing.” One problem: The activity is not a workable option for all physicians. “To be a credible and effective expert witness, a physician must be board certified in his or her specialty and must never have had any license suspension, revocation, or other serious disciplinary action,” Pat Iyer said. Also, she added, physicians who refuse to work for plaintiffs in medical malpractice cases have credibility problems when serving as expert witnesses on behalf of other doctors. “Doctors who come to us and say ‘I’ll only do defense work’ have crippled their effectiveness as expert witnesses,” she said, “because their objectivity is in question.” Another problem: out of the loop too long. Physicians who have been retired from active practice for more than five or six years may find few opportunities to serve as expert witnesses. “Doctors can and do serve as expert medical witnesses after they retire, but they must have been in active practice at the time the alleged malpractice occurred,” Iyer said. “An opinion on standards of medical practice in the ‘90s from a doctor who retired in the ‘80s would be extremely vulnerable to challenge from the other side.”

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American Medical Forensic Specialists, another organization that recruits doctors to assist in medical litigation, says the role of physician expert witnesses is to ensure justice in the review of such cases.

Pay scales for expert witnesses vary by medical specialty. But they generally begin at $200 to $250 an hour for time spent reviewing medical records, depositions, and testimony by other expert witnesses, and for preparing preliminary conclusions for the client. At that point, the expert witness may be asked to produce a more detailed written report, and, perhaps, to testify during a trial.

Expert medical witnesses may also receive the satisfaction of knowing that their efforts helped to right a wrong, improve the standards of medical practice, or exonerate a fellow physician who had been unfairly accused of malpractice.

The kicker: satisfaction. In addition to being reasonably paid for their time and expertise, expert medical witnesses may also receive the satisfaction of knowing that their efforts helped to right a wrong, improve the standards of medical practice, or exonerate a fellow physician who had been unfairly accused of malpractice. But watch out for these pitfalls. Trial attorney Phillip Kolczynski, of Santa Ana, Calif., warns that expert witnesses sometimes trip up on the witness stand, ruining an otherwise solid case and destroying their own opportunities for future assignments. Among the deadly sins he cautions his expert witnesses against: “offering opinions outside your area of expertise,” “mishandling custody of tangible evidence,” “allowing your ego to intrude in your deposition or trial testimony,” and “becoming an advocate instead of an unbiased expert whose opinion happens to favor your client.” Of course, you don’t need an M.D. degree to be an expert witness. Leonard Kushner, a retired electrical engineer from Burbank, Calif., testifies in OSHA workplace safety cases. Physician’s assistant Ray Mooney moonlights as an expert witness in personal injury cases near his practice in Michigan. Steven Smathers, a corporate finance professor from Dallas, offers his expertise in civil bankruptcy cases. And retired airline pilot Vincent Czaplyski keeps busy as an expert witness in air safety cases. No matter what your background, chances are the expertise you gained during the course of your career will be in demand in the courtroom. For more information, try: • medleague.com offers information about opportunities for legal nurses. • www.amfs.com takes you to a doctor-managed organization that provides information and forensic legal witnesses. • www.expertwitnessnetwork.com offers an online database that provides direct links to expert witnesses with varied backgrounds and to trial attorneys across the country. • www.theexpertnetework.com claims to offer expert witnesses at hourly rates that are 40% to 60% below competitors’. • Expert Witness Handbook: Tips and Techniques for the Litigation Consultant, by Dan Poynter, Para Publishing, 1997, $39.95.

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Chapter 17

College for fun or a new career Educational opportunities have never been so plentiful for mature students

Richard Almeida

F

or some of us, our college years were a magical time—a

point in our lives when we drank from the well of knowledge, explored exciting new learning opportunities, and

broadened our intellectual horizons. For others, however, perhaps even for most, the college years were a period of emotional frustration, missed opportunities, and poor choices. Though the opportunities for learning were available to us, too many of us were distracted by financial pressures, family responsibilities, raging hormones, or sheer immaturity. What so many of us missed. Though we obtained degrees and built successful careers on the foundation of our schooling, too many of us never took advantage of the educational opportunities. Some of us look back at our education (or lack of it) and blame the experience for placing us on an unrewarding career path: If I had studied music rather than medicine, art rather than accounting, or literature rather than law, perhaps.... Others may regret the absence of a well-rounded education. Our studies moved us down a narrow path that rewarded us with expertise in business, engineering, or medicine. But in the process, we missed out on learning the intricacies of language, literature, geography, economics, political science, most of the sciences, and history. For all our education, we feel culturally deprived. In my case, I started college when I was 16, too young to know I would come to enjoy fine art and classical music. Much later, when I had the opportunity, I took classes in everything from music appreciation to international law, both of which I found rewarding. Maybe it’s not too late to continue your education. You can keep learning all your life long. Every year, legions of mature Americans are returning to school with a renewal of excitement about learning. As you read these words, our colleges and universities are experiencing sharply stepped up enrollment by students in their 40s, 50s, 60s, and 70s. Going back to college could be the shortest route to a rewarding second career, a more satisfying life, or a deeper appreciation of our culture. This chapter explores some educational considerations for the mature, including how grandparents can help ensure the benefits of a college education for their grandchildren. 297

Our first doctor-client to switch from medicine quit practicing early in the ‘seventies. He completed chef school in New York and then went to Switzerland for specialty training in desserts.

Going back to college could be the shortest route to a rewarding second career, a more satisfying life, or a deeper appreciation of our culture.

Watch for college-campus retirement villages. At this writing, the latest word is that construction of a CCRC (Continuing Care Retirement Community) will be under way in 2003 on land two miles south of the football stadium at the University of Florida, Gainesville. The offerings include homes ranging in size from one to three bedrooms (plus den) and 808 to 2,350 square feet, with sheltered parking for one or two cars. Entrance fees under a life care contract range from $139,000 to $616,189, with a choice of three refund plans that can return up to 95% of the entry fee. The monthly fee is now projected to be within a range of $1,410 to $4,350. The two fees—entry and monthly—cover guaranteed lifelong private accommodations for both temporary rehabilitation and long-term care in assisted living, memory support, or skilled nursing, no matter how long the need, at no additional cost beyond certain medical supplies and meals. Other universities are watching the Gators’ experience closely, anticipating the announcement of similar resort-like projects of their own in the coming years. Florida’s village is called Oak Hammock. Its focus is on health, wellness, and lifelong learning on campus, in a resort-like setting. Read all about it at oakhammock.com. Here’s what else we discuss in this chapter: • Retire by going back to school. Let’s face it: Higher education is often wasted on the young. • Is college the key to your next career? For that matter, more education could energize your present career • Pick the right school for you. The “best” college may not be your best choice. • Go to college on the Internet. Let your computer be the gateway to higher education. • Consider these education options. There’s more to distance learning than the Internet. • Go back to school to enrich your life. Who needs a degree? Learning is its own reward. • College costs may not be a problem. There are still a few ways to take the sting out of education costs. • Give college to your grandchildren. It could be your greatest legacy.

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Retire by going back to school Let’s face it: Higher education is often wasted on the young

Enrolling in college may be the perfect cure for an empty retirement. We’ve seen too many of our clients and friends embark on a well-earned retirement only to discover that the life of leisure they anticipated for so long is unrewarding, aimless, and empty. After years of hard but fulfilling work building and managing their businesses or professional practices, some find themselves restless in retirement. If you are in that situation, the solution may be to explore your educational opportunities. You have the maturity to take full advantage of learning opportunities. Even if they were less then stellar students during their first brush with education in their youth, many older people today discover that they have the focus to succeed with coursework and actually enjoy learning. That’s borne out by studies showing that, as a group, older students score higher grades in colleges and universities than their younger counterparts do. You finally have the time to reap the rewards of education. As a rule of thumb, university-level students need to spend an average of three hours in independent study for every one-hour of classroom time in order to take full advantage of the learning opportunities offered to them. For a full-time student carrying 15 credit hours per semester, that works out to 60 hours a week. It’s tough to manage that kind of schedule while holding down a job or raising a child. As a retired person, you probably have the time to tackle an academic schedule, and you can set your own pace. If you enjoy learning, are thirsty for knowledge, and also eager to acquire new skills, your time back in school will be well spent. Don’t use geography as an excuse to miss your second chance at college. There was a time when the centers of advanced learning in this country were clustered around a few major cities. That’s no longer the case. The latest count of U.S. institutions of higher education uncovered more than 3,000 colleges and universities in operation throughout the country. The American Association of Community Colleges lists no less than 1,166 community colleges sprinkled across the 50 states, including many in suburban and rural areas. All together, 95% of the U.S. population is within a five-mile drive of at least one accredited two-year or four-year college. In addition, there are thousands 299

As a retired person, you probably have the time to tackle an academic schedule, and you can set your own pace.

of college-level correspondence courses, televised university classes, and online study opportunities.

All together, 95% of the U.S. population is within a fivemile drive of at least one accredited two-year or fouryear college.

Out of place on campus in your 60s or 70s? Not these days. Nearly one in every seven students enrolled in community colleges today is age 40 or older, and the U.S. Department of Education reports that such students are the fastest-growing segment of the college and population. All signs point to a continued rise in the proportion of seniors on campus in the years ahead as the U.S. population mix continues to age. In my own experience with taking college classes alongside much younger students, I found that our common interest in the subject matter went a long way toward compensating for the difference in ages.

A DAY IN THE LIFE I’m 45. My wife is 40, our kids are 14 and 17. We own our own business. Together, we’re paid $150,000. College costs are covered. Also, we’ve got $350,000 in the pension. Do we need life insurance?

Assuming the surviving spouse could run the business successfully, probably not.

Not!? I thought all you financial planners sold life insurance.

Only 98% or so. The rest of us are compensated like doctors: fee only. For an unqualified reply, though, I need to know about your debts, savings, estate plan, family, and liability and health insurance.

CH & GB 2001

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Is college the key to your next career? For that matter, more education could energize your present career

Colleges and universities are wooing mid-life students in search of second careers. Many are offering educational shortcuts to bring older students back to school. The University of Michigan, for example, is offering a Second Career Nursing Program enabling mature applicants with bachelor’s degrees in other fields to secure a BSN degree and prepare for the Registered Nurse NCLEX exam in just 20 months. Another example: Leslie University’s Art Institute of Boston offers three-year diploma programs for older students seeking careers in commercial art. Use your expertise as a foundation for your second career. While you may no longer be interested in practicing medicine, designing software, or preparing financial statements, your experience as a surgeon, engineer, or CPA could give you a big head start in launching a successful second career. A few education courses could open the door to a rewarding teaching career in your professional specialty. Or a mid-life MBA could lead to management responsibilities or even to your own business in the same field or a related occupation. Here are a few other second career opportunities that college may open for you: • Enroll in culinary school. Our first doctor-client to switch from medicine quit practicing early in the ‘seventies. He completed chef school in New York and then went to Switzerland for specialty training in desserts. He worked for top restaurants in Manhattan for about 10 years before buying a restaurant of his own. He retired from the restaurant business in 1998, but he still puts on the tall white hat for his own occasional dinner parties. His new skills are taught at cooking schools around the world. Cookingschools.com, an online directory, lists no less than 1,273 culinary and food preparation schools worldwide. For example: • The Capital Culinary Institute at Keiser College in Tallahassee (capitalculinaryinstitute.com) is offering accredited two-year programs. • Vancouver’s Dubrulle International Culinary Institute (dubrulle.com) offers a 17-week course in classic cuisine preparation. • Art Institutes (artinstitutes.edu) provides both associate’s and bachelor’s degree programs in culinary arts in a dozen U.S. cities. 301

Cookingschools.com, an online directory, lists no less than 1,273 culinary and food preparation schools worldwide.

Additional education is also helpful—and sometimes mandatory—for those who hope to enter missionary work as a second career.

• Consider a ‘higher calling’ for your second career. Many outwardly successful people reach the mid-point in their careers and discover that the secular world is no longer fulfilling. If you’re one of them, expect to get a warm welcome at one of the many schools of theology that train mature people for second careers in the clergy. These days, a third of the students entering master of theological studies degree programs at Nashville’s Vanderbilt University Divinity School (divinity.lib.vanderbilt.edu/ vds) are over 35, and some as old as 70 have been admitted. The Jewish Theological Seminary (jtsa.edu) in Manhattan is actively recruiting middle-aged members of the faith to undertake rabbinical and cantorial training as part of that school’s “Second Career Clergy” program. Additional education is also helpful—and sometimes mandatory—for those who hope to enter missionary work as a second career. The Association of Baptists for World Evangelism, for example, requires applicants for its career missions to have a college education that includes Bible training. • Gain foreign language fluency, and let it be your ticket to worldwide career choices. You may not need a change of careers as much as a change of scenery. Imagine practicing your present profession or running your business in Tuscany, Barcelona, or the south of France. It’s likely that your experience and skills are in high demand there and in many other exciting parts of the world, but your success may depend on fluency in the native language. Classes in the more widely spoken possibilities are widely available. We found scads of them by going to qbsearch.com and typing in the search words foreign+language+study.

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Pick the right school for you The ‘best’ college may not be your best choice

A degree from one of the nation’s top schools will take you far. If you can afford one of the top-drawer universities and get past rigorous admission screenings, you’ll be on track for a firstclass education and a degree that will open career doors for you. Each September, U.S. News & World Report ranks the nation’s top 50 schools as well as those in the second, third, and fourth tiers. Check out the latest rankings yourself at www.usnews.com. For you, shooting for the ‘best’ school may be a questionable decision. If you are seeking an advanced degree to launch a new career or reinvigorate your current one, the sacrifices you will need to make at a top-ranked college or university may be worth it. But if you’re going back to fill some gaps in your education or to become more well-rounded, a less challenging academic program may be every bit as rewarding. The best colleges needn’t cost a bundle. Because the elite schools are so well endowed, students attending them pay on average less than half the posted tuition sticker prices. In fact, many private schools now offer merit tuition discounts to attract top candidates. Example: Pennsylvania’s Alvernia College offers a 40% discount to alumni who return for additional courses and a whopping 100% tuition discount to students age 60 and older. Fact is, big discounts are now being offered to mature students on many college campuses. What does your alma mater offer? Your state university may be among the elite. At this writing, U.S. News & World Report’s latest ranking of the best 249 national universities includes 15 state schools among the elite top 50. They include the University of Virginia (ranked 21 in the U.S.), where the $9,136 annual tuition charge drops to $2,123 for state residents; UCLA (26), where Californians enrolled in the School of Theater, Film and Television degree program get a $10,740 break on tuition; and the University of Michigan (25), which charges residents $3,939 to study business administration, down from $11,659 paid by out-of-state students. Your smartest move may be to start at a two-year community college. If your goal is an undergraduate degree and you are beginning from scratch with no course credits on your academic ledger, consider starting off at a nearby community college with 303

Big discounts are now being offered to mature students on many college campuses. What does your alma mater offer?

Consider starting off at a nearby community college with an eye toward transferring to a four-year school for your degree.

an eye toward transferring to a four-year school for your degree. You figure to shave thousands of dollars off tuition costs while claiming a convenience dividend by attending classes close to home. Also, you may find the campus and class size less intimidating than at a large university. Best bet is to stick to basic core curriculum courses in community college, since universities may not accept transfers of credit for advanced courses. However, the reluctance to accept such credits from two-year colleges appears to be weakening as reduced enrollments force colleges to scramble to fill classes. Some colleges are now offering dual admissions programs. They ensure seamless transfers of all credits earned in participating two-year colleges. Temple University offers dual admission with a half-dozen community colleges in Pennsylvania and New Jersey. Under the program, two-year grads with a grade point average above 2.0 are automatically admitted to Temple, and those who maintain a 3.5 average after transferring receive a $2,000 yearly scholarship. Some states, including California, Florida, and Illinois, have employed such programs for years. Some colleges attract older students. U.S. News says over 90% of the student body is older than 25 at these five schools: Elcelsior College (N.Y.), Union Institute (Ohio), International College (Fla.), East Texas Baptist, Thomas Edison (N.J.). Also, U.S. News tells us: • Over half the students are receiving merit aid at these relatively well-known schools: Cooper Union (N.Y.), Adelphi (N.Y.), Boston Conservatory, Denison (Ohio), DePauw (Ind.), Emporia State (Kans.), U. of Wisconsin-Superior, Trinity (Tex.), U. of Georgia, Dayton (Ohio), U. of Nebraska-Kearney. • These well-known schools claim a 100% acceptance rate of older applicants: College of West Virginia, CUNY—Staten Island, Emporia State (Kans.), Louisiana State—Shreveport, National University (Calif.), Pikeville (Ky.), Texas A&M, U. of Houston— Downtown, U. of Louisiana—Monroe, Wayne State (Neb.), West Virginia—Parkersburg.

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Go to college on the Internet Let your computer be the gateway to higher education

Online cyberclasses are opening new educational opportunities for all of us. You needn’t leave your living room to get a first-class education. Thanks to the Internet, you can attend lectures in your skivvies, participate in online classroom discussion groups at 3 a.m., and watch streaming video presentations in your home or office 24 hours a day. You will never need to rush from work to a night class or miss a lecture because of a scheduling conflict. In many cases, you can also set your own learning pace. You can take on a full 15 credit-hour load or merely one or two courses at a time. In some cases, you can stretch your work over months rather than weeks. Courses at Columbia University’s Teacher’s College go for $2,115 each, but most on-line courses are available at a relatively modest $300 to $500. Many courses are offered at little or no cost. Example: classes at Barnes & Noble’s Web site (www.barnesandnobleunivesity.com) cost only the price of the books. Some of the top names offer Internet courses. You can study information technology online at Columbia University (columbia.edu), art appreciation online at Harvard’s Institute for Learning in Retirement (college.harvard.edu), or take a weightier Princeton University online course exploring Ethnic Conflict in the Balkans (princeton.edu). Fact is, most of the nation’s top colleges and universities now offer online or “distance learning programs,” and some of these schools have enlisted an impressive cyber faculty to teach them. Yes, you can really get a college degree online. A growing number of schools, such as the University of Phoenix Online (online-learning-info.com), offer complete accredited undergrad and graduate degree programs that can be completed 100% on the Net with no on-campus attendance required. The variety of Internet degree programs has grown significantly over the past five years. Capella University (Capellauniversity.edu), for example, now offers more than 500 accredited online courses leading to 80 degrees, including advanced masters and doctorate programs. Cybercourses can fill the gaps in your education. You don’t need to aim for a degree in order to benefit from online classes. Investors can take Internet courses to learn how to read corpo 305

Most of the nation’s top colleges and universities now offer online or “distance learning programs,” and some of these schools have enlisted an impressive cyber faculty to teach them.

rate financial statements; physicians, nurses, and other healthcare providers can satisfy their continuing education requirements in cyberspace; and teachers can take supplemental Internet courses exposing them to the latest educational tools and learning strategies.

You don’t need to aim for a degree in order to benefit from online classes.

Here’s where to find out more about educational offerings on the Internet. Start with a visit to geteducated.com, a site that lists 21 schools offering undergrad online courses, plus 36 schools offering online graduate degrees. Then check out some e-learning portals, such as Fathom.com, Online-Learning.net, R1edu.org, and CyberU.com. If there’s a particular college or university you’re interested in, you can probably find it on the Net quickly by typing in the name of the school followed by .edu rather than .com (e.g. stanford.edu or notredame.com). Once at the school’s site, search for online courses. Consider new institutions providing online education. Two of the most prominent are the United States Open University (www.open.edu) and UNext’s Cardean University (cardean.edu). The latter helped develop Internet business courses for such top schools as the University of Chicago, Stanford, and Columbia Business School. For those who prefer a non-Internet resource, try Nancy Stevenson’s “Distance Learning Online for Dummies” (IDG Books Worldwide, 2000). These Internet sites are sponsored by some of the leaders in online education: • www.california.edu presents online courses offered by public and private California universities. • scpd.stanford.edu is the Net site for Stanford University Center for Professional Development. • scps.nyu.edu is the online studies site for NYU (New York University). • uoponline.com introduces the University of Phoenix, the nation’s largest online institution that provides college degree programs via the Internet.

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More ways to add to your education There’s more to distance learning than the Internet

You can go back to school without going back to school. For many of us, the biggest barrier to resuming our education in mid-life is a concern that we would feel decidedly out-of-place on campus. Although the proportion of older non-traditional students is on the rise at many campuses, youth is still the dominant force and focus at most schools. If you worry that you’ll be uncomfortable sitting through classes with a room filled with 18-year olds, you need to know there are ways to minimize the time you will be in class. In fact, you may not need to set foot on campus. You can get your degree by mail. It’s hardly a new idea. College credit by mail has been available for generations, and hundreds of thousands have earned degrees through correspondence courses. Also, there are many reputable schools that provide course work by mail. One recent count identified more than 500 accredited U.S. colleges and universities offering correspondence courses, including Duke, Michigan, New York University, Purdue, Southern California, and Syracuse. Go to class in your nightgown by enrolling in telecourses. A growing number of colleges and universities are providing offcampus educational opportunities through classes presented over cable TV and on videocassette. And it’s not just the big universities that offer telecourses. Little Elgin Community College offers 40 of them, including financial accounting, abnormal psychology, early childhood development, nutrition, business law, and principles of macroeconomics. Other colleges (many of them) are broadcasting classes on everything from astronomy to political science over local TV. Enroll in a university without walls. Earn college credits through independent study under a plan approved by the school’s faculty. Some UWW programs, such as the one offered by Skidmore College in Sarasota Springs, N.Y., also provide credit to students for participating in supervised internships at businesses, hospitals, museums, or even theater companies. Alternatively, students enrolled in Skidmore’s program may be credited for courses taken at other accredited colleges around the country. In either case, UWW students are encouraged to tailor the program to their own interests and to work at their own pace.

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Colleges and universities are providing off-campus educational opportunities through classes presented over cable TV and on videocassette.

Graduate students who take the maximum six units per term can earn an MBA in two years.

Consider weekend study. A growing number of weekend degree programs are being offered. For example, the Marymount campus at Palos Verdes, Calif., offers associate in arts or science degree programs that can be completed entirely on the weekends. A similar program offering business students the opportunity to obtain bachelor’s or master’s degrees on weekends is available from Missouri’s Webster University. In both cases, classes are held Friday nights, Saturdays, and Sundays during six non-consecutive weekends over a four-month period. Graduate students who take the maximum six units per term can earn an MBA in two years. These Internet sites are among those that cover educational funding: • bankofamerica.com/financialtools offers a cost-of-college-education calculator. • collegesavings.com provides a description of College Savings Bank’s CollegeSure certificate of deposit program. • collegesavings.org is sponsored by National Association of State Treasurers. It provides information about state programs. • finaid.org has college cost calulators, covering loans, grants, and scholarships. • moneycentral.msn.com gets you to Microsoft’s site, where you will find a tuition savings calculator. • money4college123.com shows how to find and maximize financial aid. • morningstar.com/centers/529.html covers Section 529 college savings plans and much, much more. • savingforcollege.com may be the best resource for Section 529 plans. Also, it explains Coverdell education savings accounts. • smartmoney.com/college offers college planning worksheets. • troweprice.com offers an excellent funding calculator.

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Go back to school to enrich your life Who needs a degree? Learning is its own reward

Unlock your hidden talents. You may have spent the past 30 years wearing the clothes of a surgeon, attorney, or economist. You may have achieved success and enjoyed a satisfying, even exciting career. But have you tried exploring your untapped talents? What if, hidden inside yourself, you were to discover the soul of a novelist or an architect, a sculptor or a ballerina, an entrepreneur or a geneticist? What hidden spark of creativity might be exposed by a course in creative writing, drama, or the lively arts? If you are at a point in your life when you are able to return to school, maybe you owe it to yourself to find out. Learn a new language or a new culture. There’s no better way to broaden your horizons or to develop a deeper appreciation of your own culture than to study the history, traditions, and language of others. The opportunities for learning new languages or studying other cultures have never been as great as now. Hundreds of schools across the country, from nationally recognized universities to neighborhood community colleges, offer courses that can help you develop fluency in such exotic tongues as Cantonese, Arabic, or Swahili—or allow you to revisit your high-school Spanish, French, or German. You could get your education around the world. Imagine a semester in Brazil studying the ecology of the rainforest, springtime in Paris for a language immersion program, or courses in Japanese history and literature at Osaka’s Kansai University. Those and hundreds of other study-abroad options are currently available through programs arranged by many colleges and universities. One example: SUNY (State University of New York) offers study-abroad programs in more than 50 different countries from Western Europe to the Far East. For many more examples, go to studyabroad.com. And speaking of computers: Learn to surf the Internet like a 16-year-old. Those of us on the shady side of 50 completed our schooling before personal computers and the Internet reshaped the way information is shared and knowledge is communicated. Too many of us today are so intimidated by the technobabble of cyberspace that we risk missing out on the wonders of the Information Age. A few basic college courses on computers and the Internet can quickly unlock the mysteries of the online world, allow you to begin using these powerful new tools, and, just maybe, make you a hero to your grandchildren. 309

Imagine a semester in Brazil studying the ecology of the rainforest, springtime in Paris for a language immersion program, or courses in Japanese history and literature at Osaka’s Kansai University.

A few basic college courses on computers and the Internet can quickly unlock the mysteries of the online world

Don’t overlook adult education opportunities. Stimulating classes, seminars, and other learning opportunities tailored specifically for the interests of older students are offered across the country by colleges and universities and also by senior centers, county libraries, church groups, and other organizations. Example: the Renaissance Institute at the College of Notre Dame of Maryland (nmd.edu) offers adults (50 and up) a choice among several 13-week semesters of non-credit courses in such areas as literature, public affairs, art, film, science, computers, and acting. There are no tests or required papers. In return for the $310 annual tuition, students at the Institute are eligible for a variety of college perquisites, including full privileges at the award-winning Loyola-Notre Dame Library, reduced admission fees for many college events, the right to audit one credit course annually at the college, and use of campus facilities, including the pool, dance studio, and art studios. These sites provide general information on colleges: • campustours.com offers virtual tours and maps of colleges. • collegeboard.com contains a searchable database allowing side-by-side comparisons of colleges according to the features you’re interested in. Also has sections on college admissions tests, info on college costs, Section 529 plans, and loans. • collegedegree.com is a great site for locating and accessing Internet sites of colleges, state-by-state. Includes an extensive listing of schools offering distance learning opportunities, organized by subject area (engineering, law, et al.). • salliemae.com is the site for the agency that manages government college loans. It includes a wealth of info on educational loans, as well as scholarships, college planning, and collegecost calculations.

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Educational expenses may not be a problem There are still a few ways to take the sting out of education costs

First, let’s revisit sticker shock. College Board told us the average cost of attending a private, four-year college in 2002-2003 was a tad above $25,000 a year. Some of that number reflects on-campus room and board, expenses that an older student may not incur. But the average bill for tuition, fees, and books were running upwards of $18,000 at private institutions. Also, College Board warned of big increases coming after 2002. You can trim costs by attending a public university, but even there you may need more than $52,000 to cover all expenses for four years of study and more than $75,000 if you go to an out-ofstate school. The cost of post-graduate or professional education is steeper. One solution: Choose a school that’s not so costly. We cover that point in detail a few pages from here, but I’ll summarize now: Many colleges, including some of the best, offer tuition discounts to mature students. Now, here’s more good news: Your company could foot the bill for your education. If you have not yet fully retired, your employer or your business or practice may provide $5,250 in tuition assistance each year as a tax-free employment benefit, even if the course work is unrelated to job duties. If it is, tax-deductibility may be unlimited. You can slash college costs dramatically-if you don’t need a degree. If your objective is to increase your knowledge or sharpen your skills in a particular area rather than to obtain a degree, you will find a number of cost-effective options available. Tuition at a two-year community college can average half of what a flagship state university would charge. Part-time students taking only a course or two at a time pay hundreds rather than thousands of dollars per semester. Opportunities to audit classes for no credit are available at many schools at little or no cost. As I’ve pointed out in previous pages, online courses over the Internet can be a bargain. Also, you will see that you, too, qualify for the considerable benefits of a tax-smart Sec. 529 college plan. Seek out scholarships or low-interest education loans. Most forms of government and private educational assistance are designed to help young people and their parents afford the steadily rising cost of college. But there’s no reason why older students shouldn’t explore the options as well. Check out schol 311

Many colleges, including some of the best, offer tuition discounts to mature students.

government and private educational loans are available widely, but you could be better off with a taxdeductible home equity loan or line of credit.

arship and grant possibilities online at collegescholarships.com. The best government education loans— those that impose no interest charges while you are attending college—are available only on a financial need basis. Other government and private educational loans are available widely, but you could be better off with a tax-deductible home equity loan or line of credit. You won’t qualify for an Education IRA (now known as Coverdell Educational Savings Account) because the beneficiary of the account must be under age 18 at the time of the contribution. Use Federal income tax credits to soften college costs. Retirees whose incomes meet requirements (not more than $102,000 for joint filers, $51,000 for singles) can qualify for up to $1,500 in Federal Hope Scholarship tax credit aid to help with tuition and related expenses during the first two years in college (or other eligible training). The assistance comes in the form of a tax credit equal to 100% of the first $1,000 of tuition and fees plus 50% of the second $1,000. The credit is available to individuals enrolled on at least a half-time basis, but only for those first two years. You may be able to tax-deduct tuition costs. Starting 2002, you may tax-deduct up to $3,000 in college tuition expenses annually, provided your adjustable gross income doesn’t exceed $130,000 ($65,000 for single filers). In 2004, the deduction increases to $4,000, and taxpayers with even higher adjusted gross income ($160,000 for joint filers and $80,000 for singles) will be able to write off $2,000 in educational costs annually. Trouble is, those deductions will expire after 2005.

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Give college to your grandchildren Doing so could be your greatest legacy

Your grandchildren may need plenty of help to afford a good education. While the payoff from a college education is high, the cost of education is, too. In 2002, the cost of a single year at a private college-tuition, fees, books, room, board—was averaging $26,000. The experts expect the costs to continue rising at a rate of 7% a year—or more. At 7%, college costs will almost double to more than $51,000 in 10 years. By the time a newborn is ready to begin four years of college, the cost of a four-year private-college education could exceed $350,000. Less-expensive options such as community college and state universities will continue to be available, but they won’t be cheap. College Board reports that expenses at public universities are now rising even faster than those at private schools. One good strategy is to make regular monthly contributions to a college account. That kind is likely to grow larger and more safely than once-yearly gifts. One explanation: dollar cost averaging. It gives you a chance to catch a string of bargain prices in a bear market with relatively small, steady investments in carefully selected no-load mutual funds, ETFs (exchange traded funds), and common stocks. Consider: The stock market seems to present bear-market opportunities for fresh investment every 5-10 years. Recent changes make the Education IRA worthy of a new look. Renamed the Coverdell Education Savings Account, its annual contributions have been raised to $2,000 yearly per child (up from $500). As with Section 529 state plans, the appreciation on funds donated to the accounts is tax-free. Unlike 529 plans, the money may be used for elementary and secondary school costs as well as for college. The catch: to make the full $2,000per-child contribution, a married couple’s combined 2002 adjusted gross income may be no more than $190,000; eligibility phases out altogether when AGI reaches $220,000. Another alternative: a Section 529 college savings plan. Since Florida finally jumped on board, every state offers such a plan. Each state decides who or what is to be in charge of investing your money, but lifetime contributions to some plans can run as much as $250,000 per recipient—while taking that much out of your taxable estate. What’s more, withdrawals that do eventually go into college expenses are exempted from Federal income taxes. 313

By the time a newborn is ready to begin four years of college, the cost of a fouryear private-college education could exceed $350,000.

In Florida, a trust can live for up to 360 years while providing successive generations with educational opportunities and also a financial safety net in old age.

A third alternative: a trust for children. With it, you can attach strings to ensure that the funds are used the way you like. Example: If the child turns thumbs down on college, your seed capital can continue to grow until she’s, say, 65 or 70 years old, when the trust can begin making inflation-adjusted monthly payments to help provide a financially secure retirement. Chances are, she will then, older and wiser, be deeply appreciative of your loving support—especially so if she never goes to college. Still another alternative: a dynasty trust. Given an early start and significant contributions, it can pay the grandchildren’s college expenses and also make those lifelong, inflation-adjusted monthly payments when they grow old. Also, it can pay for their health, disability, and LTC (long-term care) insurance premiums as long as the coverage is needed—thus providing lifelong financial assistance. Significant tax incentives may be available to such a trust, starting with avoidance of estate taxes for all the growth of capital after the trust was funded. In Florida, a trust can live for up to 360 years while providing successive generations with educational opportunities and also a financial safety net in old age. Here’s one college savings approach we do not recommend to our clients. It’s called Uniform Gifts to Minors Account (UGMA) or Uniform Transfer to Minors Account (UTMA). It’s a vehicle often used to transfer wealth from one generation to another. The problem with a UGMA (as with a UTMA) is that all the assets in the account become available to the child when she reaches age 18. Of course, your grandchild will use the money for college, as intended—won’t she? But nothing in the law requires her to do so. Need help sorting through your situation? It’s what we provide. Just ask for me, Richard. Like other financial advisors at Balliett Financial Services, I am a general practitioner. I am also the house college-funding specialist.

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Chapter 18

The magic trusts can spin They can put a security net under yourself and your family

Gene Balliett

T

here are a great many factors to consider in estate planning, with special regard for asset protection, income and transfer taxes, and financial security for heirs. Es-

tate planning is every bit as complicated as income-tax management and investment management. Most or even all the assets of a small estate are devoured by the legal fees and court costs of probate. Such expenses slash the value of a large estate. Inappropriate documents may not cost much to create but are likely to expose the estate to enormous transfer taxes. Not all attorneys have special knowledge of estate planning. Of those who specialize in it, not all are much interested in strategies that lessen or eliminate probate and taxes. All too often, we discover hopelessly inappropriate documents had been prepared for a new client of ours. There’s no good reason to subject pension and IRA wealth to shameful legal fees and the other expenses of probate by naming the estate as beneficiary. There’s no good reason to subject an estate’s assets to unnecessary income taxes and death taxes by mishandling annual exclusions, lifetime exemptions, credit shelter, and the beneficiary designations for IRAs, qualified retirement plans, and life insurance policies. Where surplus capital is available soon enough, there’s every good reason to put a long horizon to the creation of educational opportunity and old-age financial security for children and grandchildren by way of the early use of the lifetime exemption to death taxes. Any good financial advisor can help you avoid estate taxes. That kind can help you put together a strategy that does what good planning is meant to do: to avoid probate, to create protection of your assets, and to reduce estate taxes, even on a zillion-dollar estate, to zero. Also, that kind of advisor can help you find an attorney who will provide appropriate legal documentation for your plan—one who may even suggest ways to tweak it for the better. In the balance of this chapter, we expand on those thoughts by discussing these elements: • Buy asset protection for your family. A domestic asset-protection trust can give your family protection from probate and a layer of protection from lawsuits and judgments. If you wish, it can be designed to provide not only asset protection but also 315

There’s no good reason to subject pension and IRA wealth to shameful legal fees and the other expenses of probate by naming the estate as beneficiary.

A domestic asset-protection trust can give your family protection from probate and a layer of protection from lawsuits and judgments.

old-age financial security for you and your spouse as well as for your children and grandchildren. • Buy financial security for the kids. A trust for children can be designed to ensure money for education, financial support for an impaired child after you’ve passed on, or a place to grow capital until a child is of a certain age (chosen by you). • Protect life insurance from taxes. If your family still needs the security of life insurance, a life insurance trust can legally avoid the big tax surprises too often created by blunders in insurance-policy ownership and beneficiary or contingent-beneficiary selection. • Defer a big capital gains tax. A capital gains trust can remove a major asset from the taxable estate while deferring the capital gains tax to age 70 and then reducing it to a series of inflation-eroded installments. The major asset may include realestate holdings, securities, business interests, works of art, and royalty property. • Create a legacy while avoiding the death tax. Make your spouse primary beneficiary and a family foundation trust the secondary beneficiary. Both enjoy a 100% exemption from estate taxes. With a solid plan, you needn’t be concerned about what the politicians will or won’t eventually do about estate taxes. • Get a safer alternative to a FLiP. Unlike a family limited partnership, a FLiP trust requires no business qualification and thus can provide a measure of comfort to an otherwise solid estate plan. It has administrative benefits, too. • Try on a trust while it’s still revocable. A revocable irrevocable trust can be revised or cancelled until you are comfortable making it irrevocable. An appropriately drafted trust, whether revocable or irrevocable, avoids probate. An irrevocable trust adds tax savings and domestic asset protection. • If you wish, protect a nestegg outside the U.S. An appropriately drafted offshore trust is a U.S. taxpayer that enjoys the safety of residence in a country that has no sympathy for extortion by lawsuit. This 18th is the first of three chapters on estate planning. References to Internet and bookstore resources will be found in Chapters 19 and 20. For references to trust resources, see especially p. 362.

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Buy asset protection for your family A good way is for one generation to build it into a trust for the next

A domestic asset protection trust is an affordable fortress. Its flexibility makes it appealing. You retain the right to sell property in the trust (such as an office building) and direct the reinvestment of the after-tax proceeds (as in the purchase of a business or a portfolio of securities). You also retain a one-time right to change beneficiaries as long as you and your spouse are both alive. You may also include, if you wish, all future children or grandchildren as equal beneficiaries. You can even implement provisions to divide the trust property into two trusts should you and your spouse ever decide to go your separate ways. You gain an opportunity for affordable protection. Like most living trusts, this one can help avoid probate and provide for management of the estate if you become incapacitated. After the trust becomes irrevocable, it not only gains asset protection capability but also can block a successor spouse from assuming control of the children’s money after you have passed on. But it does more: As an irrevocable trust, it can protect its assets from legal predators. I mean from lawsuits, liens, judgments, and even Medicaid claims. Obtain extra layers of protection with three trusts in one. The primary trust is used to hold the family’s financial assets, including securities and bank accounts. A separate holding trust is created for the family home. Cars and other vehicles are held in a third trust. If the family opens a business and acquires a second home, additional holding trusts can be added, one for each asset. Each is established as an independent entity with different trustees. Because the property in each trust has a different owner, the legal system considers the three (or more) trusts to be separate entities. Protect each valuable asset in a fortress trust of its own. If the family car is involved in an accident that results in legal damages, the plaintiff might be able to claim the automobile and any related insurance settlement but would be unable to touch the family’s home, investment portfolio, and other valuable property held in different trusts. You gain an additional firewall to protect the family’s assets. Although you and your spouse retain complete control over 317

After the trust becomes irrevocable, it gains asset protection capability.

the use of your property during your lifetimes, once it is placed in the trust it legally becomes the property of your heirs. As a result, if predators come after you with a series of lawsuits, your assets are insulated by a maze of firewall trusts.

If predators come after you with a series of lawsuits, your assets are insulated by a maze of firewall trusts.

Also, you keep your financial privacy as well as your assets. Once property is placed in this trust, the title to that property is transferred from you to the trust. That step serves as a deterrent against unwelcome snooping through your family’s financial affairs by private organizations and government bureaucrats. Also, the trust is designed to keep significant assets out of probate, where they would become public knowledge. Costs? Preparing the trust document may cost $2,500. If you retain your own local attorney and CPA for review services, their fees will be extra. Investment management will be added to the trust’s ongoing administrative expenses. Those may total 2% to 3% or more of the trust assets, depending on the trust’s complexity.

A DAY IN THE LIFE I see you are 60, widowed, live alone. Liquid investments total $2 mil. You live on $45,000, pre-tax. Health is good. Susan, how can I help you?

If I become seriously ill, I will want home care. My daughter’s a nurse, but she has a good career and a family. Should I buy long term care insurance for myself?

I know of six exceptional LTC policies, and one is probably for you. I can’t say you need it till we have talked more. But we can reach a decision within the hour.

CH & GB 2001

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Buy financial security for the kids Ensure money for an impaired child, and more, after you’ve passed on

Use a trust for children to serve as a financial safety net. It can be set up to pay educational expenses or provide supplemental income not only for your children but also, if you wish, for your grandchildren and/or other heirs. The grantors who create this trust can do so without adverse tax consequences by using their annual gift-tax exclusion to make contributions each year. Or fund the trust with one large gift, using all or part of each spouse’s $1,000,000 lifetime gift tax exemption. Move significant amounts out of your taxable estate. A couple with, say, three married children and seven grandchildren can transfer as much as $286,000 out of their estate each year by naming each child and grandchild as a beneficiary of the trust. As long as the gifts to any one person do not exceed the current annual exemption ($11,000 from each donor), they can be free of gift tax. In certain situations, we recommend reporting such gifts on IRS Form 709. This trust can be particularly valuable if your child has special needs. If handicapped, a special child can be assured of a lifelong financial safety net, and your family thus gains peace of mind. If you wish, the trust can be set up to pay for supplemental needs—expenses above and beyond those covered by Medicaid, insurance, or some other form of assistance. Yes, you can attach strings to this trust. If you wish, you can specify in the trust document any number of conditions or controls attached to the gift. The contributions can be earmarked for various purposes such as college expenses or to assist the child with the purchase of a first home. To ensure that the funds are used for the purpose envisioned by the grantor, the trustee may control the disbursement of the funds, such as by paying the child’s tuition bills directly rather than turning the cash over to the beneficiary. If you wish, you create a long-horizon plan. You can thus create an opportunity for long-term wealth building within the trust by deferring distributions until a beneficiary is 65 or 70 (or some other age specified by you). Uninterrupted compounding of investment over 20, 30, or more years carries the potential of wealth creation of dynastic proportions. Such a strategy provides a secondary but immediate and ongoing benefit for a young heir by freeing up earned income that otherwise might be needed for investment as a retirement resource. 319

As long as the gifts to any one person do not exceed the current annual exemption ($11,000 from each donor), they can be free of gift tax.

Uninterrupted compounding of investment over 20, 30, or more years carries the potential of wealth creation of dynastic proportions.

You can use a Crummey provision to shelter annual gifts. Like many trusts, a trust for children is subject to a 1968 Federal court ruling (IRS v. Crummey) which requires that beneficiaries be notified when certain gifts (such as those that qualify for the annual gift-tax exclusion) are transferred into the trust. The notice must inform beneficiaries that they have a right to withdraw any or all of the new contribution within 30 days. Only after that 30-day period do the restrictions placed by the grantor on the use of the trust funds take effect. In practice, the situation is usually not a concern if the beneficiary is a minor; the child’s custodian or trustee can be counted on not to permit an early withdrawal. However, if your heir is of legal age and hopelessly irresponsible, there’s a danger that your $10,000 or $20,000 gift will disappear from the trust within 30 days. The following year, you can decide whether or not to make another such gift. Costs? Preparing the trust document may cost $1,500. If you retain your own local attorney and CPA for review services, their fees will be extra. An investment management fee will be added to the trust’s ongoing administrative expenses. Those may total 2% to 3% or more of the trust assets, depending on the trust’s complexity.

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Protect life insurance from taxes Life insurance benefits are not always tax-free They’re in your taxable estate when they go to anyone other than your spouse A trust can avoid the tax implications of owning your life insurance. An estate that would otherwise qualify for exclusion from the death tax can be soaked for hundreds of thousands of dollars in tax liabilities because the dearly departed owned a large life insurance policy in his own name. If you own the policy, the proceeds will become part of your taxable estate. Benefits of $500,000 to $5,000,000 are no longer uncommon, and any such amount may be enough to catapult an otherwise relatively modest estate above the $1,000,000 tax-exemption threshold. Benefits passing through to your surviving spouse will escape the death tax. The spousal exemption is 100%. Benefits passing to your children will be considered part of your potentially taxable estate. If you and your spouse die simultaneously, any insurance benefits passing to the children as contingent beneficiaries will be subject to the tax. One solution: Transfer ownership of your life insurance to a life insurance trust. It becomes the beneficiary of the policy, but it will be owned by the trustee for the benefit of your heirs— whomever you wish. You may also place a policy covering your spouse’s life in the same trust. You may choose a policy from any insurance carrier, including a term policy rather than a cashvalue policy. You may choose an existing policy by transferring it from your ownership to the trust’s (the insurer will help). A better choice, however, may be for the trustee to take out a new policy on your life after you create the trust. The drawback to gifting an existing policy into the trust is that the death benefit may be included in your taxable estate if you die within three years of making the gift. Fund the premiums by making tax-free gifts to the trust. The trust subsequently uses the money to pay the premiums on your policy from funds that you donate to the trust for that purpose. Legally, the donations are gifts to your heirs. As long as they do not exceed the $11,000 per person/$22,000 per couple annual gift-tax exclusion, they result in no negative tax consequence. Because the trust is subject to the Crummey provisions, the trustee must notify your heirs of the contribution and of their right to claim those funds for their own personal use within 30 days. However, if your heirs are aware that the purpose of the gift is to fund a life-insurance policy for which they are the 321

A better choice may be for the trustee to take out a new policy on your life after you create the trust.

beneficiaries, it’s unlikely that that they will exercise their option to spend the gift.

That’s an important consideration if you don’t want your children or grandchildren to have access to large amounts of wealth at a tender age.

Gain control over the disbursement of your life insurance benefits. In the trust document, you may instruct the trustee on details of the timing and restrictions on death benefit payments to your heirs. That’s an important consideration if you don’t want your children or grandchildren to have access to large amounts of wealth at a tender age. For example, you could specify that each heir is to receive no more than a one-third share at age 30, another third at 40, and the balance at 50. Or you can elect to build a dynasty by keeping the capital growing in the trust until a child turns, say, 70. Gain a big tax break for your family. At the final reckoning, the death benefit is paid to the trust and that entire amount is excluded from taxation in your estate. That’s because you don’t own the policy. You donated the policy and the funds to pay the premiums to the irrevocable trust. That approach can allow you to leave your loved ones a death benefit of millions of dollars, totally free of income taxes and estate taxes. Consider a second and often better alternative. Let the trustee apply for the policy on your life. That way, there’s no threeyear waiting period to complicate matters. It’s almost surely the better way to go if there’s no doubt about your ability to pass the insurer’s health examination. Costs? Preparing the trust document may cost $1,100. If you retain your own local attorney and CPA for review services, their fees will be extra. Investment management will be added to the trust’s ongoing administrative expenses. Those may total 2% to 3% or more of the trust assets, depending on the trust’s complexity.

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Defer a big capital gains tax Do a little homework, and you may know more than the insurance agent

Let a capital gains trust give you a way to defer Federal and state taxes. When the time comes to sell an asset that has appreciated significantly in value over the years, a capital gains tax can drain much of the profit off the top—up to 20%-25% to Washington plus 5% or 10% to the state. Also: Let the trust defer the tax on recapture of depreciation. If the commercial realty (or other capital asset) has been subject to any significant depreciation over the years, the IRS may impose a special 25% income tax on the total of your depreciation deductions over the years. The taxes on recapture are payable during the same year that the asset is sold. Use the trust to avoid the problems of an installment sale. If you arranged to sell the asset on a simple installment basis, you would spread the capital gains tax liability over a number of years. Trouble is, a simple installment sale may limit the market for your property, and it won’t defer the depreciation recapture tax that will still be due during the year of the sale. A capital gains trust gives you a way to deal with those issues. Let the trust help you postpone all such taxes for years, perhaps decades. It does so without saddling you with penalties or interest. To secure this long-term tax deferral, you sell the asset to your own capital gains trust. By contract, you agree to receive the proceeds from the sale in the form of a lifetime income stream. You stretch out both your capital gains tax and the depreciation recapture tax by paying them as you receive the income each year. Get yourself a guaranteed income for life rather than a big tax bill today. The buyer (your capital gains trust) agrees to make regular payments directly to you for as long as you live, or jointly to you and your spouse under a last-to-die arrangement. You could choose to begin receiving payments immediately, or: If you wish, defer the start of the flow of income—even to age 70 or 71. That way, the trust can gain the time needed to resell the realty, works of art, securities, or other capital assets it purchased from you—and to reinvest the proceeds in a diversified, readily liquid portfolio.

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You sell the asset to your own capital gains trust. By contract, you agree to receive the proceeds from the sale in the form of a lifetime income stream. You stretch out both your capital gains tax and the depreciation recapture

Your buyer (your capital gains trust) agrees to make regular payments directly to you for as long as you live, or jointly to you and your spouse under a last-to-die arrangement.

Let the contract stand as payment in full. The IRS has agreed that the contract may represent payment in full at the time of purchase. [IRS Revenue Rulings 50-119 and 69-74; GCM 39503 of 5/19/86; TD 8754 of 1998.] The contractual arrangement is called a private annuity because of the lifelong income stream. Despite the word annuity in the description, a private annuity has nothing to do with annuity contracts sold by life-insurance companies. The capital gains trust is not an insurance-company product. And the payment arrangement is not an installment sale. Set up your capital gains trust even before finding a thirdparty buyer. As soon as you sell the asset to the trust, the full value of that property is immediately removed from your taxable estate, so it is no longer subject to estate or gift taxes. Also, in most states the asset will no longer be subject to probate or Medicaid claims. Potential bonus: If Congress permanently reduces the capital-gains tax rate, the remaining balance of your capital gain will be taxed at the lower rate. Use a capital gains trust to rescue the tax for immediate reinvestment. If you sell a capital asset for, say, $1,000,000 and are paid in one chunk, state and federal tax collectors are likely to claim 20% to 30% or more off the top, leaving that much less cash to reinvest. Sell the asset to your capital gains trust, and the trustee can immediately sell to a third party for, say, $1,000,000—the trust’s purchase price, adding no capital gain to be taxed. The trust can then focus on reinvesting the $1,000,000 for the trust rather than an after-tax $800,000 or less. Costs? Preparing the trust document may cost $2,500. If you retain your own local attorney and CPA for review services, their fees will be extra. Investment management will be added to the trust’s ongoing administrative expenses. Those may total 2% to 3% or more of the trust assets, depending on the trust’s complexity.

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Create a legacy, avoid the death tax Divert tax dollars to worthy projects of your choosing, or your heirs’

In a nutshell, here’s the terrible situation now with regard to death taxes. Early in June 2001, President Bush signed into law a tax bill widely described as the death knell for the tax on death—even though some estates are to pay even higher taxes after Dec. 31, 2001. What’s more, the law calls for restoration of the old tax rates in 2011. Adding injury to insult, it puts an end to the step up in basis in 2010. That means heirs are to pay an income tax on the entire capital gain of an investment, to the price realized from its sale measured from the price paid by the buyer (rather than from the market value on the date of the buyer’s death). Here’s how to avoid anxiety about that double whammy: To avoid taxes and anxieties, put a family foundation trust in place. It becomes your philanthropic legacy and also a shield against the estate tax now no matter what Congress eventually does to raise, lower, or eliminate the tax. Here’s our no-problem tax-avoidance strategy in three steps or less: • If you’d put a financial safety net under the children, fund it with gifts shielded from taxation by the annual gift-tax exclusion and/or the lifetime exemption. Otherwise: • The first spouse to die leaves everything to the surviving spouse. No tax. • The surviving spouse leaves everything to the family foundation trust. No tax. Use the trust to avoid even the taxes on the survivor’s IRA balance at death. In this age of larger and larger Rollover IRA balances, the worst-case tax picture is grim if your lawyer doesn’t know how to shield your IRA balance from income taxes and estate taxes. More than half can disappear into Federal and state death taxes and 35% (or more) of the remainder could go to the IRS and your state as ordinary income taxes. Naturally, insurers suggest solving the problem by buying a big, expensive life-insurance policy. The better alternative may be the foundation trust. Name it contingent beneficiary of each spouse’s IRA. That way, the remaining capital balance of even the survivor’s IRA will be subject neither to estate tax nor the ordinary income tax normally due on an IRA balance remaining at death. If you wish, create a foundation designed to do good works forever—in your name. After all, avoiding taxes is the second 325

If you’d put a financial safety net under the children, fund it with gifts shielded from taxation by the annual gifttax exclusion and/or the lifetime exemption.

ary purpose. The main idea is to create your family’s legacy by pumping cash into specific charitable projects selected by you, persons named by you, or your trustee, co-trustee, or contingent trustee.

Naturally, insurers suggest solving the problem by buying a big, expensive lifeinsurance policy. The better alternative may be the foundation trust.

The tax deductions can equal up to 50% of adjusted gross income. If the contribution is more than you can deduct, you can carry forward additional deductions over five years. That’s true for your cash contributions and also for those of other family members, even of outsiders. What’s more, capital assets contributed to the trust are immediately removed from the donor’s taxable estate. Gifts can be almost anything of value, though the tax deduction is generally less for real estate, works of art, collections, jewelry, and other valuable personal property. The gift can even be ownership shares of the family business. If the donation is an asset that has appreciated in value, neither the donor nor the foundation will incur any capital gains tax liability. If you wish, let heirs run your foundation. It’s to be a trust with worthy charitable projects to be selected by an individual or committee. Family members may serve. It’s not uncommon for the children, grandchildren, or other heirs of the founder to serve as paid, lifetime employees who approve and direct the charitable activities. The trustee can help your heirs run the trust after you’ve passed on—and stand by to get the work done for you if they lose interest. Costs? Preparing the trust document may cost $7,000. If you retain your own local attorney and CPA for review services, their fees will be extra. Investment management will be added to the trust’s ongoing administrative expenses. Those may total 2% to 3% or more of the trust assets, depending on the trust’s complexity.

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Get a safer alternative to a FLiP A trust doesn’t need a business purpose; a family limited partnership does

Family limited partnerships are still all the rage, and for good reason. FLiPs became the estate planning rage of the ‘90s for individuals and families with relatively large taxable estates. A couple can transfer $22,000 yearly to each heir, free of gift tax. So far, my firm’s record for FLiP transfers stands at 21 heirs with one $420,000 transfer in the last week of December and a second in the first week of January. At that rate, $840,000 flows out of a taxable estate in two weeks of gifting—and, by implication, $4,200,000 in 10 years. That larger figure might be boosted up to $6,000,000 or $7,000,000, given the discounted valuation trusts often enjoy with IRS blessings. You can accomplish even more. By assuming authority and control as general partner of the FLiP, you, as the founder, can provide for the year-by-year transfer of assets to heirs while creating an extra layer of protection from creditors’ claims. Avoid the need of a business purpose. Unlike a FLiP trust, a standard family limited partnership is a business entity and thus must document a business purpose. That requirement can make a traditional FLiP a challenge to set up and operate, and it may create downstream tax complications. A FLiP trust is an estateplanning tool; it needs no business purpose. Also: Reduce bureaucratic rigmarole to a minimum with a FLiP trust. Unlike a conventional partnership, the trust needn’t be registered with the state in order to limit the liability of beneficiaries. And there is no state filing or reporting requirement and no annual fees or other entity taxes to pay. Use our FLiP trust to keep it all in the family. The grantor may establish the trust through tax-free transfers either by using the annual exclusion or the lifetime gift-tax exemption. The trust is then able to issue TCUs (trust certificate units); they are like shares of stock in a corporation. The trustee distributes the shares to the trust’s beneficiaries. Their holders receive no voting rights; the trustee retains 100% control over the actions of the trust; but they do get all of the trust’s net income. Unlike an ordinary family limited partnership, our FLiP trust document can be written with restrictions on the ability of TCU members to sell their interests in the trust. As a result, the family’s estate plan can be protected from the influence of irresponsible heirs.

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A FLiP trust is an estateplanning tool; it needs no business purpose.

Use our FLiP trust to pass through the tax obligation. This trust is a hybrid entity in the U.S. Tax Code. Although it offers all the estate planning flexibility and advantages of a trust, it is treated the same as any other limited partnership for tax purposes. The trust is thus a flow-through entity; the trust pays no taxes, and all income, gains, losses, and tax liabilities flow through to the beneficiaries, who are treated as limited partners for tax purposes.

The IRS recognizes the illiquidity issue, so it allows trust shares to be valued at a discount—often, a third or more below face value.

Stretch your gift tax exclusion with a FLiP trust. By their nature, shares in the trust are relatively illiquid holdings, and the trustee’s ability to prevent their sale makes them potentially even more illiquid. The IRS recognizes the illiquidity issue, so it allows trust shares to be valued at a discount—often, a third or more below face value. In practice, a grantor could provide each of his children or other beneficiaries with a $15,000 TCU face value gift which, after being discounted by 33%, would fall within the $11,000 annual gift tax exclusion. In some situations, discounts of 40% or even more are justified. Costs? Preparing the trust document may cost $1,500. If you retain your own local attorney and CPA for review services, their fees will be extra. Investment management will be added to the trust’s ongoing administrative expenses. Those may total 2% to 3% or more of the trust assets, depending on the trust’s complexity.

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Try on a trust while it’s still revocable Make a revocable trust irrevocable when you’re comfortable with it

A revocable trust is often called a living trust. Its existence depends on a legal document that can be edited, rewritten, or cancelled at any time. The document can specify the trust either terminates or becomes irrevocable at the death of its settlor (creator). Alternatively: The trust document can say your revocable trust can be made irrevocable. It can automatically become that way at your death. Or it can become irrevocable when you execute an accompanying amendment, which may appear as a single page. You can make your revocable trust irrevocable when you’re comfortable with it. When you do, it can become a device for protecting your assets from litigation predators. Trusts have no special asset-protection attributes while they are revocable. Relax: An irrevocable trust isn’t necessarily irrevocable. It may be terminated or revised by its beneficiary or beneficiaries if the trust document grants that right. If not, the beneficiary can petition the court of probate. Whether or not the judge concurs depends on the situation and the language of the trust document. When creating your trust, you will enjoy latitude in permitting or denying privileges and powers to the trust’s beneficiaries. They can gain enormous flexibility through powers of appointment and rights to disclaim. Be sure to ask your attorney about them. You will still need a will even when you have a trust. An appropriately drafted will is still needed for certain tax elections, to appoint a personal representative for the estate, to name a guardian for minor or impaired children, and to transfer assets not titled in the name of the trust. Use a trust to avoid probate. Or not, if your estate’s cash will not cover your final expenses. To deal with that possibility, a trust document typically requires their payment (along with any other just debts) from the trust’s assets. Without such language, the court of probate may pull the trust’s assets into the probate process, subjecting them to legal fees and court costs. Retitle your capital assets into the name of the trust. Otherwise, the trust may accomplish nothing. Too often, a client pays the lawyer $1,500 or more for drafting a living trust document but then fails to make the trust the titled owner of savings, se 329

Trusts have no special assetprotection attributes while they are revocable.

curities, realty, and other assets. In part to avoid the probate process in states other than the one that serves as your principal residence, we encourage clients either to dispose of all outof-state real estate or to retitle it in the trust’s name.

Too often, a client pays the lawyer $1,500 or more for drafting a living trust document but then fails to make the trust the titled owner of savings, securities, realty, and other assets.

Make your revocable trust irrevocable by executing the amendment. The trust often addresses the disability issue. It does deal with the appointment of a co-trustee (typically the spouse or a mature, responsible child) and it may provide for ongoing investment management services by the trustee or a third party. That could be an investment advisory firm or another trustee. Name your beneficiaries in your revocable irrevocable trust. Its provisions are the same as those included in a well-designed irrevocable trust. Also: Obtain asset protection with your revocable irrevocable trust. After all, asset protection is often the primary reason for bringing an irrevocable trust to life, along with the creation of a financial security net for loved ones. Privacy is a strong secondary concern; unlike wills, trust documents are seldom made public, and they are not often contested. Costs? Preparing the trust document may cost $3,200. If you retain your own local attorney and CPA for review services, their fees will be extra. Investment management will be added to the trust’s ongoing administrative expenses. Those may total 2% to 3% or more of the trust assets, depending on the trust’s complexity.

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Protect a nestegg outside the U.S. An offshore trust can be designed to protect assets from extortion by lawsuit

Your offshore asset protection trust must be a U.S. taxpayer. It may enjoy the safety of residence in a country that has no sympathy for extortion by lawsuit, but you don’t want it to be a tax evader. Never mess with the Feds. Why you need to consider an OAPT: To set aside a protected capital resource of reasonable size in a jurisdiction where U.S. judgments are meaningless. Also, consider that the burden of proof will be on the litigant rather than you, the statutes of limitation will be relatively short, and contingent legal fees will be disallowed. The trust’s investment account can be domiciled elsewhere in the world with your present investment advisor managing the portfolio. You will have a protector to look after your interests. An American-owned protector may have oversight over the foreign trustee; it assures the grantor, beneficiaries, and their advisors that the terms of the trust document and the grantor’s wishes will be carried out. The protector has the power to change the trustee and venue and to appoint a U.S. investment advisory firm to manage the trust’s assets. Also, it’s the protector’s job to obtain any and all information from the trustee; to petition the court; to co-sign on accounts with trustee; to assure that the letter and spirit of the settlement are carried out. I am the co-owner of one such firm, along with 29 American CPAs. No one individual or company has a controlling interest in the protector, which in our case is a company domiciled in the Isle of Man. The company’s sole purpose is to act as the protector of our clients’ overseas trusts and to provide assurances that the trustee carries out the intent of the grantor. You will receive our recommendations on venue and trustee. For venue, we usually prefer St. Vincent and The Grenadines, a Caribbean nation that has favorable asset protection statutes. For trustee, we usually prefer a fiduciary in Liechtenstein, depending on the circumstances. The selection of venue and trustee depend on applicable law, so current favored nations are subject to constant review and occasional revision. Your OAPT is not controversial when it’s a U.S. taxpayer. There’s no way I’d recommend anything known to me as a tax 331

The burden of proof will be on the litigant rather than you, the statutes of limitation will be relatively short, and contingent legal fees will be disallowed.

sham. When appropriate, I do suggest protecting a capital resource of a certain size in a jurisdiction that rejects extortion by lawsuit. I have never recommended a trust that would attempt to shelter all of capital assets; that’s a pointless goal. Your lawyer will explain why.

There’s no problem with U.S. or state taxing authorities; all along, the trust’s income taxes have been paid on time.

Here’s how you might be protected from extortion by lawsuit. At first hint of a legal problem, tell your financial advisor or your trustee. The trustee moves your trust’s investment account from the U.S. to Liechtenstein. If appropriate, the protector changes the venue and overseas trustee. After the lawsuit is filed in the U.S., your overseas trust must be revealed; information on the solvency and nonfraudulent transfer is entered as evidence in your favor. A U.S. judge will probably rule that no fraudulent transfer occurred. At that point: The U.S. court may or may not give the litigant a judgment against the trust. If it does, the judgment will not be recognized in St. Vincent. If the litigant wishes to pursue, he may attempt to gain a judgment in the St. Vincent court, pay a local attorney there, and post a bond—while comparing the costs with the option of settling. If the litigant obtains a judgment there, the trustee can make discretionary payments, settle, or move the trust to another country. Meantime, There’s no problem with U.S. or state taxing authorities; all along, the trust’s income taxes have been paid on time. Here’s the trust formation process. Implementation manuals are sent to your estate lawyer, tax advisor, and your financial advisor. Your lawyer and tax advisor review the manuals, complete certain checklists, revise the standard trust deed, and do your solvency test. Appropriate consultations occur with allied international lawyers, their staff, and the consultants. Final documents are prepared by the group’s lawyer-specialist, acting as a consultant to your attorney. Your trust document is executed, documents are filed, and oversight begins. What’s the upshot? The plaintiff usually settles out of court for pennies on the dollar. Costs? Legal fees depend on the complexity of the situation, but are often about $7,500 plus the fee, if any, charged by your local attorney and CPA for evaluating the strategy and reviewing the document. Your investment advisor’s fee is negotiated independently and is paid by the trustee, not by you.

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Chapter 19

Death as an inevitability taken in stride There’s comfort in knowing, well in advance, just what to do

Dee Balliett

T

he death of a loved one is a devastating experience for

all of us. Yet, some manage to cope with the loss of a parent, a spouse, a child, or a dear friend more effec-

tively than others. Those unable to handle the emotional stress associated with a death may make decisions that jeopardize their own health and financial security while undermining the wishes of the loved one.

Death by injury can occur suddenly. Terminal illness can be just as unexpected. So, when a dying spouse, parent, or adult child loses the ability to communicate end-of-life decisions, it may fall on the surviving spouse or other family members to make painful choices between prolonging suffering or hastening death. Critical decisions must be made during those stressful times. Too often, grief-stricken widows, widowers, and others are too distracted to choose the best alternative. That fact explains how the cost of a traditional $8,000 funeral can balloon to $20,000 or $30,000 as bereaved family members rubber-stamp expensive upgrades suggested by mortuary grief counselors. The financial fallout can be disastrous. Bad decisions following the death of one spouse can jeopardize the financial security of the other, and of the family. During our 35 years as financial advisors, Gene and I have seen grief-stricken widows destroy sound estate planning by making hasty and unwise (and even disastrous) financial decisions while in mourning. Such experience has convinced us that it’s essential for both partners to be involved and in agreement with an actively shared estate-planning process. Motivating both to be that way can be incredibly difficult or frustratingly impossible, even for an advisor trained in mental-health counseling. Try not to let your family suffer from incomplete planning. Consider this chapter a wake-up call for the living. If you were to die tomorrow, would your spouse understand how your investment strategy is designed to provide financial security for the family in the years ahead? If you are stricken with a terminal illness, will your health-care directive (living will) be at your side? Will your medical power of attorney help your loved ones 333

It’s essential for both partners to be involved and in agreement with an actively shared estate-planning process.

make the hard decisions you may be unable to make for yourself?

If you are stricken with a terminal illness, will your health-care directive be at your side? Will your medical power of attorney help your loved ones make the hard decisions you may be unable to make for yourself?

Take a deep breath and prepare yourself. The pages to follow address these solemn issues: • Assure your loved one that you care. Be sure your patient remains a part of the decision-making team. • Find help when death draws near. Be aware of resources for the terminally ill—and for the survivors. • Help your loved one let go. Drawing the line between compassion and crime. • Find your head after the loss of a loved one. Keep your to-do list at the ready. • Make the right funeral decisions. Know in advance how to plan the funeral. • Cope with your grief. Use preparation to soften the pain of your loved one’s death. • Handle the financial fallout. Make only the necessary decisions early on. • Settle up with IRS. Pay the taxes on time.

A DAY IN THE LIFE You can’t ask your daughter to quit her career and abandon her family to be your private nurse. But with a good LTC policy, home care is OK. An agency could provide all the in-home help needed.

My daughter could deal with the agency and look in on me from time to time. I guess that would be OK. But can I afford LTC insurance? And do you sell it?

You can, and we don’t, but we’ll help you narrow the choice to the three best policies for you and give you their home-office phone numbers. You choose, and you dial.

CH & GB 2001

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Assure your loved one that you care Be sure your patient remains a part of the decision-making team

Address the emotional needs of your dying loved one. The terminally ill tend to be concerned about suffering overwhelming pain, being abandoned, and losing control over their bodies and lives. They need more than medical treatment. What they need most of all is to be cared about, not just cared for. You may not be able to reverse the course of an illness that will claim the life of your spouse, a parent, a child, or a cherished friend. Show that you truly do care by being at bedside. Many times the terminally ill just want someone to talk with; they fear being alone. Encourage the dying to make end-of-life decisions. A terminally ill person who loses decision-making capacity during the final days can place an enormous strain on family members who may not agree on how aggressively doctors should attempt to prolong life. Many times, such decisions can lead to family squabbles and legal battles. The decisions can and should be made in advance through a living will, medical power of attorney, or other advance directive issued by the patient. Listen carefully to directions from your loved one concerning all endof-life issues, including organ donation and funeral preferences. Your wishes do not matter. Don’t discourage terminal patients from taking control of their medical treatment. When a spouse or parent is dying, there is a tendency among family members to insulate the patient from information about the condition as well as from decisions regarding therapy. While the silent treatment’s purpose may be to protect the loved one from distressing realities, the result may be to disenfranchise the individual. The terminally ill can and should participate in decisions about palliative care, and if possible they should be allowed to decide whether to return home for the final days. Few patients want the truth withheld. Most want to make some final decisions and say goodbye to their family and friends. Help resolve concerns about unfinished business. It’s not at all unusual for dying people to spend their final hours worrying about family responsibilities, financial issues, or unfinished work. You can ease such concerns by helping to put temporal affairs in order. Assuring the terminally ill that debts will be repaid, that dependents will be cared for, or that good homes will be found for pets may put them at peace during their last 335

The decisions can and should be made in advance through a living will, medical power of attorney, or other advance directive issued by the patient. Listen carefully to directions from your loved one concerning all end-of-life issues.

days. By all means, avoid making empty assurances. Preplanning can make the decisions easier for everyone.

The terminally ill can and should participate in decisions about palliative care, and if possible they should be allowed to decide whether to return home for the final days. Few patients want the truth withheld. Most want to make some final decisions and say goodbye to their family and friends.

Expect family ties to strengthen near the end. A major need of many terminally ill patients is to find a sense of belonging. The dying tend to worry about being forgotten by friends and family. Expect a terminally ill loved one to seek the companionship of friends and family members, and perhaps to even reach out to those from whom they have been estranged. This is a time for strengthening bonds of friendship and love, for healing old wounds, and for saying goodbye. Family tiffs should be put aside. Everyone’s concern needs to be centered on the dying person’s needs. These resources offer more information on caring for the terminally ill: • dyingwell.org takes you to palliative care physician Ira Byock, M.D., who offers online advice and strategies for providing aid and comfort to the dying. • death-dying.com, Beyond Indigo, is a Web site offering online tools and advice to assist caregivers for the terminally ill. • abcd-caring.org takes you to Americans for Better Care of the Dying, (202) 895-2660, 4200 Wisconsin Ave., NW, Suite 418, Washington, DC 20016. It’s a nonprofit public advocacy group that supports policy initiatives to improve pain management and to provide assistance to caregivers for the terminally ill. • For the Living: Coping, Caring and Communicating With the Terminally Ill, by Mark Golubow, Baywood Publishing Co., 2001, $34.95. • Outrunning Your Shadow: Caring For Dying Parents, by Fred Hill, VanMeter Publishing, 2000, $12.95.

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Find help when death draws near Be aware of resources for the terminally ill—and for the survivors

Hospice care can improve the quality of life during the final days. Hospice is a blend of treatment to reduce pain and other troubling symptoms, and to provide social, emotional, and spiritual comfort to the terminally ill and their families. Hospice services—available from thousands of organizations—are provided mostly by physicians, nurses, social workers, clergy, housekeeping aides, and others who volunteer. Services vary from place to place, but they typically include medical supervision by a physician, visitation by registered nurses, spiritual support from the clergy, and personal care by home health aides. Visits will range from three times a week to daily. When it is determined that a patient will die within 24 to 72 hours, roundthe-clock nursing will be provided. Many hospices maintain facilities for in-patient care, but most services are provided to dying patients in their own homes. Families of the terminally ill can benefit from hospice services. Most hospices provide counseling for family members, and many offer temporary in-patient care to provide a needed break for family caregivers. Many hospices help family members through the grieving process. The support may range from referrals to periodic visits by hospice counselors or trained volunteers for as long as a year after the death. The counseling is generally available to all members of the immediate family. Medicare pays for hospice care—but there’s a catch. If a physician certifies that a Medicare beneficiary has less than six months to live, the Federal program will pay for the services of an approved hospice. Most such care can be provided in the home, though short stays in an in-patient facility are permitted. In order to qualify, however, the patient must sign away rights to all other Medicare benefits related to the terminal illness. Most private health insurance policies provide coverage of hospice services for the dying. When caregivers for terminal patients need support, here’s where to look: • nfcacares.org takes you to National Family Caregivers Association (1-800-896-3650). It provides information, advice, and encouragement to those providing care for dying family members via toll-free telephone and Internet counseling. Also, NFCA offers a bereavement kit to help survivors deal with the loss of a loved one. 337

Services vary from place to place, but they typically include medical supervision by a physician, visitation by registered nurses, spiritual support from the clergy, and personal care by home health aides. Visits will range from three times a week to daily.

• fepi.com is the address of Family Experiences Productions, Inc. (512-494-0338). It provides five videotapes ($275) to help end-of-life patients and their caregivers know what to expect and how to comfort each other. (Six tapes for $360 will be available later in 2002.) • candlelighters.org is for parents with a child in hospice care for cancer and those who have lost a child to the disease.

Many hospices help family members through the grieving process. The support may range from referrals to periodic visits by hospice counselors or trained volunteers for as long as a year after the death. The counseling is generally available to all the members of the immediate family.

Call in a ‘grief counselor’ when the loss is overwhelming. When feelings of grief over the death of a loved one become unbearable, professional intervention may be essential. Care is required in the selection of a grief counselor because licensing and credentialing requirements vary widely among jurisdictions and are nonexistent in many areas. • aihcp.org/aagc.htm is the gateway to the American Academy of Grief Counseling. It offers certification to physicians, medical social workers, clinical psychologists, clergymen, funeral directors, and others who undertake 80 to 180 hours of study in grief counseling and bereavement therapy. • aarp.org/griefandloss/support is where to go to find a nearby grief counseling program sponsored by the American Association of Retired Persons. Other resources for the families of the terminally ill: • nahc.org/HAA takes you to Hospice Association of America (202-546-4759), a national organization representing 2,800 hospices and thousands of professional and volunteer caregivers throughout the U.S. • cityofhope.org/prc gives you City of Hope Pain/Palliative Care Resource Center, a clearinghouse that disseminates information and resources to improve the quality of pain management for the terminally ill. • aarp.org/griefandloss is the Web address of AARP Grief and Loss Programs (202 434-2260), providing links to bereavement support groups as well as booklets, brochures, and online bulletin boards. •Hospice and Palliative Care Handbook: Quality, Compliance, and Reimbursement, by T. M. Marrelli, Fred F. Ferri, Mosby, Inc., 1999, $34.95.

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Help your loved one let go Drawing the line between compassion and crime

You may be forced to make life or death decisions for a dying parent or spouse. These deeply troubling issues occur every day when terminally ill patients lose the ability to communicate their wishes regarding clinical life support. Unless the patient has executed a “living will” or other advance directive outlining preferences, a spouse or other family member may be called on to decide how aggressively medical treatment is to be pursued. Most states have enacted surrogate decisionmaking statutes allowing family members to make critical decisions on medical treatment for a patient who has lost decisionmaking capacity and failed to prepare an advance directive. But there are limits on the right of others to decide end-of-life issues. Where is the line between withholding treatment and mercy killing? Legally and ethically, there is a clear distinction between those two very different courses of action. Even the harshest critics of euthanasia concede that neither the law nor medical ethics require that “everything be done” to keep a person alive. Indeed, efforts undertaken against the patient’s wishes to postpone death by every means available are contrary to law and medical practice standards. In contrast, euthanasia— the intentional termination of the life of a terminally ill individual by another—is a criminal offense throughout the U.S. and in most other countries. Is physician-assisted suicide legal? Depends on where you’d die. Physician-assisted suicide—defined as intentional action by a doctor in support of a patient’s efforts at life termination— has been legal in Oregon since 1997. North Carolina, Utah, and Wyoming have abolished common-law criminal prohibitions against the practice. Elsewhere in the U.S., assisted suicide is considered a criminal offense either by statute or common law. Outside the United States, Belgium and the Netherlands have legalized both physician-assisted suicide and euthanasia. Do the terminally ill have a legal right to die? Neither suicide nor attempted suicide is illegal in the U.S.—a fact that is widely used by “right to death” advocacy groups to support efforts to repeal laws against assisted suicide and euthanasia. In rebuttal, opponents of euthanasia contend that the fact that suicide is not illegal does not mean individuals have a right to engage in it. Attempted suicide, they note, was decriminalized in an 339

Even the harshest critics of euthanasia concede that neither the law nor medical ethics require that “everything be done” to keep a person alive. Indeed, efforts undertaken against the patient’s wishes to postpone death by every means available are contrary to law and medical practice standards.

effort to discourage the practice by allowing treatment and counseling without the threat of criminal punishment.

It is both legally and ethically appropriate to discontinue medical treatments that no longer are beneficial to a dying patient. In such cases it is the underlying disease, not the act of withdrawing treatment, that causes death.

When is it appropriate to discontinue life support for the terminally ill? Life support is clearly warranted as long as life support treatment relieves suffering, restores functioning, or enhances the quality of life of a terminally ill patient. But when the same treatment causes pain, prolongs the dying process without offering benefit, or adds to the perception of a diminished quality of life during a dying person’s final days, it’s time to reconsider. It is both legally and ethically appropriate to discontinue medical treatments that no longer are beneficial to a dying patient. In such cases it is the underlying disease, not the act of withdrawing treatment, that causes death. End-of-life options include withholding artificial nutrition and hydration, the termination of mechanical ventilation, and a “do-not-resuscitate” order signed by a physician instructing health care providers not to attempt cardiopulmonary resuscitation (CPR) in case of cardiac or respiratory arrest. The following resources offer various viewpoints on hastening death: • Final Exit: The Practicalities of Self-Deliverance and Assisted Suicide for the Dying, by Derek Humphry, DTP, 1997, $13.95. It’s the controversial textbook on euthanasia by the founder of the Hemlock Society. • The Case Against Assisted Suicide: For the Right to End-OfLife Care, by Kathleen M. Foley (Editor) and Herbert Hendin (Editor), Johns Hopkins University Press, 2002, $49.95. Counterpoint to Humphry’s book. • partnershipforcaring.org is the Web site for Partnership for Caring: America’s Voices for the Dying (1-800-989-9455). An advocate for the rights of dying patients, this national non-profit end-of-life organization offers counseling, education, and legal services to the dying, as well as free online living will (medical directive) and medical power of attorney documents.

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Find your head after the loss of a loved one Keep your to-do list at the ready

Know whom to notify immediately. Start with family members and close friends. And then: your loved one’s employer, business partner, secretary, assistant, and employees. Others: the funeral home; the financial advisor, lawyer, accountant, executor (personal representative), every trustee and/or successor trustee; and other friends and relatives. The calls can be made by a relative or close family friend. Next, make the funeral arrangements. A competent, trusted funeral director can handle many of the details, such as transporting the body, obtaining the necessary permits, scheduling viewings, securing a burial plot, and arranging for graveside services or a memorial ceremony. Some funeral directors will handle the dissemination of death notices to the local newspapers. You will still have plenty of decisions to make, including whether to cremate or to embalm, the selection of a cemetery plot, and the type of casket. Some decisions—such as the timing of the funeral—may be determined by state requirements. Have someone stay at your home when you are absent; burglars read obituaries in search of unoccupied houses. Get your paperwork in order. Start by obtaining a dozen copies of the death certificate at the county courthouse. The funeral director or the family lawyer may be willing to get them for you, or you can go to the county clerk’s office. Other documents needed include bank records, wills, trust documents, letter of instruction, insurance policies, tax records, and unpaid bills. Finally, deal with the financial consequences. If your loved one had life insurance, you need to file a claim along with a copy of the death certificate. If no claim is filed, the benefits will probably be lost. There may be more than one life-insurance policy, one or more disability policies, and other types of insurance that pay death benefits. Check thoroughly. Ask each insurer whether or not some portion of the last premium paid will be refunded. Within four weeks of the funeral, provide notification to: • Your local Social Security office. If your deceased spouse paid FICA taxes, Social Security will pay a modest ($255) death benefit, and unmarried children may be eligible for monthly benefits until they reach age 18 (19 if in school). If your spouse 341

Some decisions—such as the timing of the funeral—may be determined by state requirements. Have someone stay at your home when you are absent; burglars read obituaries in search of unoccupied houses.

If your loved one had life insurance, you need to file a claim along with a copy of the death certificate. If no claim is filed, the benefits will probably be lost. There may be more than one lifeinsurance policy, one or more disability policies, and other types of insurance that pay death benefits. Check thoroughly.

provided support to dependent parents age 62 or older, they may also qualify for benefits. Phone ahead for an appointment and be prepared with copies of the death certificate, your marriage certificate, both birth certificates, both Social Security numbers, both driving licenses, and your spouse’s most recent W-2 or self-employment tax return. • Your bank or other savings institution. Convert any joint accounts and safe deposit boxes into your own name. If your spouse was receiving any direct deposit payments (e.g. from clients, pension plans, or Social Security), instruct the bank to return the payments to the sender. Ask whether any death benefits are due from credit life insurance policies. • Your retirement-plan administrator and portfolio manager. Prompt notifications should be given to the trustee of any trust benefiting your spouse, and the sponsors of any IRA held by the deceased. Ask the plan administrator whether or not the clock is running on any decisions you will be required to make concerning the accounts. • Your mortgage holder and other creditors. Notify all your creditors and utility providers (phone, gas, electricity, water, Internet service, software subscriptions) of accounts that need to be canceled or transferred to your name. Immediately cancel credit cards issued solely in your spouse’s name or convert them to your name. Others who should be notified. These include the personnel department of your spouse’s employer or labor union (to determine if any death or retirement plan benefits are due to you), the Department of Motor Vehicles (transfer titles of jointly owned vehicles), your real-estate tax department, and college financial aid office (to determine if the children now qualify for additional financial assistance). Here’s where to find more help dealing with the aftermath: • www.ssa.gov/survivorplan/index.htm has information for survivors. • mainelse.org/spouse.htm offers general legal advice on joint bank accounts, vehicle registrations, and more. • When Your Spouse Dies, by Cathleen L. Curry, Ave Maria Press, 1990, $8.95.

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Make the right funeral decisions Know in advance how to plan the funeral

Remember: Funerals are for the living. The funeral is for the survivors to gather for support, to reminisce, and to say goodbye to a loved one. It is an opportunity to celebrate the life and accomplishments of a person who touched their lives. The best time to plan your funeral is long before it’s needed. Your spouse or other family members should know if you have strong feelings about where you will be buried, if you prefer cremation to internment. Burial plots, caskets, or urns can be selected and purchased in advance, and entire funerals can be prepaid. Bury, cremate, or donate your body? Burial has been the most common approach in the U.S., but that’s changing. In 2002, 25% choose cremation, and in many western states that percentage has doubled. By 2010, cremation will be the choice nationally for at least 36%. Cremation is less costly than burial. A direct cremation (without embalming, casket, and cemetery fees) can be arranged through cremation specialists for under $1,000, not including an urn. These companies are located nationwide. Another option on the rise: donating the body to medical science. Select the final resting place. If you opt for an earth burial, you must not only decide the location of the internment but also whether to use a traditional cemetery or one of the newer memorial parks that feature open spaces unbroken by gravestones. Either way, you will need to purchase a burial plot and pay fees covering the opening and closing of the grave—charges that also include the cemetery’s administrative expenses. Some cemeteries require the purchase of a vault or grave liner to prevent the subsequent collapse of the grave. You must also decide whether to plan a graveside ceremony rather than (or in addition to) a subsequent memorial service. Be prepared for the high cost of dying. According to the National Association of Funeral Directors, the average cost of a funeral in the U.S. in 2002 is $6,130, including $2,330 for a casket, $950 for a vault or outer burial container, and the rest going for embalming, visitation facilities, hearse, limousine, professional fees, and lesser funeral-home services—but not including the cost of the grave site, a marker or monument, cemetery fees, and charges for opening and closing the grave, clergy hono 343

If you opt for an earth burial, you must not only decide the location of the internment but also whether to use a traditional cemetery or one of the newer memorial parks that feature open spaces unbroken by gravestones. Either way, you will need to purchase a burial plot and pay fees covering the opening and closing of the grave.

rarium, newspaper notices, flowers, and organist. With highend caskets selling for $10,000, plus a number of pricey optional services, funeral costs can quickly climb to $15,000 or $20,000, or more.

Although most funeral homes may offer packages of commonly selected services, they cannot require customers to pay for unwanted services such as embalming, viewing rooms, limousine transportation, et al. The Federal rule also prohibits funeral homes from refusing to handle caskets or urns purchased elsewhere.

Know your rights. A nationwide Federal Trade Commission rule requires funeral directors to provide itemized price lists covering all products and services, and to offer the information over the phone as well as in person. Although most funeral homes may offer packages of commonly selected services, they cannot require customers to pay for unwanted services such as embalming, viewing rooms, limousine transportation, et al. The Federal rule also prohibits funeral homes from refusing to handle caskets or urns purchased elsewhere. The following resources provide more suggestions for planning a funeral: • ftc.gov/ftc/consumer.htm provides an online consumer’s guide to funerals by the Federal Trade Commission. The site includes access to the agency’s rule prohibiting abusive pricing practices. • funeralservicefoundation.org takes you to the Funeral Service Foundation (1-800-662-7666), a nonprofit group that provides practical advice on funeral planning through an online consumer assistance program. • death-dying.com provides information on all aspects of funeral planning. • Cemetery Consumer Service Council, P.O. Box 2028, Reston, VA 20195-0028, 1-703 391-8407. It’s a nonprofit group formed by funeral and cemetery groups to resolve consumer complaints arising from funeral and burial practices. • Everyone Dies!: Secrets That Can Save You Thousands in Unnecessary Funeral Costs, by Ralph Hicks, Betty Metoyer (Editor), Miles Associates, Equitable Associates, 1999, $19.95. • The American Way of Death Revisited, by Jessica Mitford, Vintage Books, 2000, $14. It’s the updated edition of the original 1960s expose of funeral industry practices.

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Cope with your grief Use preparation to soften the pain of your loved one’s death

Grief is natural; don’t try to suppress it. Suppressing grief in order to reduce the pain of a loss can lead to dulled feelings, a hardening of the heart, and loss of some of life’s sweetest memories. Those who confront their loss directly and work their way through the suffering are likely to heal faster and emerge from the process with a new inner strength. Let others share the grief. During our bereavement following the loss of a spouse, many tend to be so self-absorbed with their own suffering that they fail to notice others are in pain. Some may even resent expressions of mourning by friends, business associates, or other family members. Remember: While the deceased may have been your spouse, he was also someone’s child, parent, sibling, trusted business partner, or friend. There’s enough grief to go around; let others share it. Accept support from friends and family. But don’t count on others to heal the pain. Many of us respond to the death of a loved one by withdrawing, rather than reaching out for help. Too often, that is a course of action that deepens our own selfabsorption and prolongs our suffering. The sympathy and condolences of others won’t offset the pain of your loss. But the support of friends and family in difficult times may help you avoid slipping deeper into despair. Many who are grieving over the loss of a loved one find that contributing their time and energy to helping others makes it easier to deal with their own suffering. How long will the grief last? There’s no easy answer. For some, the pain mellows into feelings of sadness more quickly than it does for others. Even when the grief is gone, the feeling of loss may remain with us permanently. Filling the void is a slow process that may involve setbacks that are often triggered by holidays, weddings, funerals, or anniversaries. Overcoming the feelings of grief that accompany a loss is a process that can’t be rushed, but recognizing that there are no short-cuts may help you deal with your suffering. Heal your body as well as your soul. The emotional anguish resulting from the death of a loved one can be so all-consuming that we may neglect our physical well-being. It’s not unusual for a grieving widow or widower to lose interest in food, forget to take medication, or fail to seek treatment for medical prob 345

While the deceased may have been your spouse, he was also someone’s child, parent, sibling, trusted business partner, or friend. There’s enough grief to go around; let others share it.

lems. The stress of bereavement may tempt others to renew acquaintances with old demons such as alcohol or tobacco. The preoccupation with our own suffering may drain our concentration and turn even routine daily activities, such as driving or cooking meals, into potentially hazardous undertakings. Don’t let grief distract you from protecting your own health.

The sympathy and condolences of others won’t offset the pain of your loss. But the support of friends and family in difficult times may help you avoid slipping deeper into despair. Many who are grieving over the loss of a loved one find that contributing their time and energy to helping others makes it easier to deal with their own suffering.

Watch for these warning signs of depression. While grief is natural following the death of a loved one, the shock of such a loss can trigger a variety of depressive mood disorders that may create life-threatening problems. The classic symptoms of depression include persistent sadness or unhappiness; lethargy; loss of interest in previously enjoyable activities; irritability; sudden change in appetite; disruption of normal sleep pattern; physical discomfort; difficulty thinking or concentrating; and thoughts of suicide or death. If an individual displays four or more of these symptoms for more than two weeks, medical intervention is warranted. Here’s where to find more help in overcoming grief: • griefnet.org is one of the oldest grief sites on the Internet, offering many grief-related e-mail discussion groups for specialized types of bereavement. Also sells books and bereavement supplies; offers a memorial section. • growthhouse.org is an award-winning Web site offering online articles on grief management and a database of resources for dealing with bereavement. • aacap.org is the window to the American Academy of Child and Adolescent Psychiatry (202-966-7300). It offers a helpful pamphlet, Facts for Families: Children And Grief. • I Wasn’t Ready to Say Goodbye: Surviving, Coping and Healing After the Sudden Death of a Loved One, by Brook Noel, Pamela D. Blair, Champion Press Ltd., 2000, $14.95. • A Broken Heart Still Beats: After Your Child Dies, by Anne McCracken (Editor), Mary Semel (Editor), Hazelden Information Education, 2001, $15.00.

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Handle the financial fallout Make only the necessary decisions early on

Avoid rash financial decisions following the death of a spouse. Some of the worst financial decisions are made during periods of emotional distress. It’s often best not to make any major financial decisions until six months after the funeral. However, the stock market can be much too volatile for stock and bond portfolios to be ignored for so long. Early in your down time, organize your financial documents, inventory your capital assets, track your living expenses, and calculate how much income you will need each month. Put the information in our hands, and we will update your comprehensive financial plan, starting with a new financial forecast and a new evaluation of your investment portfolios. Not ready for retirement? Don’t be quick to cash in your spouse’s pension account. If you’re the sole beneficiary of your spouse’s IRA and other retirement plans, you may be able to roll the money into your own IRA account, which will continue to grow tax-free until you do start drawing income from it. Like other good financial advisors, we will walk you through the IRA maze. Don’t be too quick to sell your home after the loss of a spouse. Too many widows and widowers put the family home up for sale immediately after the death of their spouse, only to regret the decision. Once the grief softens, you may find comfort living in familiar surroundings. Be careful about paying off debts. Paying down high-interest credit-card balances or unsecured loans is usually a good idea, but not always. Paying off a home mortgage is often a bad idea. Cash you’d use for eliminating debt is cash that may desperately be needed as the investment capital that will keep income flowing for the rest of your life. If so, it can slowly pay down the debt, over time. If you need cash for living costs, a reverse mortgage may be the ticket. It’s a loan against your home that can be structured so that you do not have to make payments for as long as you live there. The lender will either make monthly payments to you to supplement your retirement income or hand you a lump sum, as you prefer. To qualify, you must be at least 62, the property must be your primary residence, and normally it must be a single family home. Reverse mortgages, however, are not for 347

If you’re the sole beneficiary of your spouse’s IRA and other retirement plans, you may be able to roll the money into your own IRA account, which will continue to grow tax-free until you do start drawing income from it. Like other good financial advisors, we will walk you through the IRA maze.

everyone. If you ever require nursing-home care and are unable to remain in your home for at least six months each year, the lender may have a right to recall the loan, and you could lose your home. Also, the arrangement drains all equity from the house, leaving less to pass on to heirs.

Paying off a home mortgage is often a bad idea. Cash you’d use for eliminating debt is cash that may desperately be needed as the investment capital that will keep income flowing for the rest of your life. If so, it can slowly pay down the debt, over time.

Social Security may have a surprise for you. Pleasantly. Most of us expect little income from Social Security, but the survivors benefits offered under the program can be more generous than the retirement payoff to breadwinners who live to 65. The widow of a Social Security recipient who dies at 65 could collect up to $1,433 in monthly benefits, and as much as $2,500 monthly in family benefits if dependent children are involved. The wife and child of a $60,000 wage earner who dies at 30 would each collect $1,174 a month in benefits, up to a family maximum of $2,741 monthly. Dependent parents of a deceased breadwinner and disabled adult children may qualify for up to 75% of the deceased’s full Social Security retirement benefit. Here’s where to learn more about financial decision making in widowhood: • ivillage.com is a Web site for women that includes a series of articles on the financial decisions facing the newly widowed. At the top of the opening window, in FIND IT, type in the words newly widowed; click GO. • Tomorrow’s Choices: Legal, Financial, Health Care, a publication for widows and widowers by the AARP’s Widowed Persons Service, 601 E Street NW, Washington, D.C. 20049. • Suddenly Single: Money Skills for Divorcees and Widows, by Kerry Hannon, John Wiley & Sons, 1998, $14.95. • What to do When Someone Dies: A Legal, Financial, and Practical Guide, by Milton Berry Scott, Pere Bruin Press, 1997, $19.95.

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Settle up with IRS Pay the taxes on time

Income tax returns need to be filed, even for the dead. When an individual dies early in the year, two tax returns may be due: one by April 15 for the previous year and a final return a year later for any income received during the year of death. Income received after the date of death should be reported on a return for an estate, trust, or surviving joint tenant. If a refund is due on the decedent’s final tax return, an IRS Form 1310 needs to be attached to it. Start by locating the decedent’s income tax return for the previous four years. The executor will need them to settle the estate. If you cannot find them, copies may be available from the tax preparer. As a last resort, IRS and your state’s tax authority can provide at least some copies (normally available for the past three years). Also, you will need to search for records, receipts, and other information to facilitate preparation of the final income tax return and estate tax return. Locate the bank, brokerage, and retirement-plan statements, propertytax bills, deeds to real estate holdings, outstanding bills, undeposited checks, and all prior gift tax returns filed by the deceased. Locating receipts for charitable contributions, business expenses, 1099 forms, and other records is important but may be difficult. Request a ‘prompt assessment’ of the decedent’s taxes. Under normal circumstances, the Internal Revenue Service has three years from the date that an income tax return was filed (or from the due date, if later) to charge for any additional tax due. To shorten the period of uncertainty and to allow for a faster disbursement to beneficiaries, the executor may ask IRS for a “prompt assessment” for any years for which the statutory assessment is open. That step shortens the time period for an IRS assessment of additional taxes to 18 months from the date that the written request (IRS Form 4810) was received. Other tax filings may be due. If the decedent gave away more than $10,000 in cash or property to any one person during the calendar year, a gift tax return must be filed (even though no tax will be due unless the taxpayer’s $1,000,000 lifetime gift tax exemption has been exhausted). If the value of the deceased’s estate is more than $1,000,000 ($1,500,000 in 2004), a Federal estate tax return will need to be filed, even if no estate taxes are due. 349

Under normal circumstances, the IRS has three years from the date that an income tax return was filed (or from the due date, if later) to charge for any additional tax due.

If the decedent gave away more than $10,000 in cash or property to any one person during the calendar year, a gift tax return must be filed (even though no tax will be due unless the taxpayer’s $1,000,000 lifetime gift tax exemption has been exhausted). If the value of the deceased’s estate is more than $1,000,000 ($1,500,000 in 2004), a Federal estate tax return will need to be filed, even if no estate taxes are due.

The death tax may go away, but does it matter? The estate tax will disappear after 2009 for one year (2010) unless it’s put to rest sooner or reinstated by new Federal legislation. As we’ve been pointing out for many moons, none of those three possible outcomes needs to matter to married couples. If each spouse leaves everything to the other, there’s no estate tax because of a 100% spousal exemption. If the survivor leaves everything to a qualified charity, there’s no Federal estate tax because of a 100% charitable exemption—even if millions are held in the survivor’s Rollover IRA. But look out: Not every tax lawyer, CPA, and insurance agent is up to speed. Also, some states claim death tax of their own. Some foreign countries do, too. An ‘innocent spouse’ may avoid tax penalties after the death of a spouse. When a married couple files taxes jointly, IRS generally holds both spouses fully accountable for taxes, penalties, and interest due on the return. But recent changes in the tax code give the tax service flexibility to provide relief to a spouse who was unaware that the joint return understated the couple’s tax liability. Here’s where to find more help dealing with tax after death: • irs.gov is the Internal Revenue Service’s award-winning Web site offering access to tax service publications, forms, and guidance for determining and reporting income taxes. • pwctax.com. Accounting industry giant PricewaterhouseCooper’s Internet Web site offers a detailed discussion of the rules governing taxation of deceased taxpayers. • The Ernst & Young Tax Guide 2002, John Wiley & Son, 2002. Includes a chapter on income tax issues following the death of a taxpayer. • Innocent Spouse Relief: Insights and Strategies, by Kip Dellinger, CCH, Inc., 2001, $48.

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Chapter 20

You’re going to die. Plan on it. Plan well, and you won’t abandon your loved ones emotionally and financially

Dee Balliett

I

f we mortals were born with an expiration date—advance

knowledge of exactly how long we would live and when we would die—perhaps we would live our lives differently. Then

again, maybe we wouldn’t. Even when we do have advance warning of our deaths, most humans do little or nothing to prepare. Worse, we too often fail to take steps to ease the emotional and financial suffering that our departure will cause for those we leave behind. Too many widows are left to struggle financially. The reason is just this inexcusable: Their deceased husbands failed to take reasonable and responsible precautions to protect their wives’ financial security. Reasonable and responsible mean buying more than a simple will or a mere will alone. Good planning can eliminate death taxes and the costs of probate while providing protection of capital assets and lifelong financial security for a breadwinner’s survivors. Too many businesses fail within a year of the founder’s death. Why? The owners neglect to take steps to ensure their survival by putting a successor plan in place. Too many estates are drained of their assets. Why? The lack of even rudimentary estate planning. Without good planning, a $4 million pension account or rollover IRA gives $3.2 million to federal and state death taxes and ordinary income taxes. With it, the combined taxes can be reduced drastically and easily, even to zero. Too many grieving families grapple with painful end-of-life decisions. Why? Their loved one failed to prepare a healthcare directive, a medical durable power of attorney, and certain seemingly mundane lists. Too many pass on before taking the trouble to heal old wounds. I mean forgiving those who wronged us and seeking forgiveness for our own trespasses. Too many of us pass away without leaving a marker. I mean something by which others will remember—a legacy that endures beyond our lifetimes, 351

Without good planning, a $4 million pension account or rollover IRA gives $3.2 million to federal and state death taxes and ordinary income taxes. With it, the combined taxes can be reduced drastically and easily, even to zero.

You can and should make decisions now that will ease the financial and emotional burdens on your loved ones. You can’t relive your life, but you can correct some of the mistakes you made along the way.

It needn’t be that way. You can and should make decisions now that will ease the financial and emotional burdens on your loved ones. You can’t relive your life, but you can correct some of the mistakes you made along the way. Also, you can take steps now to ensure that you will leave the world a better place. Here are the issues we explore in this chapter: • Put your financial house in order. Don’t leave your loved ones at loose ends. • Be clear about your wishes. Don’t lose control of your life at the end. • Make sure your business survives you. Too many enterprises are buried with the owner. • A will protects wishes but faces probate. Your family will hate you if you die without a sound will or living trust document. • Wills, trusts: Write your own? You have the right, but DIY estate planning, like DIY surgery, is usually a bad idea • Prepare for the high cost of dying. Spare your survivors the financial toll. • Make the most of your final days. They are your last chance to set things right. • Create a legacy: Leave a better place. How will you be remembered?

A DAY IN THE LIFE I don’t know much about money. I’m sure you do, but can I trust you?

You won’t be selling investments to me? I won’t ask you to lend money to me, but you can trust me. I am a fiduciary in a closely regulated industry.

No. We’re not stockbrokers; we’re more like tutors. We teach clients how to manage their own money.

Won’t you manage my money for me?

Not necessarily. Tell me what you expect me to do for you. If I say I can’t do it, you may be happier managing it yourself. I can show you how.

CH & GB 2001

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Put your financial house in order Don’t leave your loved ones at loose ends

The deathbed is no place to start the estate planning process. Estate planning is an activity that should be undertaken long before death is imminent, and at Balliett Financial we urge clients to begin the process early in life. There’s no assurance that we will have any advance warning of our deaths, so even the young, healthy, and robust need to protect their loved ones. Assemble all key documents and keep them safe. Prepare a list showing where you’ve stored your medical directive, birth certificate, passport, marriage license(s), Social Security numbers or cards, loan documents, lease agreements, property deeds, car titles, lists of what you own and owe, and your will, trust document(s), and other estate-planning papers. Be careful what you leave in a safety deposit box. In many states, the box is sealed upon the death of the account holder. If your will, insurance policies, cemetery plot deed, and other key documents are kept in a safety deposit box, your executor may not have timely access to the papers needed to close your estate. A better choice may be to place them in safekeeping with your executor or in your office safe. Prepare a post-mortem letter of instructions. This do-it-yourself tool can help your executor and beneficiaries locate your assets and important papers while avoiding delays in settling your estate. The letter contains your last loving words, but it also includes your credit card numbers, the locations of bank accounts, and any passwords and ID numbers that may be needed to access your records. If you have deposits in bank accounts that are not in your name—such as numbered Swiss accounts—they need to be identified or may be lost forever. Also, your letter should contain information on any IRAs, profitsharing and pension accounts, 401(k) plans, annuity contracts, and any other retirement accounts, including the beneficiarydesignation form for each. Also, include information on real-estate transactions, creditors, loans, and other outstanding debts. Don’t forget the tax collector. The IRS will expect your executor to pay any taxes due through the date of your death. You can ease the process—and perhaps reduce the risk of an overpayment—by leaving an organized set of records documenting your income, expenses, investments, real estate transactions, and other information affecting tax liability. That ought to in 353

The IRS will expect your executor to pay any taxes due through the date of your death. You can ease the process—and perhaps reduce the risk of an overpayment— by leaving an organized set of records documenting your income, expenses, investments, real estate transactions, and other information affecting tax liability.

clude the date and amount of gifts totaling five figures. Past tax returns (and supporting documents) going back at least three years should also be made readily available.

We’ve seen too many widows forsake the sound financial plan mapped out by their deceased husbands in favor of questionable schemes pushed by people selling financial products.

Leave your family an explanation of your investment goals and strategy. We’ve seen too many widows forsake the sound financial plan mapped out by their deceased husbands in favor of questionable schemes pushed by people selling financial products. Make sure your spouse, children, and other heirs understand not only what investments you will leave but also the reasons for your investment choices. Make sure they understand that insurance agents and stockbrokers are salespeople who may not know the shortcomings of the products they sell. Don’t let your heirs miss out on entitlements. Your executor should be made aware of any government employment or military service that may entitle your heirs to death benefits. Also, your estate should be informed of any outstanding debts owed to you, insurance coverages, pensions or death benefits due from current or past employers, and Social Security survivors’ benefits. The following resources may be useful: • www.ssa.gov is the U.S. Social Security Administration’s official Web site. It offers detailed information on survivor’s benefits and how to claim them. • www.aarp.org. The American Association of Retired Persons Web site offers a section featuring advice on financial issues associated with dying. • Dignified Departure: Your Guide...a Complete National Outline for Preparing All Necessary Documents to Control Your Death or That of a Loved One, by Bryane K. Miller, R&E Publishers, 1993, $11.95.

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Be clear about your wishes Don’t lose control of your life at the end

Spare your loved ones painful deathbed decisions. Coping with the impending death of a terminally ill family member is painful enough without facing the guilt and anguish of deciding whether or not to prolong artificially the life of that person. Don’t put your loved ones in that position. A medical directive prepared now will provide instructions governing future medical care in the event that you become unable to communicate your wishes. A medical directive (living will) guides your treatment when you cannot. The document tells your doctors how aggressively you wish them to use medical treatment to delay your death. It should spell out what you want medical treatment to accomplish. Is it enough that treatment may prolong your life, or do you wish to set standards for the quality of life you will experience after treatment? Should life-sustaining treatment be continued if it’s unlikely to restore consciousness or your ability to communicate? You can delegate end-of-life decisions with a medical durable power of attorney. Unlike a living will, this document authorizes someone else to make medical decisions on your behalf if you become unable to communicate. Also known as a health care proxy and the appointment of a health-care agent, the medical durable power of attorney may be granted to your spouse, another family member, or someone who is not a relative. Implement a medical power of attorney because it’s impossible to anticipate, in a living will, every circumstance that may arise. Discuss your end-of-life wishes with your family and friends. Bringing family and friends into the decision-making process may help to avoid misunderstandings, hurt feelings, and delays at a critical point in your treatment. A candid and open discussion with loved ones will help them to advocate on your behalf when you can’t speak for yourself. Be aware, however, that you may need to initiate discussions; family members may be reluctant to raise such sensitive issues. Bring your doctor into the decision making process, too. Don’t wait for a crisis to occur before exploring end-of-life treatment options with your physician. Tell your doctor that you are preparing advance directives for your care. Ask for explanations 355

Is it enough that treatment may prolong your life, or do you wish to set standards for the quality of life you will experience after treatment? Should life-sustaining treatment be continued if it’s unlikely to restore consciousness or your ability to communicate?

of any treatments or procedures that may be pertinent to your condition. When your medical directives are completed, provide a written copy to your physician and ask that it be made part of your medical record. Make sure your doctor is willing to follow your directives; state law generally does not require a physician to comply with a patient’s instructions.

Although advance directives are legally valid throughout the U.S., the laws governing the use of them vary from state to state. Make sure your living will and medical power of attorney are prepared according to the rules of your state. If you relocate, a fresh legal review of your directive documents may be in order.

Advance directives are not portable—review them if you move out of state. Although advance directives are legally valid throughout the U.S., the laws governing the use of them vary from state to state. Make sure your living will and medical power of attorney are prepared according to the rules of your state. If you relocate, a fresh legal review of your directive documents may be in order. More information on end-of-life issues is available from the following: • aarp.org gets you to the American Association of Retired Persons, 601 E St., NW, Washington, D.C., 20049, 1-800 424-3410. AARP offers state-by-state information on the laws governing advance directives as well as forms and model language to help seniors prepare their own living wills and to designate a healthcare agent. • partnershipforcaring.org is the Web site of The Partnership for Caring, Inc., 1620 Eye Street, NW, Suite 202, Washington, D.C. 20006, 1-800 989-9455. It provides news on changes in laws governing end-of-life issues as well as state-specific advance directive documents. • familydoctor.org takes you to the American Academy of Family Physicians, which offers electronic tips to consumers about living wills, do not resuscitate orders, and procedures for making changes to advance directives. • What Dying People Want: Practical Wisdom for the End of Life, by David Kuhl, M.D., Public Affairs, 2002, $25. * Advance Directives and the Pursuit of Death With Dignity (Medical Ethics), by Norman L. Cantor, Indiana University Press, 1993, $27.95.

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Make sure your business survives you Too many enterprises are buried with the owner

How much will your business be worth if you died tomorrow? Businesses are hard enough to sell when the owner is alive and actively involved in management. A solo medical practice, an advertising agency, or other small business may be next to impossible to sell once the driving force behind the company has died. On paper, a small business may be worth six, seven, or eight figures. In practice, surviving family members may have to sell it for the salvage value of the equipment and inventory. Bring in partners to ensure the survival of your business. If you’re the sole owner, you enjoy a degree of flexibility and control not available to those who must share decision-making authority with co-owners. But the downside of being a lone wolf is the very real danger that your business may not be able to survive without you at the helm. One way to reduce the risk is to bring in one or more partners or key employees who will be able to carry on the business. Turn your business into a family affair. Some of the most successful and long-lasting businesses are family concerns in which several generations share responsibilities for management and operations. To be sure, that approach won’t work for all types of businesses or for all families. If it’s appropriate, do consider bringing family members into the enterprise. Work out a contingency sale agreement, just in case. For certain types of businesses, such as real estate or insurance agencies, or accounting, legal, or medical practices, it’s often possible to work out a cross-purchase agreement with a colleague or competitor in the same industry. It can provide the surviving spouse or other heirs prenegotiated compensation for the business that may be higher than they could otherwise hope to realize. Negotiate an escape clause in your business lease. Painful as it may be for your heirs to lose the assets and income from a business that you spent a lifetime building, it’s not the worst that could happen. Suppose that, in addition to seeing the business self-destruct, your loved ones also discovered that they would continue to be liable, for years to come, for lease payments on your now-vacant office space. Negotiate a lease with an escape clause in the event of death or disability. If the land 357

It’s often possible to work out a cross-purchase agreement with a colleague or competitor in the same industry. It can provide the surviving spouse or other heirs prenegotiated compensation for the business that may be higher than they could otherwise hope to realize.

lord won’t cooperate, consider having your trustee buy enough life insurance to cover the cost. However:

Many small and mid-sized businesses buy key person life-insurance policies to provide sufficient cash flow to tide the company over when the owner dies. Caution: If the insurance covers the owner of 50% or more of the company’s stock, the proceeds are included in the deceased’s taxable estate.

Be wary of life insurance to protect your company’s survival. Many small and mid-sized businesses buy key person life-insurance policies to provide sufficient cash flow to tide the company over when the owner dies. Caution: If the insurance covers the owner of 50% or more of the company’s stock, the proceeds are included in the deceased’s taxable estate. Leave detailed written instructions for your survivors. Too often, a small business flounders because the owner left no instructions. A good bookkeeping system detailing all accounts receivable and accounts payable is a starting point. Also, prepare lists (names, addresses and phone numbers) of clients, creditors, vendors, and resources (such as consultants, accountants, and attorneys). Prepare information on insurance policies, mortgages, liens, loans, leases, and contracts held by your business. Keep the information where it will be readily available to your family. Here’s where to find more help to ensure the survival of your business: • sba.gov is the Web site of the U.S. Small Business Administration, 1-800 827-5722. The federal agency offers information on obtaining government business loans, loan guarantees, and other forms of assistance that may keep a business solvent after the founder’s death. • businesstown.com is an Internet site with a detailed section on selling a small business. • usbx.com gets you to U.S. Business Exchange, an online database of individuals seeking to buy businesses in the U.S. Also, it lists businesses for sale. • Selling Your Business Successfully: Tips, Strategies, and Tools, by Rexford E. Umbenhaur, John Wiley & Sons, 1999, $24.95. • J.K. Lasser Pro Estate and Business Succession Planning: A Legal Guide to Wealth Transfer, by Russell J. Fishkind, Robert C. Kautz, John Wiley & Sons, 2001, $49.95.

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A will protects wishes but faces probate Your family will hate you if you die without a sound will or living trust document

Think you don’t need a will? Think again. Many married couples incorrectly assume that a will serves no purpose for them because they jointly own everything of significance—real estate, bank accounts, stocks, and vehicles. JTWROS (joint tenancy with right of survivorship) is called the poor man’s estate plan. It has two problems. One is liability—at best, a matter of uncertainty and concern. If either owner is the target of a collection procedure, a court may allow jointly owned assets to be taken by a creditor. Another problem is simultaneous death. Without a will, and if there’s no trust document that says who gets what, the jointly owned assets are then divided up by a court of probate under the terms of state legislation. Don’t let the state decide who inherits your wealth. Those who pass without a will are considered to have died intestate. That means state regulations determine the distribution of the possessions. Many a widow and widower has been shocked to discover that, because the late spouse failed to leave a will, a court (in most states) will award from half to two-thirds of the estate to the children of the deceased, regardless of their ages. If there are no children, the surviving spouse still may wind up with no more than one-half to one-third of the estate; the decedent’s parents or siblings may be entitled to the balance. If you have minor children, a will is doubly important. Your will not only directs the disposition of your property but also can determine who is to be appointed guardian of minor children. Usually, a surviving parent living in the household automatically becomes the child’s guardian. In a divorce situation, the parent with legal custody should designate the guardian (though the selection may be overruled by a court if someone other than the surviving parent is chosen). It’s a good idea to designate alternate guardians, and it may be wise to select one to raise the child, the other to oversee the child’s inheritance. Even with a will, leaving significant wealth to minor children is risky business. The financial guardian selected by you (or appointed by the court) will oversee your children’s assets until the legal age of adulthood (18 in most states). At that point, the guardianship ends and possession and control of the assets are transferred to the child. Some teenagers may be mature enough to handle the responsibility, but you probably shouldn’t count on it. The better idea: 359

Another problem is simultaneous death. Without a will, and if there’s no trust document that says who gets what, the jointly owned assets are then divided up by a court of probate under the terms of state legislation.

Protect your children from themselves by establishing an irrevocable trust. A trust for children allows you to transfer significant wealth to your kids with no estate tax by using the lifelong exclusion from gift taxes: $1,000,000 per parent. Anything more than that is subject to gift or estate taxes. You can attach conditions requiring that the proceeds be used as you have directed in the trust document—e.g., educational expenses, the purchase of a home, financial security in old age.

A trust for children allows you to transfer significant wealth to your kids with no estate tax by using the lifelong exclusion from gift taxes: $1,000,000 per parent. Anything more than that is subject to gift or estate taxes.

That’s only one of several trust options. Any irrevocable trust can be designed to protect wealth from tort predators and to deal efficiently with capital-gains taxes (as from the sale of real estate or securities). Still others are designed to provide taxsheltered, lifelong income (from a charitable remainder trust or a private annuity trust), to create tax-sheltered wealth from a charitable lead trust, to exempt life-insurance proceeds from estate taxes, and to create a philanthropic legacy (a charitable foundation trust). Here’s where to learn more about wills and trusts: • nolo.com is a plain-English legal-information site that offers detailed information on wills and estate planning. • laweasy.com takes you to author-attorney Martin Shenkman’s Internet site, where you will find plain speaking by him about estate-planning mistakes, including those of living trusts. • mtpalermo.com is a Web site that offers a free crash course in wills and trusts, presented by attorney Michael T. Palermo. • The Complete Book of Wills, Estates & Trusts, by Alexander A. Bove, Henry Holt, 2000, $15.00. • Beyond the Grave: The Right Way and the Wrong Way of Leaving Money to Your Children (And Others), by Gerald M. Condon, Jeffrey L. Condon, HarperBusiness, 2001, $17.00. • Understanding Living Trusts: How You Can Avoid Probate, Save Taxes and Enjoy Peace of Mind, by Vickie Schumacher, Jim Schumacher, Schumacher, 1999, $24.95.

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Wills, trusts: write you own? You have the right, but DIY estate planning, like DIY surgery, is usually a bad idea

Yes, you can do it yourself—but should you? Libraries, bookstores, and the Internet are crammed with fill-in-the-blank resources that will enable you to write your own last will and living-trust document, cheaply and easily. If your family and estate situation is plain vanilla, the result may be perfectly adequate. If your circumstances are the least bit complicated, the legal fees you avoid by preparing your own documents may be the most expensive money you ever saved. Even a good do-it-yourself will won’t avoid the costs of probate. Those are commonly 5%-12% of probate assets, but they can run a lot more. The costs of probate are divided between court costs and the lawyer’s fees and expenses. Estate taxes? They can be avoided, or they can take 55% of net worth exceeding $1,000,000. If your estate is worth seven figures, you need a lawyer. If much more than $1,000,000, you definitely need an incorruptible, competent attorney. That kind will help you avoid probate and both income and estate taxes on your IRA and qualified retirement-plan balances. Also, that kind will reduce the federal taxes on your estate to zero. At the other extreme, an incompetent or larcenous lawyer will drag all your wealth, even including your retirement-plan capital and life-insurance death benefits, through probate by making your estate the beneficiary of both. What’s more, that kind may also encourage you to see a buddy of his about an expensive cash-value life insurance policy meant to compensate your heirs for the estate taxes to be collected on your estate. Do select the right people to administer your estate. Whether you prepare your own will or retain a lawyer to do it, your first task if you have minor children should be to decide on a guardian. Then, decide on an executor (personal representative) to oversee the disposition of your estate. That could be an easy matter if you own little. If you own a lot, be sure your executor is up to the task. Your library or bookstore probably has more than one title on how to close an estate. Same goes for how to be the trustee of a living trust that automatically becomes an irrevocable trust at death. Search for and destroy obsolete versions of your will. The purpose of a will is to ensure that the proceeds of your estate 361

An incompetent or larcenous lawyer will drag all your wealth, even including your retirement-plan capital and life-insurance death benefits, through probate by making your estate the beneficiary of both.

are disbursed to your heirs according to your wishes, with a minimum of legal expense and delay. While it is important to make multiple copies of your will and to keep them in different locations, be sure to round up and destroy all the outdated versions whenever a revised will is signed.

If you own a lot, be sure your executor is up to the task. Your library or bookstore probably has more than one title on how to close an estate. Same goes for how to be the trustee of a living trust that automatically becomes an irrevocable trust at death.

Use your will or living trust document to reward loyalty, remember kindnesses, and support good causes. If you’re fortunate enough to leave an estate large enough to ensure the financial security of your spouse and children, consider earmarking some of the excess as a remembrance for loyal employees, trusted business associates, or those who offered help, guidance, or comfort to you along the way. Some of the proceeds from your estate can also be put to good use—your legacy—by supporting medical research, encouraging art and culture, or advancing social justice. The following resources may be helpful in preparing good wills and revocable trusts. • laweasy.com is the comprehensive and imaginative site of attorney Martin Shenkman. It’s loaded with information about revocable and irrevocable trusts. When Marty isn’t practicing law, he’s often writing books about it. • nolo.com/lawstore tells you about Quicken Lawyer 2003 Personal, $79.99. It’s computer software written for Intuit by Nolo Press. The package includes updated versions of WillMaker and Living Trust Maker (including a new tax-saving A-B trust), plus a selection of useful legal forms, authorizations, and contracts for daily use. May be downloaded online. Also, Nolo offers books on how to close an estate. • nafep.com gives you chapter and verse on innovative and reasonably priced trust documents. • findlaw.com is an online legal referral resource that will help you locate an attorney in your area who specializes in estate planning. • Prepare Your Own Will: The National Will Kit, by Daniel Sitarz, Dan Sitarz, Nova Publishing, 2000, $17.95. Contains simplified legal forms and detailed instructions, assessment questionnaires on property and beneficiaries, checklists, and sample wills, with an appendix of state laws relating to wills. The companion disk contains forms that can be imported into popular word-processing programs. • The Truth About Trusts: A Trustee’s Survival Guide, by Jack W. Everett, $27.95 (bookstores). • Executor & Trustee Survival Guide, by Douglas D. Wilson, $29.95 (bookstores). • The Executor’s Handbook: A Step-By-Step Guide to Settling an Estate for Personal Representatives, Administrators, and Beneficiaries, by Theodore E. Hughes and David Klein; $12.57 (bookstores).

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Prepare for the high cost of dying Spare your survivors the financial toll

For the sake of your family, decide your own final resting place. Without clear instructions from you, your family members may disagree bitterly over how to dispose of your body, burial instructions, and the like. Also: Let your plan protect your family from overcharges. Outright consumer fraud has become rare in the funeral industry, but the markup on many mortuary services can be exorbitant. Funeral industry grief counselors (salespeople) may add to the problem by encouraging distraught survivors to trade up to more elaborate proceedings. It’s not unusual for a grieving spouse to spend tens of thousands of dollars on a Rolls Royce funeral only to realize later that the money could have helped build desperately needed financial security for the family. Yes, you can comparison-shop funeral homes. In 2002, funeral homes were charging an average of nearly $6,500 for their services, excluding such expenses as burial plots, grave markers, and cemetery charges. The add-ons can easily bring the total cost to $10,000, $20,000, or more. Grieving relatives are often reluctant to shop for funeral services, but those who pre-plan their own funerals can reduce costs significantly by checking prices at several places. Under industry-wide rules laid down by the FTC (Federal Trade Commission), funeral directors are required to provide itemized price lists for all products and services, and the information may be obtained over the phone or in person. Find ways to hold down final expenses for your family. Biggest single expense for most funerals is the casket, which in 2002 averaged nearly $2,500. Top-of-the-line models may retail for four times as much. FTC allows you to sidestep the hefty 100%-300% markup that mortuaries charge by supplying a coffin. Caskets may be purchased online at steep discounts and shipped to any funeral home in the U.S. Foregoing embalming, often an unnecessary procedure, can trim another $600 to $800. Cremation, an increasingly popular option in many parts of the country, can reduce funeral costs by 50% to 75%. Another cost cutter: special bereavement fares offered by many airlines; they may result in significant savings for those who must schedule last-minute trips to attend a funeral. Consider insurance to cover your funeral costs. Although you can pre-plan a funeral without pre-paying for it, another strat 363

It’s not unusual for a grieving spouse to spend tens of thousands of dollars on a Rolls Royce funeral only to realize later that the money could have helped build desperately needed financial security for the family.

Special bereavement fares, offered by many airlines, may result in significant savings for those who must schedule last-minute trips to attend a funeral.

egy is to hedge against inflation by purchasing preneed insurance—coverage that is sold by many funeral directors to help ensure that your final expenses won’t be a burden to your family. The policies are typically a combination of life insurance and an annuity. Such coverage may provide assurance that your wishes will be honored while locking in today’s prices. FTC rules require that preneed funds be deposited in a Federally insured bank as a safeguard against the funeral home’s bankruptcy. But read the fine print to make sure the policy guarantees the costs will be covered entirely. Some of the better policies allow you to secure funeral arrangements in a different state if you relocate. Here are more resources to help you with the final plans: • funeralplan.com is an online resource to help you pre-plan a funeral for yourself or others. The site includes articles on choosing a funeral home, casket selection, and cremation as an alternative to burial. • nfda.org takes you to National Funeral Directors Association, which has issued a Consumer Pre-Need Bill of Rights, among other information for consumers. • trappistcaskets.com takes you to an online seller of reasonably priced funeral caskets and urns made by Trappist monks. • My Final Wishes by Bradley H. Davis, Bradley Davis Corp., 2001, $19.95. A guide for planning your own funeral. • funeralservicefoundation.org presents information on preneed funeral planning, by Funeral Service Foundation, 1-800-662-7666. • seaservices.com is the site of Sea Services, Inc., which arranges funerals at sea, on the moon, and in outer space. Could be a gift for the man who has everything.

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Make the most of your final days They are your last chance to set things right

Even a few days of advance notice may be enough time. Use them to tie important loose ends and to put your financial and emotional affairs in order. Use the time to: • Prepare advance directives that will spare your loved ones the pain of making end-of-life decisions if you become unable to communicate. • Make financial adjustments to preserve your estate and to protect your heirs. • Make an effort to atone for the wrongs committed against others. Take care of unfinished business. Update your will, revocable trust documents, durable financial and medical powers of attorney, health-care directive (living will), and letter of instructions. Settle debts (economic and otherwise)—particularly informal debts owed to friends and family members that may evade the radar screen when your estate is being closed. Be sure your household bills are being paid—especially the premiums due for any insurance that may pay benefits upon your death. Resolve any lingering issues at your business or place of employment that could delay the payment of benefits to your family members. Consider some 11th-hour estate planning. If your taxable estate is large enough to create some death-tax liability (above $1,000,000), you can reduce the bite by making tax-free gifts. The annual exclusion from gift taxes now stands at $11,000 given to each of an unlimited number of people. Example: 38 gifts of $11,000 to 38 people (four children, 16 grandchildren, six neighbors, four siblings, and 8 nephews and nieces) lowers one’s taxable estate by $418,000 (with no tax liability to the recipients or to you or your heirs). Consider the tax break on unrealized capital gains. Bequests of securities, real estate, works of art, and business interests may carry positive estate-tax implications and zero capital-gains tax. Such assets can pass at death as bequests to heirs free of income tax to the estate, and the tax base is raised for the new owner to the asset’s fair market value on the date of death (or six months later). So, an heir might sell an asset free of income tax even if the property had appreciated one zillion per cent during the original owner’s lifetime.

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Resolve any lingering issues at your business or place of employment that could delay the payment of benefits to your family members.

Don’t leave important things unsaid. Being an emotional miser is bad enough when alive. Carrying your feelings silently to the grave is inexcusable. Reach out to those you love.

Don’t carry a grudge to the grave. Just as it’s important to make amends for our own wrongful acts, it’s equally fitting for us to forgive those who have wronged us.

Seek forgiveness for your trespasses. We may not like to admit it, but there are people we have wronged over the years. At the time, it may have seemed like a minor slight. Our insensitivity may have caused hurt feelings, even humiliation. Perhaps we misjudged someone, or took unfair advantage of a friendship, or caused unnecessary emotional pain with an unkind word or thoughtless act. If these seemingly minor transgressions weigh on our minds during our final days, it’s an indication that we ourselves have been hurt by our own wrongful behavior. Make use of the time you have left to seek forgiveness. Forgive those who trespassed against you. I’ve seen lifelong friendships severed by a simple misunderstanding. I’ve witnessed long-term business associations dissolve due to a breach of trust by one partner. I know entire families who remain bitterly divided due to the insensitive or irresponsible behavior of one member years earlier. Don’t carry a grudge to the grave. Just as it’s important to make amends for our own wrongful acts, it’s equally fitting for us to forgive those who have wronged us. Here’s where to learn more about making the most of your final days: • wwlaw.com/nar.htm is an Internet resource offering advice on deathbed financial decisions by estate lawyer Marc S. Weissman. • forgivenessweb.com is an online resource, The Forgiveness Web, offering guidance on seeking forgiveness from others. • You Only Die Once: Preparing for the End of Life With Grace and Gusto, by Margie Little Jenkins, Integrity Publishers, 2002, $12.99. • I Thought We’d Never Speak Again: The Road from Estrangement to Reconciliation, by Laura Davis, HarperCollins, 2002, $24.95. • Total Forgiveness: True Inner Peace Awaits You!, by R. T. Kendall, Washington A. J. Okumu, D. James Kennedy, Charisma House, 2002, $13.99.

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Create a legacy: leave a better place How will you be remembered?

Your legacy can be financial security for your loved ones. At a time when terrorists threaten our lives, foreign dictators challenge our patience and our country, and home-grown anarchists attack the foundations of our freedom, your family’s long-term security is in greater jeopardy than at any time since the 1930s. As individuals, we may not be able to prevent war, stop terrorism, or preserve free enterprise. But we can take steps now to ensure the financial security of our loved ones—not just during our lifetimes, but for generations to come. Comprehensive estate planning includes trusts designed to carry out strategies for tax-reduction, wealth-building, asset-protection, and financial security for heirs. Choose or create a charitable foundation to support worthy causes. The wealth you accumulate can reduce the suffering of others, enrich our culture, and help to create a better quality of life for others. One way to leave a humankind legacy without short-changing your heirs is to create a family foundation trust, an entity that will give your heirs a powerful tool for supporting charitable activities. It can maximize the ability of your estate to support worthwhile causes while lowering or even eliminating estate-tax liability. At the same time, the trust can provide financial security for your family for generations to come. Your children, grandchildren, and other heirs can serve as paid, lifetime employees of the foundation, with full authority for directing its charitable activities. If they lose interest, a corporate trustee can carry out your wishes. Leave the gift of life by donating organs. In 2002 more than 60,000 Americans were waiting desperately for organ transplants, and every 16 minutes a new name was added to the national waiting list. Tragically, thousands die each year because of a continuing shortage of donated organs and tissues. A recent Gallup poll found that 96% of Americans say they would likely donate organs after death, but experience indicates very few follow through by authorizing donation. What better legacy can you leave than the gift of sight to a blind child or a kidney to a dialysis patient? Your body may be an invaluable legacy. Leaving your body to science can help to train the next generation of physicians and surgeons. It may contribute to a healthier future for your surviving loved ones. Medical researchers seeking cures for 367

Comprehensive estate planning includes trusts designed to carry out strategies for tax-reduction, wealth-building, assetprotection, and financial security for heirs.

Alzheimer’s, muscular dystrophy, leukemia, and other dread diseases find their work delayed and their progress frustrated by the chronic shortage of tissues needed for research.

Most of all, success requires a code of ethics, a moral compass, a willingness to trust others, and the ability to instill trust in ourselves. Pass along the values that enabled you to achieve your success.

Your greatest legacy may be the values you leave behind. The recipe for success is no secret—it includes a healthy dose of educational preparation and hard work, equal portions of sacrifice and commitment, a dash of patience, a dollop of good sense, and a sprinkling of luck. Most of all, success requires a code of ethics, a moral compass, a willingness to trust others, and the ability to instill trust in ourselves. Pass along the values that enabled you to achieve your success. Write an ethical will to preserve your legacy of values. Unlike a last will and testament, an ethical will is a document written to preserve an even more precious legacy: your values, beliefs, dreams, hopes for future generations, and the lessons that you learned from life. You can learn more about creating a legacy from the following resources: • www.ethicalwill.com is loaded with suggestions that will help you share “your values, beliefs, and blessings” with family members you will not meet in your lifetime. • thelegacycenter.net can assist in the telling of your story, the sharing of your beliefs and values, and preserving of it all for future generations. • ancestrylifelegacy.weblogger.com provides a checklist to topics to cover and more, to help you create your own ethical will. • organdonor.gov provides information on organ and tissue donation from the U.S. Department of Health and Human Services. Includes a downloadable organ donor card and links to organ procurement organizations in 50 states. • sciencecare.com offers information on the legal and ethical aspects of tissue banking, as well as reasons for donating your body to medical science. • ncfp.org offers nonprofit information and guidance on family charitable activities, by the National Center for Family Philanthropy. • legacy.com is designed to help preserve the memories of deceased loved ones through the posting and sharing of biographies, eulogies, photographs, and other personal remembrances. • Family Foundation Handbook, by Jerry J. McCoy, Kathryn W. Miree, Panel Publishing, 2001, $185. • The Ethical Will Writing Guide Workbook, by Barry K. Baines, Josaba Ltd., 2001, $4.95.

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Planning ahead Fill in this list now

Names : ___________________________________________________________________________ Use this list, or one of your own, as a model. Keep it with your letter(s) of instructions. 1. We’ve got our advisory team in place, and we’re both happy with its members: Day-to-day practical assistance: _____________________ Dial: _______________________ Pastoral counselor: ________________________________ Dial: _______________________ Probate-avoidance estate-planning attorney: __________ Dial: _______________________ Tax accountant: ___________________________________ Dial: _______________________ Investment portfolio manager: ______________________ Dial: _______________________ Financial counselor: _______________________________ Dial: _______________________ Insurance agent (personal): _________________________ Dial: _______________________ Insurance broker (business): ________________________ Dial: _______________________ Prearranged funeral or cremation: ___________________ Dial: _______________________ Other: __________________________________________ Dial: _______________________ Asterisks identify person holding financial durable power of attorney for *Husband **Wife 2. We’ve even made a list of those who provide essential services at home: Plumber: ________________________________________ Dial: _______________________ Electrician: _______________________________________ Dial: _______________________ House cleaning: __________________________________ Dial: _______________________ Carpet cleaning: __________________________________ Dial: _______________________ Yard service: _____________________________________ Dial: _______________________ Snow removal: ___________________________________ Dial: _______________________ Grocery delivery: _________________________________ Dial: _______________________ Newspaper delivery: ______________________________ Dial: _______________________ Handyman: ______________________________________ Dial: _______________________ Other: __________________________________________ Dial: _______________________ 3. We’ve also made a list of key people to contact at work: Colleague: _______________________________________ Manager: ________________________________________ Secretary: _______________________________________ Other: __________________________________________

Dial: _______________________ Dial: _______________________ Dial: _______________________ Dial: _______________________

4. Each of us has made a list of friends and relatives to contact.

 Yes  Not yet

5. Each of us has written a letter of instructions. Items 4 & 5 are kept here:

 Yes  Not yet

6. All key documents are accounted for and kept in a safe place.

 Yes  Not yet

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Included:  Birth certificates  Adoption documents  Naturalization papers  Marriage license  Passports  Social Security cards/numbers  Military discharge papers  Bank records  Documents needed to claim death benefits  Life-insurance policies  Other contracts and legal agreements  Tax returns Other: _______________________________________________________________________ _____________________________________________________________________________ 7. Arrangements are in place for disposition of the business/practice.  Yes  Not yet It is to be:  Closed  Sold  Arrangements pending Surviving spouse’s obligation under terms of the office lease: _____________________________ Management consultant: ___________________________ Dial: _______________________ Final letter to patients: _____________________________ Dial: _______________________ Final letter to staff: ________________________________ Dial: _______________________ Final letter to suppliers, referral sources: _______________ Dial: _______________________ Federal Drug Enforcement Agency: __________________ Dial: _______________________ Office landlord: ___________________________________ Dial: _______________________ Other: __________________________________________ Dial: _______________________ 8. We have considered/reconsidered our pension beneficiary designation.  Yes  Not yet Financial counselor: _______________________________ Dial: _______________________ Pension consultant: _______________________________ Dial: _______________________ Other: __________________________________________ Dial: _______________________ 9. We have considered/reconsidered our life-insurance beneficiary designations.  Yes  Not yet Financial counselor: _______________________________ Dial: _______________________ Pension consultant: _______________________________ Dial: _______________________ Other: __________________________________________ Dial: _______________________ 10. No significant assets will pass through probate.  Correct  Documents pending Disposal of significant assets includes use of the following:  Joint ownership  Direct gifts using the $10,000 annual exclusion  Direct gifts against the $625,000 lifetime exemption  Funding one or more trusts using Crummey provisions oFunding one or more irrevocable trusts by using the $625,000 lifetime exemption  Family limited partnership  Foreign trust  SuprrrTrust®  Charitable lead trust  Charitable remainder trust Other: _______________________________________________________________________ 11. We’ve provided for the children/grandchildren, nephews/nieces, et al. Personal guardian(s): ______________________________ Dial: _______________________ Financial guardian(s): ______________________________ Dial: _______________________ Trust’s administrator: ______________________________ Dial: _______________________ Trust’s portfolio manager: __________________________ Dial: _______________________ Other: __________________________________________ Dial: _______________________ 12. Each of us has executed a document appointing a medical surrogate.  Yes  Not yet Husband’s: _______________________________________ Dial: _______________________ Wife’s: __________________________________________ Dial: _______________________ 370

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Your last words on paper Here’s a pair of forms that will ease your survivor’ stask.

Grief figures to make it difficult for survivors to make decisions. Many decisions need to be made after a member of the family dies. As I mentioned in the previous chapter, people must be notified, work in progress must be carried through, various arrangements must be made, property must be disposed of, key papers must be located, and the family must realize that a team is already in place to help the survivors with all such matters, and more. When you’re to be the one who’s passing on, let’s hope you’re lucky enough to have a patient, tireless friend, neighbor, relative, secretary, or an associate who lives nearby and will easily be accepted by those closest to you as your surrogate for dealing with all the chores and decisions that must be done after you have died, or even sooner if you become terminally ill or injured. Think about recruiting someone who would happily recruit you for the surrogate task. Siblings come quickly to mind. That one valuable person will see that your wishes are known and carried out, that important papers are collected, that all the right people are notified, and that the grieving family members are spared not only the selection of funeral arrangements but also the inevitable puzzlement over the acquisition of death certificates. Death is an event, and not just for the deceased. Dying sets in motion all sorts of activities and decisionmaking. Your final act of love and caring can be to ease the burden. The appointment of your surrogate for day-to-day practical assistance to your spouse or other closest family member may be the most important matter to which you can attend. You need to choose wisely, and to impress on the family the wisdom of accepting your surrogate’s assistance. Now is a good time to act. Put all of your important papers in proper places, like the safe-deposit box at the bank. The papers most urgently needed early on are likely to be the ones I’m about to name, and the best place to keep copies of them may be someplace handy at home, as in an imposing-looking metal box with a hinged lid, unlocked, and kept in your desk at home— a box that everyone in the immediate family knows about. These are among the papers to be safeguarded: • The instructions you’re now reading, which include not only tips on preparing your letter of instructions but also a locator list to help the personal surrogate find everything and to notify 371

Let’s hope you’re lucky enough to have a patient, tireless friend, neighbor, relative, secretary, or an associate who lives nearby and will easily be accepted by those closest to you as your surrogate for dealing with all the chores and decisions that must be done after you have died.

Death is an event, and not just for the deceased. Dying sets in motion all sorts of activities and decisionmaking. Your final act of love and caring can be to ease the burden. The appointment of your surrogate for day-to-day practical assistance to your spouse or other closest family member may be the most important matter to which you can attend.

everybody. • Everything in this section of the book. • Your letter of instructions. • Your medical directive (“living will”). • If you are in the public eye, your biographical sketch, in the company of your curriculum vitae and a black and white glossy mug shot (in case the newspaper or news service asks for them). • Documentation of the funeral arrangements you’ve made, if you choose to make them yourself—not a bad idea, considering how difficult such decisions can be for someone stunned with grief. You can approach this exercise with a good deal more good humor and logic than someone who is grieving for you, so you are likely to discover that I have left out something of great importance to you. Just fill in our gaps yourself. Here’s a valuable device not even known to all of the lawyers who specialize in estate planning: Your letter of instructions. Since your funeral may have taken place several days before anyone gets around to reading your will, the will is no place to specify your burial instructions. Neither is it the place to specify the disposal of your personal property—jewelry and furs, for example, or collections, cars, or just about any property other than real estate. Personal property comes and goes during anyone’s lifetime, and there’s no point having to revise our wills with each change. Instead, just say in the will (or, better, in a living-trust document) that the estate’s administrator (or your successor trustee) has the right to dispose of your personal property in the manner specified in your accompanying letter of instructions. A living trust document is usually the better place to specify who’s to get which item, especially when personal possessions are valuable—in which case they can bypass probate by identifying them as property of the living trust. Be sure your loved ones know of the letter’s existence. Be sure they know where to find it, and that they’re to open it immediately after your death—or sooner in the event of your terminal illness or injury, so that copies of your “living will” (healthcare directive) are placed in the hands the physicians and hospital administrator with minimal delay. Where to find my valuable papers. A big problem for anyone trying to wind up an estate can be simply finding all the valuable papers. You can do your heirs and executor or trustee a favor by filling out this form and giving copies to your spouse, other relatives who will help in settling the estate, any outside executor, and your lawyer. Update the information periodically. Keep the original with your letter of instructions.

372

Your letter of instructions A checklist to help you decide on the topics to cover in your letter  People to notify (surrogate):  People to notify (immediate family):  People to notify (other relatives):  People to notify (friends):  People to notify (neighbors):  People to notify (office):  People to notify (colleagues):  People to notify (financial team):  People to notify (other advisors):  People to notify (media):  People to notify (still others):  Borrowed property to return  Credit cards  Deeds to home, second home, other real estate  Disposition of equipment  Disposition of drug inventory  Disposition of supplies  Disposition of patient charts  Disposition of jewelry  Disposition of collections  Disposition of personal possessions  Documentation of any other investments and property  Documentation of money owed to me by others  Funeral arrangements made, or preferences  How to dispose of my personal property  Instructions on notification of patients and suppliers  List of significant debts owed by me to others  Location of checking and savings accounts  Location of Federal, state, local income tax returns  Location of narcotics license  Location of office lease, with instruction  Money-market funds and other mutual funds  Safe-deposit boxes  Stock certificates, bonds, other securities  Titles to car, boat, plane, other vehicles  Where any other valuables or valuable papers are kept  My employment agreement and buy-sell agreement  _________________________________  _________________________________  _________________________________  _________________________________  _________________________________ 373

Where to find my valuable papers First, identify your places of safekeeping: A: ______________________________________________________ B: ______________________________________________________ C: ______________________________________________________

You can approach this exercise with a good deal more good humor and logic than someone who is grieving for you.

D: ______________________________________________________ E: ______________________________________________________ F: ______________________________________________________ Next, indicate where each item can be found: A B My medical directive (living will) ............   My letter of instructions .............................   My living trust document (original) .......   Spouse’s living trust document (original) ...   My will (original) ...........................................   My will (copy) .................................................   My spouse’s will (original) ..........................   My spouse’s will (copy) ...............................   Power(s) of attorney ....................................   Durable power(s) of attorney ...................   My burial instructions .................................   Cemetery plot deed .....................................   Annuity contract(s) ......................................   Auto ownership records .............................   Bank statements, canceled checks .........   Bequests, handwritten list of ....................   Biographical sketch, with c.v. & phot .....   Birth certificate ..............................................   Boat ownership records .............................   Bond certificates ...........................................   Brokerage account records .......................   Buy-sell agreement(s) .................................   Cash & checks on hand ...............................   Certificates of deposit .................................   Checkbook(s) .................................................   Children’s adoption papers .......................   Children’s birth certificates .......................   Citizenship papers ........................................   Current unpaid bills .....................................   Divorce/separation records ......................   Employee-benefit documents .................   Employment contract(s) ............................   Guardian, document appointing ............   Homestead exemption ...............................   374

C                                  

D                                  

E                                  

F                                  

A B C D E F Income and gift tax returns ......................       Insurance: property and casualty ...........       Insurance: aut .................................................       Insurance: health policy(ies) .....................       Insurance: homeowners .............................       Insurance: office coverages .......................       Insurance: professional liability ...............       Life insurance on my spouse ....................       Life insurance on myself.............................       Life insurance, group ...................................       List of checking & savings accounts ......       List of credit cards ........................................       List of loaned valuable possessions .......       List of stored valuable possessions ........       Marriage certificate ......................................       Memberships, professional .......................       Memberships, fraternal ...............................       Memberships, social organizations ........       Military discharge papers ..........................       Mortgage papers: other home(s) ............       Mortgage papers: residence .....................       Mutual fund statements ............................       My adoption papers ....................................       Names and addresses of relatives/friends ..       Notes and other loan agreements .........       Partnership agreements ............................       Pension: corp. Pension documents ........       Pension: corp. Profit-sharing document ..       Pension: IRA account(s) ..............................       Pension: Keogh plan document ..............       Plane ownership records ...........................       Profit-sharing plan........................................       Realty titles and deeds ...............................       Record of investment securities ..............       Rental property records .............................       Safe combination, business ......................       Safe combination, home ............................       Savings passbooks .......................................       Securities .........................................................       Spouse’s burial instructions ......................       Stock certificates ...........................................       Stock-option plan .........................................       Stock-purchase plan ....................................       Title insurance ................................................       Trust agreements ..........................................       Others: _________________________________________________ _______________________________________________________ _______________________________________________________

375

Don’t wait till you’re feeling a sense of urgency about putting your financial affairs in order. That’s something we all should have done in the first year out of school, or in the first year of familial obligation—and kept updated ever since.

376

The last word

It’s about more than money We wish you the gift of joy from using it well

Gene Balliett

D

ee and I—and Tedi, Kathy, Richard, Chris, and Ken—

have tried to make this more than just another money book. Informational, advisory, and financial resources can

be more useful than anticipated, but inner resources are the vital ingredient. It can color your attitude toward dealing with money— making it, using it, and putting it into perspective. Dee and I are among the growing number of advisors on personal finances who believe money frees up the time, energy, and imagination to deal with what’s important. That’s a treasured lesson we’ve learned from our clients. Among numerous others who live lives we admire, they include these four: • Will, who retired from private practice to become a full-time doctor in a Veterans Administration hospital. “I can’t wait to get to work,” he told me not long ago. “My patients are some of the best people I have known. They’ve become my best friends. I can’t imagine a better way for me to be retired.” • John, who flew through 11 time zones to Vietnam not long ago. His purpose was to contribute his surgical skills for a month to patients who desperately needed them but couldn’t have had them if he’d remained on his ranch. He was on his feet in Nam, working all day, every day. After dinner one evening, weary, he went for an after-evening stroll, expecting to be revived by the night air and the stars. Just like that, a heart attack ended his life on Earth. • Faythe and Lowell, a husband and wife enjoying their retirement, travel the globe as a nurse and doctor. Think of a continent with hot spots, and then think of another—and another. They’ve been there, occasionally dodging bullets and ducking shrapnel, always paying their own expenses and immersed in meaningful lives. Dee and I have been advisors since 1967. That’s when she helped me launch my career as a financial consultant. She and I had started our life together in 1954 with nothing beyond high hopes and significant but low-paying jobs. We learned from them, including perspective about money.

377

In time, Dee and I came to notice that wealth means nothing when not accompanied by integrity and purpose. We wish you the special happiness that comes from committing inner resources, along with those other three, to a useful and noble purpose of your own.

378

index

Index A

C

Acadia National Park 135 Acapulco 157, 163 adjustable rate mortgage 83 Alamo, the 152 Alaska 161 Alberta, Canada 157 Alcatraz 155 allowance 42, 191, 192, 197, 202 alternative investments 10, 58, 64, 74 Alternative Minimum Tax 44 antiques 93, 97, 98, 109, 110, 257 armed services/forces 239, 240 asset allocation 66 asset allocation fund 57, 65, 66 asset protection 189, 315, 317, 330, 331 Atlantic City 150

Calgary 157 California 135 Cambridge, Mass. 149 Canada 153, 157, 158, 162, 163, 164 Cancun 158 Cape Canaveral 151 capital gains 19, 28, 33, 39, 47, 50, 77, 127, 197, 205, 365 capital gains tax 39, 40, 51, 52, 77, 78, 86, 88, 220, 323, 326 capital gains trust 39, 40, 323, 324 career goals 228, 229, 231, 241 career success 225, 251 Caribbean 158 Central Florida 152 charitable foundation trust 33, 54, 360 charitable remainder trust 360 Chicago 153 Chinatown 155 Cincinnati 161 Cirque Du Soleil 160 Clearwater Beach 152 college savings plan 137, 138, 142, 313 commodities 10 common stocks 36, 57, 58, 73, 87, 313 conservation easement 27, 45, 46 Coverdell Education Savings Account 313 Cozumel 158 credit cards 11, 16, 18, 21, 22, 29, 79, 83, 113, 114, 117, 120, 125, 137, 185, 202, 203, 221, 342, 347, 353 Czaplyski, Vincent 296

B Bainbridge Island 155 balanced fund 57, 63, 64, 65, 66 Balboa Park 156 Ballard Locks 156 Banff National Park 157 banking 11, 116, 189 Bar Harbor 162 beneficiary 187 Beverly Hills 156 billpaying 116 Boehning, Harold 280, 293 Bogle, John 35 bond funds 59, 66 bonds 7, 35, 57, 59, 63, 64, 65, 75, 93, 99, 115, 347 Boston 149, 162 Bottomley, Dennis 287 Bourbon Street 151 Bradley, Rob 289 Branson, Missouri 154 British Columbia 157 Broadway 149 budget 44, 95, 113, 116, 119, 121, 141, 193, 202, 277 Buffett, Warren 36, 62 building wealth 49, 54, 78, 91, 111, 205, 240 Butchart Gardens 157 379

D Daytona 151 death 28, 33, 39, 40, 115, 139, 144, 165, 169, 180 death benefit 126, 181, 183, 269, 321, 322, 341, 342, 354, 361 death tax (also see "estate tax") 28, 40, 183, 315, 316, 321, 325, 350, 351, 365 debt 21, 22, 25, 29, 30, 55, 63, 68, 79, 83, 111, 113, 114, 121, 125, 137, 185, 186, 187, 189, 194, 195, 203, 204, 215, 221, 241, 281, 282, 329, 335, 347, 353, 354, 365, 373

Delray Beach 152 disability 5, 42, 168, 180, 234, 269, 277, 314, 330, 341, 357 Discovery Cove 152 Disney 135 Disney Animal Kingdom 160 Disney World 152, 160 Disney-MGM Studios 152, 160 Disneyland 135, 156, 160 distance learning 305 dividend 187 divorce 116, 131, 139, 145, 146, 169, 359 Duluth 153 dynasty trust 183, 314

Ghiradelli Square 155 Grand Canyon 135 Great Lakes, the 153

E

insurance 1, 5, 6, 26, 28, 35, 42, 55, 89, 91, 95, 111, 126, 165, 167, 214, 247, 261, 317, 319, 321, 341, 353, 354, 358, 363, 365 auto 175 business 6, 179 cash-value 5, 126, 181, 182, 183, 184, 185, 186, 187, 321, 361 disability 6, 126, 168, 180, 269 health 6, 23, 169, 170, 171, 215, 221, 234, 238, 267, 268, 277, 278, 292, 337 homeowners 6, 173, 174, 178, 179, 270 liability 160, 176, 177, 178 life 5, 23, 40, 115, 126, 145, 182, 183, 184, 186, 187, 222, 234, 253, 269, 277, 281, 282, 315, 321, 322, 341, 342, 358, 360, 361, 364 long term care (LTC) 27, 42, 167, 168, 171, 259, 270, 314 pets 270 renters 165, 174 term life 27 unemployment 238 investment account 188 IRA vii, 19, 21, 23, 25, 31, 33, 40, 42, 49, 50, 59, 111, 123, 127, 137, 138, 183, 185, 194, 197, 205, 222, 265, 268, 312, 313, 315, 325, 342, 347, 350, 351, 353, 361 IRS 27, 44, 128, 185, 209, 216, 219, 242, 277, 278, 319, 320, 323, 324, 325, 327, 328, 349, 350, 353 Iyer, Pat 295

Education IRA 313 entertainment 1 Epcot 152, 160 estate planning 372 estate tax 28, 33, 37, 39, 40, 42, 45, 53, 182, 183, 314, 315, 322, 325, 349, 350, 360, 361, 365, 367 Estes, Colo. 163 ETF proxy 70 ETFs 36, 57, 58, 64, 69, 70, 71, 73, 75, 111, 206, 313 executor 372

F 401(k) vii, 30, 49, 137, 194, 205, 222, 234, 247, 260, 263, 264, 266, 353 403(b) 30 family vacation 135 Fifth Avenue 149 financial planning vii financial security 5, 7, 19, 28, 38, 47, 53, 54, 57, 64, 93, 111, 112, 113, 126, 128, 131, 138, 141, 143, 183, 186, 205, 234, 244, 253, 263, 282, 315, 330, 333, 351, 360, 362, 363, 367 Fisherman’s Wharf 155 FLiP 40, 327, 328 Florida 151 Florida Keys 163 French Market 151 French Quarter 151 funeral 333, 335, 341, 343, 344, 345, 347, 371, 372 Furman, Lowell 289 Furman, Richard 289

G Gaslamp Quarter 156 Gene Balliett Monthly Report 36

H Halifax 162, 164 Harrah’s New Orleans Casino 151 health care proxy 355 hedge fund 58, 73, 74 Heron, Joan 291 Hollywood’s Walk of Fame 156 honeymoon 113, 115, 117, 148, 163, 164

I

J Jackson Square 151

K Keogh 19, 222 Key West 152 380

Kill Devil Hills 151 Kitty Hawk 151 Kolczynski, Phillip 296 Kushner, Leonard 296

95, 111, 125, 191, 197, 205, 206, 261, 313 Myers, Allison 290

L

Nags Head 151 NAPFA 2, 37, 189 Naples 152 Natchez 161 New England 162 New Orleans 151, 161 New Smyrna Beach 152 New York 149 New York City 162 Newport 162 North Beach 155 North Carolina 151 Nova Scotia 162

N

La Brea Tar Pits 156 La Crosse, Wis. 154 La Jolla’s Torrey Pines 156 La Villita National Historic District 152 Lake Louise 157 Lake Tahoe 155, 163 Lancaster 150 Las Vegas 155 legacy 46, 111, 183, 325, 326, 351, 360, 362, 367, 368 letter of instructions 371 liability 6 Little Current 153 Little, William, Jr. 291 living trust 317, 329, 361, 362, 372 living will 372 Long Beach 156 long term care (also see "LTC") 5 Los Angeles 156 LTC (also see "long term care") 6

M Mackinac Island 153 Magic Kingdom 160 Maine 135 Make Your Kid Rich 7 Manhattan 149 Manitoulin Island 153 Mardi Gras 151 Martha’s Vineyard 164 Massachusetts 164 Mayan Coral Reef 158 Medical Savings Account 6, 27, 42, 170, 171, 172, 268, 278, 281 Memphis 161 Mexican Riveria 161 Mexico 157, 158, 163 Michigan 153 Michigan Avenue 153 Mississippi River, the 151, 154, 161 Missouri 154 money management 191, 195 Montreal 158, 162, 164 Mooney, Ray 296 Mount St. Helens National Volcanic Monument 156 Muir Woods 155 mutual funds 10, 31, 36, 56, 57, 59, 66, 68, 69, 70, 71, 73, 75, 381

O Oak Street Beach 153 Ocracoke Island 151 Old Town San Diego 156 Olvera Street 156 O’Neil , Bill 61, 62, 71 Oregon Inlet 151 Orlando 135, 160 Outer Banks 151 Ozarks, the 154

P Paap, Jack I. 289 Pacific Coast 163 Pacific Northwest, the 157 Page, Will 283 Palm Beach 151 Peace Corps 285, 286 Pennsylvania Dutch 150 pension 30, 40, 47, 48, 49, 71, 127, 128, 145, 222, 247, 259, 261, 263, 264, 265, 266, 269, 281, 315, 342, 347, 351, 353, 354 personal finances 1, 12, 35, 125, 189, 194, 205, 262 Philadelphia 150 portfolio manager 7, 67, 69, 70, 71, 342 portfolio-management 35 Preservation Hall 151 private annuity trust 360 private mortgage insurance 84 probate 53, 116, 315, 317, 318, 324, 329, 330, 351, 359, 361, 372 profit-sharing 27, 30, 49, 127, 182, 222, 240, 241, 242, 256, 264, 265, 266, 353

Puerto Vallerta 157 Puget Sound 155

Q qualified retirement plan 27, 38, 47, 247, 253, 315 Quebec City 153, 162

R real estate 13, 14, 16, 30, 35, 39, 42, 52, 75, 78, 80, 84, 86, 87, 88, 89, 90, 91, 93, 96, 98, 99, 128, 183, 241, 258, 326, 330, 349, 353, 357, 359, 360, 365, 372 real estate investment trust 58, 73 recordkeeping 261 rescue cash 20, 181 residence rollover 28 resource planning vii retirement 1 retirement plan 30, 41, 42, 47, 48, 49, 50, 115, 137, 185, 194, 205, 214, 222, 234, 247, 253, 261, 263, 265, 266, 273, 342, 347 reverse mortgage 91, 92, 347 Roanoke Island 151 Rocky Mountains, the 157, 164 Rodanthe 151 Rodeo Drive 156 Rogers, Harrison L., Jr. 287

S San Antonio 152 San Antonio’s Riverwalk 152 San Diego 156 San Diego Zoo 156 San Francisco 155 Sarasota 151 Sausalito 155 Sea World 135, 152, 156 Sears Tower 153 Seattle 155 second home 52, 58, 85, 86, 157, 317 SEP 49, 222 Siegel, Jeremy 35, 137 SIMPLE (Savings Incentive Match Plan for Employees) 49 Smathers, Steven 296 Social Security vii South Beach 151 Southern California 156

spending plan 21, 125, 186, 194, 199, 201, 202 St. Augustine 152 St. Lawrence 162 St. Michaels, Md. 163 successor trustee 372 Sunset Boulevard 156 surrogate 371 Sydney 162

T tax break 27, 41, 44, 45, 46, 48, 50, 51, 77, 86, 123, 183, 263, 322, 365 tax shelter 37, 38, 45, 47, 48, 75, 77, 78, 185 technical analysis 62 Texas 152 Tijuana 156 Toronto 164 trustee 372

U Uniform Gifts to Minors Account (UGMA) 314 Uniform Transfer to Minors Account (UTMA) 314 Universal Studios 135, 152, 156

V Vancouver 157, 164 Vancouver Island 157 ventures 43, 58, 73 Vicksburg 161 Victoria 157 Viragh, Skip 70 volatility 63, 73

W Washington, D.C. 136, 149 wealth building 23, 31, 39, 127, 205, 234, 319, 367 Winter Park 152 Wyoming 135

Y Yellowstone National Park 135 York 150 Yosemite National Park 135 Your Financial Plan is A Vision of Riches 7, 181

Z Zihuatanejo 157

382

What do you mean, Resource Planning? Drawing from your inner resources while learning where to find informational, advisory, and financial resources. p. vii

Why share solid financial tips so openly?

In a renter's world, can it be good to own your own home? Yes, it can. p. 77

Got a clever way to make money on a second home? Sure do. pp. 85-86

It's easier to work with well-informed clients than the other kind. p. 37

Your best easy but widely overlooked tip?

A $1 lottery ticket, a dollar's fun. Why not?

Start your IRA early in life; invest it wisely all your life long. p. 38

You've got a point. Even so, your chance of winning big is smaller than your chance of being killed by a donkey. p. 111

Best tip to the young, successfully self-employed person?

What's wrong with a big, expensive wedding?

Add a fully invested profit-sharing plan to your IRA. p. 47

Suggestion to a successful person in midlife? Consider being a gentleman farmer. p. 44

A big tax break for a successful environmentalist? A conservation easement. p. 46

Nothing, if you can afford one—and if you consider its implications. p. 113

I've got huge debt. Should I tell my fiancée? If you hope to stay married long, you'd better. p. 115

Shouldn't I buy life insurance from someone I know and like? Can she describe the flaws in the policies she sells? Compare hers with policies sold by competitors? Give you reasons never to borrow from a policy? pp. 181-182

Advice to an employer on keeping good employees? Motivate the career-minded with tax-smart financial security. p. 47

What's the truth about cash-value life insurance? It's best only for those who need that kind. pp. 183-188

Sly tax advice to the owner of a small business? Begin by buying prime land, leasing it to your company. pp. 51-52, 90

What do I need to tell my kids about money? A lot more than anyone told you. pp. 189-206

Got any awesome advice on creating wealth? Think legacy, understand irrevocable. pp. 53-54

My young adult is struggling with his career. What to do? Refer him to pp.225-242.

Is any one charitable trust any better than another? Oh, yes. p. 54

I'm older, and I'm unhappy with my own career. What to do? Turn to pp. 243-260.

Do you suggest a good way to invest? Yes: how much, how soon, how often, and in what. pp. 55-74

I own a good business, but I'm perplexed about employee benefits. You'll find clarity in pp. 261-278.

Are you a big fan of Buy & Hold strategy? Not in an investment that's failing. p. 62

My brother says I should look forward to retirement. I don't. Maybe he's wrong. pp. 279-296.

Are you a big fan of mutual funds? We've got a very few favorites and little use for the rest. pp. 69-70

Can I earn a college degree from an online education? You sure can. pp. 305-306.

Stocks scare me. Why should I buy them? As long as you feel that way, you shouldn’t. p. 71

How best to choose a lawyer for estate planning? With caution and great care. p. 315

Can people make money in real estate? Oh, my, yes. pp. 75-92

How else can you help my family with estate planning? Enormously more. pp. 315-376

Your family needs this book!

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