Protect Your Finances

With the economy in flux, now is the time to shore up your funds. Here are three areas to focus on.

By Ryan Mack

From the controversy over the debt ceiling to the Dow Jones index fluctuations in recent months, the economic ups and downs of the past few years have left many of us wondering when the turbulence will finally subside. Navigating these financial highs and lows has been a rocky road. Still, now is not the time to panic. Follow these smart moves to help protect your financial future.

HOW TO HELP PRESERVE YOUR...

LOANS AND CREDIT LINES

Those who will benefit most from falling interest rates are people who have high liquidity and good credit scores. Go to annualcreditreport.com to start repairing or building your credit. And stash some cash. Your goal should be to save up to 12 months of living expenses.

Pay bills on time. It may sound simple, but making timely bill payments can decrease the chance of a rate spike. If you have good credit, check in with creditors every six months to negotiate a better rate.

Watch interest rates. Federal Reserve Chairman Ben S. Bernanke’s decision to keep rates close to zero through 2013 means that the variable rate on your credit card will stay low. To compare rates, go to bankrate.com.

RETIREMENT SAVINGS

The worst thing to do is to make a knee-jerk decision that locks in losses. Think of falling stock prices as you might a shoe sale. Cheap can be good! Consider picking up more shares now, and regularly discuss asset allocation and risk tolerance with your financial adviser. Other stopgaps:

Consider safe havens. Talk to your adviser about other avenues that can provide a decent yield in your portfolio, like municipal bonds, which can help protect your initial investment while earning you tax-free interest.

Bond investing is subject to risks, such as interest rate, credit and inflation risk. As interest rates rise, bond prices fall. Long-term bonds have more exposure to interest rate risk than short-term bonds. Unlike bonds, bond funds have ongoing fees and expenses. Lower-rated bonds may offer higher yields in return for more risk.

Manage your 401(k). Review the plan to familiarize yourself with your portfolio of investments. Then talk to your adviser to be sure you have the appropriate asset allocation. Check your plan at least twice a year to monitor performance.

REAL ESTATE

Mortgage rates should stay low for at least the next several months. Rates are tied to the U.S. Treasury, so consider refinancing to lock in a better interest rate. If you are at risk of foreclosure, contact hud.gov to find a credit counselor who can help you save your home. Additional actions:

Invest for less. You can’t stop your home from depreciating, but you can maybe take advantage of opportunities that a volatile market presents. Consider pooling funds with family and close friends to buy investment property. That way, you’ll mitigate the risk of full ownership.



From the October 2011 issue of Essence.© 2012 Time Inc. All rights reserved.

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Protecting Your Parents

How to help Mom and Dad with money issues as they age
By Penelope Wang, with additional reporting by Walecia Konrad and Beth Braverman

Face it. Mom and Dad are getting up there in age, and their finances aren’t getting any simpler. Some of life’s trickiest money tasks—managing a large but basically fixed nest egg and figuring out how to make it last—are in the hands of people who at some point may not be up to handling it themselves. This means that in addition to managing your own finances, you have the tough new job of helping your parents manage their money.

It’s a delicate art. You’re used to Mom and Dad being the authority figures. So are they. But if your folks are over 70, you and your siblings should start getting them comfortable with the idea that you can help.

To get started, it helps to know more about how your parents’ lives have been changing with age. That can help you decide when and how you should step in.

What to Watch Out For

Old age brings enormous changes—not all of them physical—that could leave your parents feeling overwhelmed by the work of running their money.

THEY ARE DEALING WITH ISSUES THAT ARE NEW TO THEM

In many marriages—especially in your parents’ generation—husbands and wives split up financial duties. When one of your parents dies or becomes seriously ill, the other will very likely be handling unfamiliar problems, whether it’s picking mutual funds or making sure the utility bills are paid on time.

THEY’RE STILL SHARP BUT FIND MONEY TASKS MORE TAXING

Even normal aging can bring gradual changes in mental function. Those changes may not affect the ability to make sound financial decisions, but if Dad takes longer to work with numbers than he used to, he may become less diligent about checking his account statements.

General health issues can also make things harder. Russ Hendricks of Watertown, Tenn., helps his mom, Helen, 77, manage the bill paying. She’s been spending a lot of time caring for his dad, Harry, 81, and she recently had back surgery. Russ noticed Helen was having trouble balancing the checkbook. "My mom isn’t forgetting things, but she gets overwhelmed,” he says. Other possible red flags: increased complaints about having to fill out forms from an insurer or brokerage, trouble reading fine print or a general rise in stress about paying bills.

THEY ARE SHOWING SIGNS OF BIGGER PROBLEMS

About half of people in their eighties suffer from significant cognitive impairment. That includes Alzheimer’s but also other issues. This mental deterioration often takes families by surprise. “Older people may be able to answer questions and respond well in social situations, but people end up shocked when they finally look at their finances,” says Beth Kallmyer of the Alzheimer’s Association.

So what should you be on the lookout for? Your parent might have forgotten to pay utility bills or rent, or could be having trouble making change or writing checks. Or they may complain that money is missing from their bank account or that someone is stealing from them.

What to Do When They Simply Need a Hand

Get involved in small ways while your parents are still healthy. Let them know you are available for advice, and make routine tasks easier for them. This will make it easier to step in when bigger issues arise later.

DON’T START IN ASKING ABOUT MONEY PROBLEMS

It won’t be easy to get your parents to open up about their finances, which many consider a taboo topic. Get the conversation rolling by asking how they’ve prepared their financial accounts in case of an emergency. Where do they keep their accounts and insurance? Where would you find the paperwork? Who has the passwords? Those are straightforward questions, as you’re simply asking them whether they’ve made the contingency plans everyone ought to have.

TELL THEM ABOUT YOUR OWN FINANCES

They may also have an easier time talking if you keep them in their familiar parental role, says Miriam Zucker, a geriatric-care manager and social worker in New Rochelle, N.Y. Ask Dad for advice on how best to invest the money you put in his granddaughter’s college savings account. Or tell Mom you are revising your will and you’re wondering how they’d handle it. You could very well get good advice, and conversation will flow naturally from there.

ASK THEM TO HELP YOU

Tell your parents you’ve been worried and they could make you feel better if you knew more about their plans. “You’re asking them to do you a favor,” says Jake Harwood, an expert on communication and aging at the University of Arizona. Try citing the 40/70 rule, suggests Paul Hogan, head of a senior-care agency called Home Instead. The idea is that families should talk money when the parents turn 70 or the kids turn 40.

GET THEIR ACCOUNTS ONLINE

Russ Hendricks says online banking has been an important tool for helping to manage his parents’ finances. “I said, ‘Mom, I use electronic banking, and it makes my life so much easier. Let me help you do this,’ ” he says. Working with your parents to set up their accounts will also give you a glimpse at the state of their finances.

IF THEY USE AN ADVISER, ASK TO GO TO THEIR NEXT MEETING

Financial advisers and planners can be a huge help, in part because having a neutral third party can defuse family tensions. But don’t count on this person to sound the alarm if your parents are showing signs of Alzheimer’s, as advisers say they aren’t always comfortable broaching the issue with clients.

Ask your parents if you can come along next time they meet their adviser. Watch to see if they are following the conversation. Clarify any points of concern regarding any suggested new financial products, especially if there are up-front loads and commissions attached. And make sure your parents aren’t taking on too much risk.

When It’s Time to Help Them Make DecisionsAs your parents get older, you’ll have to do more. Enlist the help of your siblings, and make sure everyone stays informed about what’s going on so you don’t risk misunderstandings or bad feelings.

SET UP EARLY-WARNING SYSTEMS

With increased forgetfulness, your mom and dad may be at greater risk of making a major money misstep. They may also be targets for scams. So put some trip wires in place that will alert you if there are problems. Ask your parents to have you listed to receive automatic notification if they miss a bill payment. And consider getting them to give you access to their bank accounts so you can see their daily cash flow information.

One caveat: Be sure to check with the bank about what kind of account your parents have. Make sure you or your siblings are sharing a so-called convenience account, not becoming a joint owner with right of survivorship. That might run afoul of your parents’ estate plan, since you would inherit any leftover assets. It could also put your parents on the hook for the debts of anyone listed on the account, says Patricia Sitchler, an elder-law attorney in San Antonio.

DON’T RUSH TO TAKE OVER EVERYTHING

Remember, Mom and Dad are adults. It’s important to give them as much financial independence as they can handle. Staying active is essential to older people’s well-being, says Laura Carstensen, director of the Stanford Center on Longevity. That means getting out and socializing with friends, which can be difficult for them to do if they don’t have control over some money. Even if you and your siblings eventually have to manage most of their finances, make sure your parents have access to cash and perhaps credit cards, with modest limits, for as long as possible.

Adapted from the June 2011 issue of Money. © 2011 Time Inc. All rights reserved.

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Following the Federal Reserve

To spur borrowing and boost the economy, the Federal Reserve cut the federal funds target rate to near zero at the end of 2008. More recently, the Fed disclosed that it is unlikely to raise rates until late 2014. In January 2012, the central bank released detailed forecasts for the federal funds rate — and stated a specific goal for the rate of inflation (2%) — for the first time in its history.^1–2

The Federal Reserve and the Federal Open Market Committee (FOMC) operate under a dual mandate to conduct monetary policies that foster maximum employment and price stability. In response to the financial crisis, lingering economic weakness, and high unemployment, the Fed has taken a series of unconventional steps.

Meet the Committee

The FOMC meets eight times a year. Projections for economic growth, unemployment, and inflation are collected from all seven members of the Board of Governors of the Federal Reserve System (including Chairman Ben Bernanke) and 12 regional Reserve Bank presidents ahead of scheduled FOMC meetings.

Behind closed doors, participants discuss how economic conditions are likely to change and which policy responses might be appropriate given the economic outlook. The 12 committee members — including all seven governors, the president of the Federal Reserve Bank of New York, and four of the remaining 11 Reserve Bank presidents (on a rotating basis) — vote on specific policy actions proposed during the meeting. Quarterly projections are typically released after their two-day meetings.

Portfolio Moves

During the 2008 credit crisis, the Fed helped stabilize the banking system by making emergency loans to banks and businesses and buying up “toxic” securities whose values had plummeted. The central bank was criticized by some people for putting itself in a position to sustain losses, but so far Fed holdings have generated profits.³

The central bank now holds almost $2.9 trillion of Treasuries, agency debt, and other securities, much of which was acquired through bond-buying programs known as quantitative easing and QE2.⁴

In September 2011, the Fed announced a plan to help drive down long-term rates further. “Operation Twist” involved trading $400 billion of short-term Treasuries for new ones with longer maturities. If the economy falters in 2012, a third round of monetary stimulus remains a possibility.⁵

Communication Matters

One of the most powerful tools the Fed has at its disposal is communication. Traditionally, speeches made by FOMC participants, published economic projections, and the official statements released after each FOMC meeting have been used to inform the public.

Chairman Bernanke began holding press conferences after FOMC meetings in 2011, and detailed rate forecasts followed in January 2012.⁶ This marks quite a shift from the early 1990s, when the Fed didn’t even announce when (or by how much) rates had been adjusted.⁷

Bernanke believes that greater transparency and the clarity gained from forecasts could push down long-term rates and help shape the expectations and behavior of investors, businesses, and households — and managing the public’s expectations could make the Fed’s policy moves more effective.⁸

Investors should remember that future Fed actions will depend on economic conditions. If inflation rises more than expected, higher interest rates will likely follow, despite any previous forecasts.

All investments are subject to market fluctuation, risk, and loss of principal. When sold, investments may be worth more or less than their original cost. U.S. Treasury securities are guaranteed by the federal government as to the timely payment of principal and interest.

1) Federal Reserve, 2012
2, 6) CNNMoney, January 25, 2012
3) The Wall Street Journal, January 10, 2012
4) CNNMoney, January 10, 2012
5) The Wall Street Journal, September 21, 2011
7–8) The Wall Street Journal, January 4, 2012

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent Naperville Financial Planner. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright © 2012 Emerald Connect, Inc.

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Tax-Efficient Investments for the Tax-Averse

Raising taxes is one of many ideas that have been proposed to help reduce mounting federal budget deficits. Yet some taxpayers are already facing the prospect of higher taxes as a result of health-reform legislation passed in 2009.

In 2013, single filers with modified adjusted gross incomes exceeding $200,000 ($250,000 for joint filers) will be subject to a 3.8% Medicare unearned income tax on net investment income. The Medicare payroll tax will increase by 0.9% on wages exceeding these thresholds.

If you are concerned about higher taxes in the future, it may be a good time to consider the tax advantages associated with municipal bonds and tax-exempt mutual funds.

Investing in Infrastructure

State and local governments sell bonds to finance public-works projects such as roads, sewers, schools, and stadiums. Because government entities have the power to raise taxes and fees to pay the interest, municipal bonds are generally considered higher-quality assets. However, they typically pay less interest than taxable debt.

On the plus side, municipal bond income is generally exempt from federal taxes and may not trigger the Medicare tax mentioned earlier. The interest on a bond issued outside the state in which you reside could be subject to state and local taxes, and some municipal bond interest could be subject to the federal alternative minimum tax.

Tax-Free Fund Options

Tax-exempt mutual funds earn interest from their underlying state and local bonds, so they share the same federal income tax exemption. However, if you sell a municipal bond or tax-exempt fund at a profit, you could incur capital gains taxes.

The tax benefits associated with these lower-yielding mutual funds may also make them more suitable for taxable accounts, as opposed to qualified retirement plans and IRAs that allow for tax-deferred growth until the assets are withdrawn. Withdrawals from tax-deferred plans prior to age 59½ may be subject to a 10% federal income tax penalty.

The return and principal value of bonds and mutual fund shares fluctuate with changes in market conditions. When redeemed, they may be worth more or less than their original cost. Bond funds are subject to the same inflation, interest-rate, and credit risks associated with their underlying bonds. As interest rates rise, bond prices typically fall, which can adversely affect a bond fund’s performance.

High Earners May Net More

Investors in the top tax brackets may find that the lower tax-free yields from muni bonds and tax-exempt funds are worth more to them than the after-tax yield from taxable bond investments. For example, a 3% tax-free yield is equivalent to a 4.62% taxable yield for an investor in the 35% federal income tax bracket.

Municipal bonds and tax-exempt funds can be a key component of the portfolios of investors with high incomes and/or a relatively low tolerance for risk. If you fall into these categories, you may want to learn more about tax-efficient investment opportunities that could be appropriate for your personal situation.

Mutual funds are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from a Naperville financial planner. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.

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