DailyFinance.comhttp://www.dailyfinance.comDailyFinance.comhttp://o.aolcdn.com/os/df/2013/img/2-dailyfinance_logo_m.pngDailyFinance.comhttp://www.dailyfinance.comen-usCopyright 2013 Weblogs, Inc. The contents of this feed are available for non-commercial use only.Blogsmith http://www.blogsmith.com/5 Signs That Your Investment Adviser Is Scamming Youhttp://www.dailyfinance.com/2013/05/21/investment-advice-financial-scams/http://www.dailyfinance.com/2013/05/21/investment-advice-financial-scams/http://www.dailyfinance.com/2013/05/21/investment-advice-financial-scams/#commentsFiled under: , , ,

Adviser is a crook
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When it comes to investing, there are precious few certainties, other than the fact that nobody works for your financial best interest as completely as you do.

That fact became obvious to the clients of the Warrenville, Ill., company Capital Management Associates recently when the SEC brought a suit against the father-and-son team that run it for "cherry picking" trades.

We'll get back to that story in a moment. But it's important for everyone to know that even the ethical players in the financial industry earn their living based on the fees they get directly from you or via the providers of products they recommend to help you achieve your goals.

In addition, because financial management is somewhat complicated and the future is never guaranteed, it's an industry rife with opportunities for fraud and theft. That's especially a risk when people turn over complete control of their hard-earned cash to an "expert" who promises to manage it for them.

If you suspect that your financial adviser may be scamming you, here are five signs that can help you uncover it.

Sign No. 1: An Adviser Won't Provide Real-Time Trading Information.

In the case against Capital Management Associates, the SEC alleges that the duo ran trades without specifying whether they were for clients' accounts or for the owners' accounts. Then, once the profitability or loss of the trade was assured, the company would backdate that information, assigning the profitable trades for themselves and the losers to clients.

Losing money in an investment is not a crime, but cherry-picking among winning and losing trades after the fact is.

How could clients of Capital Management Associates have known that they were getting saddled with the bad trades? The short answer is: by staying in the loop.

Those who trust their adviser to trade on their behalf should, at the very least, insist on receiving a running total of all trades when they are made. If your financial adviser can't or won't do that for you, then chances are pretty good that you're being scammed.

Sign No. 2: An Adviser's Returns Are Too Good to Be True.

Bernie Madoff swindled investors out of billions of dollars in what has been called the largest Ponzi scheme ever uncovered. While Madoff, a former chairman of the Nasdaq stock exchange and securities representative on SEC industry panels, knew enough to hide from the regulators for decades, his returns were too consistent to be real.

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Any time an investment advisor is guaranteeing returns or assuring consistency, year in and year out, there's a pretty good chance it's a scam. And while there are a few legitimate annuities with investment accounts structured in a way to "guarantee" you won't lose money, they're generally just high-cost insurance plans where you're paying dearly for those guarantees through the structure of the deal.

Sign No. 3: You're Getting Hot Tips That You're Told You Need to Act on Now.

Any legitimate investment worth owning will still be available tomorrow, after you've had the time to think about it (and research it independently). Any pushy advisor telling you things like, "You've got to act today to get in on the ground floor" or "You don't have time to read the paperwork"
is asking you to act without reviewing something, which is a common hallmark of a scam.

While there are real deadlines for things like IRA contributions, the money in those accounts can easily sit as cash until you've had time to review the details of the investment recommendation. And be aware that prices in the stock and bond markets do change regularly -- often several times throughout a trading day. If your adviser brings you an investment to consider and you do take the time to review it before buying, don't be surprised if the price winds up being a bit different than initially discussed.

Still, it's better to wait and lose a little bit than to lose everything to an outright scam.

Sign No. 4: You're Promised Investments That Will Be "No Cost to You."

If you're working with a financial adviser, that advisor is getting paid by you, either directly by checks you write or indirectly via commissions, spreads, or fees generated by the investments you make. Any adviser claiming otherwise is hiding something -- likely an outlandishly high fee for placing an investment or insurance policy, which can often run north of 7 percent of the invested amount.

A competent advisor deserves to be paid for his or her time and expertise. But one that won't tell you how much you're paying for the service or how you're paying for it is an adviser to walk away from.

Sign No. 5: Your Account Is Being Churned and Burned.

And speaking of fees, be wary of an adviser who regularly churns your account through multiple trades of similar types of annuities, mutual funds, or other investments. If your adviser is getting paid through a hidden commission from making the transaction, that activity is very likely lucrative for the adviser ... but not so much for you.

Not all investments work out, of course, but a common definition of insanity is doing the same thing over and over again while expecting different results.

If your advisor is trying to convince you that the investment you are in is so much worse than a fairly similar one you should be in, that's a sign that neither investment is likely right for you.

Look Out For Your Own Best Interests

To check out a broker or adviser, you can use the free Broker Check from FINRA, the Financial Industry Regulatory Authority. And to learn more about the signs of investment fraud, check out our free course on How to Avoid Financial Scams in the DailyFinance Learning Center.

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]]>capital management associatesfinancial scamsinvestment adviceChuck SalettaTue, 21 May 2013 05:00:00 ESTWant a Happy Retirement? Don't Just Guess About What You'll Needhttp://www.dailyfinance.com/2013/05/10/retirement-planning-guesswork-diy-calculators-advisors/http://www.dailyfinance.com/2013/05/10/retirement-planning-guesswork-diy-calculators-advisors/http://www.dailyfinance.com/2013/05/10/retirement-planning-guesswork-diy-calculators-advisors/#commentsFiled under: , , , ,

retirement planning - too important to guess at.
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Recent research from the Employee Benefit Research Institute confirms what you probably already know: Retirement planning isn't something you can successfully leave to guesswork.

In its research, EBRI found that people who either used online retirement calculators or who worked with financial advisers were far more prepared to have a successful retirement than those who didn't. On the flip side, those who relied primarily on guessing at how much they'd need to cover their expenses wound up far worse prepared for their retirement than the typical person.

At Least Someone Has Contemplated Your Retirement

Intuitively, that makes a ton of sense. Your paychecks stop in retirement, but most of your expenses won't. Indeed, some of your costs -- most likely health insurance -- may well go up once you leave your employer. If you don't have a good handle on what all of your costs will be, you won't be able to adequately prepare for them.

Working with a professional or an online calculator helps in large part because an expert somewhere along the line has already thought about just about everything that goes into a typical retirement.

Those expenses can be estimated, tallied, and totaled. And with those cost estimates in hand, it becomes a straightforward math exercise to figure out how much someone needs to have saved.

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Of course, you'll have to add in some fudge factors, because you can't know how long your retirement will last, and because any future expense estimate is just that -- an estimate. But still, once you have a solid framework for your expenses, the bucket of money you'll need to cover them becomes far clearer.

And speaking of that bucket of money, once you know how big it has to be, figuring out how to accumulate it will largely be driven by estimates on your savings levels, rates of return, and time. Once again, a calculator -- whether run by you yourself or by a financial adviser you hire -- makes it fairly straightforward to figure out what you need to do to get there. The rest is largely a matter of regular review and course corrections, aided, of course, by either your or your planner's retirement calculator.

Which Is Better: Working Alone or with an Adviser?

There's good news for the retirement planning do-it-yourselfers out there. According to the EBRI's data, those who took charge of their own retirement and planned for it on their own with the help of online calculators were generally better prepared than those who used a professional adviser. That held true across all family statuses and income ranges that the EBRI considered.

Still, just like many people need to hire a personal trainer for the encouragement to exercise, other people may need to hire a financial adviser for the encouragement to invest for their retirement. Just beware that every dollar you spend on an adviser -- either directly or indirectly through money the adviser gets paid for selling you products -- is a dollar you can't invest. That dollar also won't compound on your behalf, making it that much tougher for you to ultimately reach your retirement goal.

Nevertheless, you're still far better off putting something away for your future than not investing at all, even if your overall returns aren't the greatest. If it takes prodding from a financial adviser to get you moving on a reasonable plan, that's still leagues ahead of where you'd likely get from mere guessing.

Stop Guessing, Start Doing

If you've never used an online retirement calculator before, now is the absolute best time to take a few out for a test drive. Since time can be the most powerful weapon in your retirement arsenal, the sooner you get moving, the better off you'll be.

The three links below are to different free calculators, any of which will help get you in the ballpark of where you need to be to have a successful plan:
  • AARP -- Very simple and straightforward, with inputs and results graph on the same page.
  • CNN Money -- Good balance between entry effort and results. Big benefit: It shows you the odds of your plan succeeding, rather than just assuming you'll hit your targets.
  • E$P Planner -- Very comprehensive, but takes a long time and requires a lot of inputs and reading.
  • DailyFinance retirement calculators -- This suite of calculators helps you home in on retirement savings specifics, such as which savings account should be tapped first in retirement to the effects of tax law changes and inflation.

Gallery: 13 Money Lies You Should Stop Telling Yourself By Age 40

1. Debt collectors will stop chasing me once I'm in retirement, so why worry about it?2. I can definitely get by in retirement with less income than I'm making now.3. I can always save more by postponing retirement until my late 60s or early 70s.4. I can always rely on Medicare for my long-term health care needs.5. My nest egg will be safe in a bank account.

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]]>Employee Benefit Research InstituteFinanceFinancial advisorHealthretirement calculatorretirement planningChuck SalettaFri, 10 May 2013 13:48:00 ESTDon't Fall For It, Mom. It's a Scam!http://www.dailyfinance.com/2013/05/09/common-financial-scams-that-target-moms/http://www.dailyfinance.com/2013/05/09/common-financial-scams-that-target-moms/http://www.dailyfinance.com/2013/05/09/common-financial-scams-that-target-moms/#commentsFiled under: , , , ,

AMAJYJ Woman Outraged by Scam Mail
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Moms will go to any lengths to ensure their family's well-being. Unfortunately, scammers know that too. So under the guise of helping, they'll go to equally great lengths to part moms from their cash. This Mother's Day -- and every day -- be on the lookout for these common scams that often target mothers and other caregivers.

Make Big Bucks Working at Home!

When money is tight, working at home while still caring for the family may seem like a great way to bring in a few extra bucks. While there are some legitimate work-at-home jobs, the ones that promise easy money for very little work are almost always scams. Be wary of any of the following:
  • You're asked to come up with an "up-front fee" (how about $32,450?!) to get started. Even if you need to acquire certain equipment to do the job, a legitimate work-at-home opportunity will let you buy it from an independent source. If the equipment is really so specialized that the only source is the company, then it shouldn't make you buy it as a condition of employment.
  • It's a requirement that you hand over your bank account details. Direct deposit can be a great convenience, but a legitimate company will either be willing to cut you a paper check or pay you through a trusted intermediary.
  • The job involves transferring money into and out of your account or depositing and sending out checks. In this era of free online bill payments, any legitimate company will have a cheaper way of moving its money around than cutting you a "commission" to forward it on.
Help! I'm Stranded in a Foreign Country!

Moms typically get the call when something goes wrong. That's why scammers look pull at the heartstrings and loosen the pursestrings.

Here's how it works: The scammer contacts a parent or grandparent via email, telephone, text, or social networking site and purports to be a relative stranded overseas or at the hospital and in need of fast cash. The scammer may even put a "policeman" on the phone to add a legitimate air to the situation. Just remember:
  • Hospitals are required to give emergency care regardless of a person's ability to pay. Even if an uninsured person was hospitalized, the hospital will let that person walk out upon completion of care with either a payment plan or financial aid paperwork. If there's a real medical problem, the payment can certainly be worked out later.
  • If someone is legitimately overseas and can actually contact you, that means he or she has a passport and some method of payment. The state department has a process for replacing a lost or stolen passport. Lost or stolen credit cards can be replaced around the world, and major issuers have emergency contact numbers for fast response and assistance. And also, American Express Travelers Cheques can also be refunded if lost or stolen and emergency cash provided if needed.
Let Us Help You Get Out of Debt

Moms regularly manage the day-to-day household budget and spending. If money gets tight and the credit card balances get out of control, it might be tempting to turn to a credit card settlement company for help. Unfortunately, there are a lot of shady folks operating them, and the worst among them will charge you an arm and a leg to do what you could do by yourself.

Watch out for the following bad behaviors:
  • It's generally illegal for a debt settlement company to require you to pay an up-front fee to negotiate with your lenders on your behalf.
  • If a settlement company makes you pay your money to them to have them pass it on to the credit card company, the "cure" may wind up worse than the disease. That could be a telltale sign that they are using a harmful strategy -- not paying your bills until the credit card company is willing to be more flexible in order to get something back. The problem is, it's your credit, not the settlement company's, that gets destroyed by those missing payments. Plus, you may end up owing taxes on the canceled debt.
Instead, before you let Mom get into deeper trouble by paying someone to make her credit even worse, instruct her to try the following:
  • Call the lender and ask for a lower interest rate. They'll more likely be flexible with customers who have a good payment history than with those who have missed several payments. They'd rather get their money back in full at a lower interest rate than wind up settling for only a portion later.
  • If Mom has already missed several payments, she's got just about the same negotiating leverage (and dinged-up credit) as if she had used a "slow-pay" settlement company. Make a phone call to the credit card company and work out a settlement payment plan directly with them on your own. It might work out better than using the settlement company, and certainly helps avoid the middleman settlement fees.
It's tough being a mom and juggling family and money. It's even tougher if you get tripped up in a financial scam that sets you back, especially when you only wanted to help. By watching out for the telltale signs and knowing how things really work, you can protect yourself and your family from getting burned.

Gallery: 9 Scary Ways Criminals Use Facebook

1. Hacking Accounts2. Commandeering Accounts3. Profile Cloning4. Cross-Platform Profile Cloning5. Phishing

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]]>credit repairfinancial scamsMothers DayScamsChuck SalettaThu, 09 May 2013 05:00:00 ESTBerkshire Hathaway's Future Weighs on Investors' Mindshttp://www.dailyfinance.com/2013/05/03/berkshire-hathaway-annual-meeting-warren-buffett/http://www.dailyfinance.com/2013/05/03/berkshire-hathaway-annual-meeting-warren-buffett/http://www.dailyfinance.com/2013/05/03/berkshire-hathaway-annual-meeting-warren-buffett/#commentsFiled under: , , ,

charles munger warren buffett berkshire hathaway annual meeting
ChinaFotoPress/Getty ImagesBerkshire Hathaway vice chairman Charles Thomas Munger, left, and CEO Warren E. Buffett attend a conference in Beijing in 2010.
This weekend, somewhere in the neighborhood of 40,000 capitalists will make what has become their annual pilgrimage to the investing mecca normally known as Omaha, Neb., On Saturday, Berkshire Hathaway (BRK.A) (BRK.B) hosts its annual meeting, and the investing world will listen with rapt attention to the words of wisdom of the company's leaders: Warren Buffett and Charlie Munger.

The admission ticket to be a part of this event that has become known as "Woodstock for Capitalists" is available for free to anyone who owns at least one share of stock in Berkshire Hathaway. An "A" class share will cost you about as much as a house -- $160,857 as of Thursday's close. For those of us who aren't the multimillionaire type capable of dropping a hundred grand (and then some) on a weekend getaway, "B" class shares are also available, closing Thursday at a more pedestrian $107.30.

What's on everyone's minds this year?
Buffett's and Munger's successes throughout the decades have been tremendous, and everyone wishes them continued success and health. Still, that combination of a ticking clock (these gents are octogenarians, after all) and incredibly strong performance means there are two big questions that face the company, now more than ever before:

Question No. 1: Who will succeed Buffett and Munger -- now age 82 and 89, respectively -- to lead the company when, by choice or by force of nature, they move on?
It's an important question to ask, since the company has achieved so much mainly because of those two men at the top. They possess an incredible -- and rare -- combination of investing prowess, patience with a long-term perspective, and operational discipline that has allowed Berkshire to become the powerhouse company it is today.

Unless all three qualities can be found in the company's next generation of leaders, the Berkshire Hathaway 10 years from now will look nothing like the one that investors know and love today.

The temperament to stick to a long-term time frame is a critical skill for the leader of the Berkshire operation to possess because Berkshire Hathaway is a conglomerate of largely independently operating companies. As Buffett has said, "Charlie [Munger] and I are the managing partners of Berkshire. But we subcontract all of the heavy lifting in this business to the managers of our subsidiaries. In fact, we delegate almost to the point of abdication."
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Many people who get to CEO level of a company do so because they're strong managers. The temptation would be incredibly strong for a CEO candidate to put his or her stamp on the brand and fiddle with that unique recipe that got Berkshire this far. Yet if companies no longer feel like they can be acquired by Berkshire and be put in the corporate equivalent of the "Metropolitan Museum" (to forever have a wing unto itself) to continue to run independently, Berkshire will lose its ability to get such great pricing for solid businesses.

Additionally, two of Berkshire's key qualities are its rock-solid balance sheet and its prodigious cash-generating abilities. Those were made possible by Buffett's and Munger's long-term focus and operational discipline. A CEO more accustomed to the "make the quarter's numbers at any cost" mentality of most public companies would be easily tempted by that cash. After all, even Berkshire Hathaway under Buffett posts losses every once in a while.

Many of those losses could have been avoided by a manager with a short-term mentality and a willingness to make a quick deal. But that short-term thinking would likely have destroyed billions in long-term value.

The next Berkshire CEO must be willing to put the long-term health of the company ahead of the short-term quest for the next quarter's profit target, or else the company will lose its ability to compound over the long term as efficiently and effectively.

Question No. 2: How can the company continue to outperform, now that it has gotten so big? And if it can't, isn't now the time to start paying a dividend?

Under Buffett, Berkshire Hathaway has grown. A lot. Yet the bigger a company, the bigger its deals need to be to effectively move the needle.

Even Buffett himself acknowledges that it's tougher to outperform as the manager of a large pot of cash:

Anyone who says that size does not hurt investment performance is selling. The highest rates of return I've ever achieved were in the 1950s. I killed the Dow. You ought to see the numbers. But I was investing peanuts then. It's a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that.

The company has underperformed the S&P 500 over the past four years, and if it underperforms this year, it'll be the first time in the company's history under Buffett that it underperforms the market for five years. If Berkshire Hathaway has gotten so large that the world's greatest investor can't reliably steer it to beat the market, then what chance is there for any other mere mortal to do it?

In the absence of a consistent market-beating growth plan, the logical choice is to initiate a dividend. That would allow shareholders to retain their ownership of a still incredibly strong Berkshire Hathaway while freeing up money to either invest elsewhere or spend.

Still, given Buffett's reputation as a dividend collector rather than dividend payer, along with his ability to still manage Berkshire's portfolio better than anyone else, that question may be one that will have to wait for his successor.

Will we find out?
If history is any guide, neither of those questions will likely be completely answered in this weekend's Berkshire Hathaway annual meeting. Still, the experience pays a unique homage to American capitalism and one of the greatest investing teams of all time. It's worth the price of admission, especially since you get a stake in one of the world's strongest companies along with your entry to that event.

Motley Fool contributor Chuck Saletta has no position in any stocks mentioned. The Motley Fool recommends Berkshire Hathaway. The Motley Fool owns shares of Berkshire Hathaway.

Gallery: Companies Paying The Most and Least Taxes

Companies Paying the Most in TaxesCompanies Paying the Most in TaxesCompanies Paying the Most in TaxesCompanies Paying the Most in TaxesCompanies Paying the Most in Taxes

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]]>annual meetingberkshire hathawaycharlie mungerconglomerateinvestoracle of omahashareholderswarren buffettChuck SalettaFri, 03 May 2013 13:27:00 ESTWhat's Next for Social Security?http://www.dailyfinance.com/2013/04/24/social-security-trust-fund-outlook/http://www.dailyfinance.com/2013/04/24/social-security-trust-fund-outlook/http://www.dailyfinance.com/2013/04/24/social-security-trust-fund-outlook/#commentsFiled under: , , , ,

social security card and banknotes.
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Over the last several years, the news about Social Security's long-term health has gotten progressively worse. With nearly every passing year, the Social Security Administration's annual Trustees' Report has pulled forward the date when the Social Security Trust Funds are expected to run out of cash.

About a year has passed since the last report, which pegged the date at 2033, and the next is due soon. Still, a collapse date 20 years from now wouldn't seem so bad if it weren't for the fact that the trend suggests it probably won't stay that far away, as the chart below illustrates:
Trustee Report Year Estimated "Run Dry" Date
2012 2033
2011 2036
2010 2037
2009 2037
2008 2041
Source: Social Security Administration.

On top of that worrisome pattern, data published earlier this year by the Congressional Budget Office indicate that the Social Security Trust Funds' problems continue to get worse. A combination of higher disability claims, low interest rates, and stubbornly high unemployment have conspired to draw closer the date when the program's reserves will be exhausted.

Based on that, chances are strong that this year's Trustees' Report will pull the funds' expiration date even sooner.

Regardless of exactly when the projected date for the Trust Funds to run dry is, if nothing changes, those reserves are going to run out -- at which time, benefits will be cut.

What Happens to You When It Runs Out of Reserves?

The Social Security Trustees indicate that when the reserves are gone, incoming taxes will only be able to cover about 75 percent of the program's current promised benefits. Nobody is quite sure yet how that 75 percent will be distributed across beneficiaries, but chances are good that your benefits, along with everyone else's, will be affected by that shortfall.

The average monthly Social Security check to a retiree currently sits at $1,265.82. While everyone's situation varies, a 25 percent cut in those benefits translates to a substantial loss in income.

The table below shows just how big a kick in the pocketbook those cuts will be to typical beneficiaries:
Family Status Average Annual Benefit Benefit at 75% Annual Cut
Two retired workers $30,379.68 $22,784.76 $7,594.92
One retired worker, one spouse $22,743.00 $17,057.25 $5,685.75
One retired worker only $15,189.84 $11,392.38 $3,797.46
Source: Author calculations based on data from the Social Security Administration.

If you're a fairly young retiree now of around age 65, in 20 years, when the Trust Funds are currently projected to empty, you'll be 85. Will you be willing -- or even able -- to find a job to cover that shortfall?
And if you're in your mid-40s or younger now, all signs point to you never getting your anticipated full retirement benefit as long as Social Security remains on its current path.

What's Being Done to Stop the Slide?

As the years tick closer to the date the Trust Funds empty, it gets far tougher financially to shore up the system to prevent that collapse. Rght now, the only proposal getting serious consideration is President Obama's budget proposal to tie the increases in Social Security payments to the "Chained CPI," which would slow the rate that benefits grow in response to inflation.

By reducing the inflation-adjusted growth in the average Social Security check by an estimated $30 a month by 2023, the Chained CPI modification would reduce the program's net outflow of cash. But that would only cover about a quarter of the program's long-term shortfall. It's a little bit of pain over a long period of time that postpones, but doesn't stop, the Trust Funds' collapse and the eventual substantial cut in overall benefits as a result.

If it comes to pass, the Chained CPI change is expected to cut the growth in payments by somewhere in the neighborhood of around 0.1 percentage points to 0.3 percentage points per year. The table below shows what that would mean to a recipient getting today's average Social Security retiree payment, assuming 3 percent inflation calculated under the current method and a few different Chained CPI levels:
Year 3% Inflation 2.9% Chained CPI 2.8% Chained CPI 2.7% Chained CPI
2013 $1,265.82 $1,265.82 $1,265.82 $1,265.82
2014 $1,303.79 $1,302.53 $1,301.26 $1,300.00
2024 $1,752.19 $1,733.57 $1,715.13 $1,696.86
2034 $2,354.80 $2,307.25 $2,260.62 $2,214.89
2044 $3,164.65 $3,070.78 $2,979.60 $2,891.05
Source: Author's calculations. Assumes no reduction in payments after the Trust Funds empty.


One thing is becoming crystal clear -- you can expect to be on the hook to cover more of your retirement income needs on your own. That's true regardless of whether we'll face the reduction from the Chained CPI, the reduction from the emptying of the Social Security Trust Funds, or some combination of both.

For ideas on how to start covering for the shortfall:

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]]>Barack ObamaCongressional Budget OfficeRetirementretirement planningSocial SecuritySocial Security trust fundChuck SalettaWed, 24 Apr 2013 09:40:00 EST3 Spring-Cleaning Tips for Your Finances Worth $8,000 to Youhttp://www.dailyfinance.com/2013/04/23/financial-spring-cleaning-tips/http://www.dailyfinance.com/2013/04/23/financial-spring-cleaning-tips/http://www.dailyfinance.com/2013/04/23/financial-spring-cleaning-tips/#commentsFiled under: , , , , , , ,

Spring cleaning credit card balance - Alamy
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Money's tight for most of us these days, with the median household income well off the peak it reached before the financial meltdown. Anything that helps people scrape together a few extra bucks can be a great help.

With tax season over and the weather finally thawing out, now is the perfect time to take a look at three easy steps you can take to spring-clean your finances. These simple moves could put more than $8,000 in your pocket over the next year.

No. 1: Stop loaning your money to Uncle Sam for free (money in your pocket: $2,790)

Are you looking forward to a sweet refund from the Feds or your state this year? You're not alone. According to IRS data, the average tax refund is somewhere in the neighborhood of $2,790 this year. As nice as it may feel to get that refund, in reality, you're just getting your own money back after having lent it to the U.S. government interest-free for the better part of a year.

By adjusting your withholdings (or your estimated tax payments if you're self-employed or retired) to come closer to breakeven on your taxes, you can keep more of your money working for you. As long as you keep within what are known as the Safe Harbor limits and make your payments on time, you can even borrow a bit from Uncle Sam, interest-free, and settle up on April 15 next year. You're covered by those Safe Harbor rules if any of the following are true:
  • You owe less than $1,000.
  • You pay at least 90 percent of what you owe for 2013.
  • You pay at least as much as you owed last year (or 110 percent of what you owed for 2012 if your 2012 AGI was above $150,000 or above $75,000 if married filing separately).

No. 2: Make a dent in your credit card debt (money in your pocket: $2,392.50)

If you are getting a refund, turn around and use the money to pay down your highest-interest credit card debt. The average American family with credit card debt owes around $15,950 on their cards, with typical interest rates around 13 percent to 15 percent. Letting that debt fester at 15 percent interest ends up costing you $2,392.50 in interest per year. The sooner you can stop paying out that interest, the better off you'll be.

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And even if you can't pay off your credit card debt, paying it down still helps your credit score by lowering the amount of outstanding debt you have. That has a positive cascading effect: The higher your credit score, the better position you're in to negotiate with your creditors to knock down your rates on your balances. With a good enough score, you can reduce the interest rates on your cards substantially -- and may even qualify for some 0 percent introductory-rate cards. The less you pay in interest, the easier it is to dig yourself out of debt.

No. 3: Refinance your home mortgage (money in your pocket: $2,893.60)

As recently as 2011, 30-year fixed mortgage rates were above 5 percent. Now, they're down around 3.4 percent. A typical mortgage balance is around $213,000. If you're planning on staying in your home for the foreseeable future, refinancing a two-year-old mortgage to knock 1.6 percent off the interest rate could save you around $2,893.60 in interest in your first year. That's money going toward your equity and/or directly into your pocket that benefits you and not your bank.

Of course, you may need to pay up-front fees in order to lock in that lower rate, but those are costs you'll quickly recover through the lower interest payments on the mortgage. And if you're strapped for cash and can't cover the up-front fees, many lenders offer lower-fee mortgages where you trade off a slightly higher rate in exchange for lower fees up front. That trade-off means that you won't save quite as much on interest, but the lower rates still may be worth it for you over the life of your mortgage.

Three changes -- $8,076.10 more in your pocket

If you're able to take advantage of all three of these tips, together they can put $8,076.10 in your pocket over the next year. That's a decent haul, even in good times. These days when we're all feeling more strapped for cash, it might just be the edge needed to help stop you from merely treading water and start you swimming toward the shore of financial stability.

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]]>Financepaying down debtrefinancingsaving moneyspring cleaningwithholdingChuck SalettaTue, 23 Apr 2013 12:25:00 ESTInflation Worries? Fight Back with Dividend Stockshttp://www.dailyfinance.com/2013/04/17/inflation-worries-fight-back-with-dividend-stocks/http://www.dailyfinance.com/2013/04/17/inflation-worries-fight-back-with-dividend-stocks/http://www.dailyfinance.com/2013/04/17/inflation-worries-fight-back-with-dividend-stocks/#commentsFiled under: , , ,

Budget proposal could change how inflation is calculated
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Inflation is back in the news these days, thanks to President Obama's new budget proposal. That proposal adjusts the way inflation gets calculated in an attempt to raise tax revenue and stem the rise of Social Security spending by slowing the rise in the Consumer Price Index.

No matter how it gets officially calculated, inflation is a real threat to your long-run ability to make ends meet. You need an effective way to fight that threat, especially now that potential changes to the official calculations are likely to slow the automatic benefits you're used to getting from the old method.

Pick your Risk

In this era of abysmally low interest rates, there are no safe and surefire ways to protect yourself from the ravages of inflation. Even recent issues of TIPS bonds -- the U.S. government's Treasury Inflation Protected Securities, which are designed to help investors fight inflation -- currently carry negative interest rates. That means investors will still lose money in real terms after those bonds adjust for inflation.

The real question these days isn't whether you take risks with your money to try to keep pace with inflation -- it's what risks you take just to keep treading water in real terms.

In that light, owning the stocks of companies that pay dividends, have regularly increased their dividend payments, and look capable of continuing to raise their dividend payments just might be the best inflation fighter available to your arsenal.

Why Dividends May Be Your Best Bet

There are three key reasons to believe that successful companies can continue to raise their dividends at least as fast as inflation: accounting, real growth, and cost-cutting.

Accounting: Consider a company that likes to pay a dividend equal to 50 percent of its after-tax earnings to its shareholders as a reward for the risks of owning its stock. If its costs rise in line with inflation and it can pass a similar increase down the line to its customers (whose costs would also be rising in line with inflation), then it has an automatic gain in profits and dividends, in line with that inflation. The table below shows how it works:
First Year Second Year, After 3% Inflation
Costs $1,000,000 $1,030,000
Revenues $1,100,000 $1,133,000
Pre-Tax Profits $100,000 $103,000
Tax (35%) $35,000 $36,050
Profit After Tax $65,000 $66,950
Dividend (50%) $32,500 $33,475
Dividend Increase 3%
Data from author's calculations.

In reality, not all costs or prices rise exactly in line with inflation, but the general concept still holds.

Real growth: Of course, most companies wouldn't be satisfied to just keep pace with inflation; they're trying to grow their businesses in real terms, as well. Assume that, in addition to the 3 percent inflation, they manage to eke out 1 percent growth in both revenues and costs, from really building their business through introducing new products or gaining new customers. The adjusted table would look like this:
First Year Second Year, After 3% Inflation and 1% Real Growth
Costs $1,000,000 $1,040,000
Revenues $1,100,000 $1,144,000
Pre-Tax Profits $100,000 $104,000
Tax (35%) $35,000 $36,400
Profit After Tax $65,000 $67,600
Dividend (50%) $32,500 $33,800
Dividend Increase 4%
Data from author's calculations.

Cost-cutting: Additionally, just like you and I try to look for ways to cut costs in order to keep our own personal inflation rates down, so do companies. They use tactics like "leveraging their scale" to try to get better prices on their larger purchases, not replacing people who leave (or even downright firing folks), and redesigning their products and processes to cost them less.

Assume that same company facing 3 percent inflation and the costs of 1 percent real growth successfully cuts down its baseline costs by 1 percent. Its adjusted table would look like this:
First Year Second Year, After 3% Inflation, 1% Real Growth, and 1% Cost-Cutting
Costs $1,000,000 $1,029,600
Revenues $1,100,000 $1,144,000
Pre-Tax Profits $100,000 $114,400
Tax (35%) $35,000 $40,040
Profit After Tax $65,000 $74,360
Dividend (50%) $32,500 $37,180
Dividend Increase 14.4%
Data from author's calculations.

Those three factors, working together, are what allow many companies to consistently raise their dividends and what enable those dividends to often increase at least as fast as inflation.

Who's Done It?

These sorts of things actually happen in the real world. Several companies have been increasing their dividends for decades, and a few have actually reached the half-century mark of not only paying dividends, but regularly increasing them as well.

The table below calls out a handful of the ones that have been most successful at pulling off that string of longevity:
Company Industry Years of Consecutive Increases Date of Last Increase Amount of Last Increase Payout Ratio
American States Water (AWR) Water utilities 58 July 31, 2012 27% 45%
Genuine Parts (GPC) Auto parts wholesale 57 Feb. 19, 2013 9% 48%
3M (MMM) Conglomerate 55 Feb. 5, 2013 8% 37%
Coca-Cola (KO) Beverages-soft drinks 51 Feb. 21, 2013 10% 52%
Johnson & Johnson (JNJ) Drug manufacturers -- major 50 April 26, 2012 7% 62%
Data from company press releases and DailyFinance, as of April 10, 2013.

Dividends aren't guaranteed, of course. But given the choice between an absolute guarantee that your buying power will lose ground to inflation over time and a fighting chance to keep pace that's backed up by decades of evidence, wouldn't you want to at least consider giving growing dividends a try?

For More on Dependable Dividends

If you're on the lookout for stocks with strong track records of paying you well for owning them, The Motley Fool has compiled a special free report outlining our nine top dependable dividend-paying stocks. It's called "Secure Your Future With 9 Rock-Solid Dividend Stocks."

Motley Fool contributor Chuck Saletta owns shares of Genuine Parts Company. The Motley Fool recommends 3M, Coca-Cola, and Johnson & Johnson. The Motley Fool owns shares of Johnson & Johnson.

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]]>3MBarack Obamacoca coladividend stocksFinanceinflationInvestingJohnson & JohnsonChuck SalettaWed, 17 Apr 2013 05:00:00 ESTHow 'Chained CPI' Will Hit Your Pocketbookhttp://www.dailyfinance.com/2013/04/10/chained-cpi-explained/http://www.dailyfinance.com/2013/04/10/chained-cpi-explained/http://www.dailyfinance.com/2013/04/10/chained-cpi-explained/#commentsFiled under: , , , ,

President Obama
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President Obama's new budget proposal includes changing a couple of key inflation calculations to something called a "chained CPI." The shift is getting a lot of attention right now because of the expected effect it will have on individuals.

There are two key places where a chained CPI -- short for consumer price index -- will have a direct impact on your pocketbook: income taxes and Social Security benefits. All else being equal, over time, your income taxes will be higher and your Social Security benefits will be lower than they are under current inflation calculations.

The key difference between the chained CPI and the traditional consumer price index is how the index measures consumer behavior. The chained CPI assumes that as prices rise on one product, some portion of consumers will be willing to substitute less expensive alternatives for what they used to buy.

That changes the product weightings used in the inflation calculation. By incorporating information from those new product weightings, the chained CPI typically produces a lower inflation level.

Here's how it works.

The Impact on Income Taxes

If you pay income taxes, your tax bracket is determined by the amount of taxable income you make. The cutoffs for each bracket generally rise over time with inflation.

The two charts below show the IRS "Schedule X" brackets for single taxpayers; the first is for 2012, and the second is what's currently expected for 2013:
IRS Chart
Chart for 2012 from the U.S. Internal Revenue Service
Chart for 2013 from the US Internal Revenue Service
Chart for 2013 from the U.S. Internal Revenue Service


While the 39.6 percent tax rate is new for 2013, note that the other brackets have higher cutoffs for 2013 than they did for 2012. That's thanks to the inflation adjustment made to the tax brackets.

If the law is changed so that the chained CPI is used, the tops of those brackets are expected to rise more slowly, exposing more of your income to higher tax rates than under current law.

The Effect on Social Security Benefits

Similarly, Social Security benefits are increased based on the inflation rate. By tying the payment increases to the chained CPI -- an inflation rate that grows more slowly than the current measure -- those benefit payments will grow less quickly as well. As a result, over time your Social Security checks will be smaller than they would have been under the old inflation calculation.

The annual changes aren't too extreme -- they're estimated to be somewhere in the vicinity of 0.1 percent to 0.3 percent per year, depending on what the future brings. But over time, it adds up to real money for those who pay income taxes or receive Social Security checks, with official estimates in the neighborhood of $340 billion in higher taxes and lower costs over the next 10 years.

Is It Better? Is It Fair?

To some extent, the chained CPI is more effective at measuring the behavior changes that we all make whenever possible to save some cash.

For example, if you've switched to generic medications whenever they're available, you're doing exactly what the chained CPI expects you to do. Likewise, if you started carpooling or taking the bus in response to higher gas prices, you're changing your behavior based on higher prices, just like the chained CPI projects.

On the flip side, of course, not all costs are easily switchable, especially for the seniors who rely on Social Security. For instance, health care costs have been rising faster than the overall inflation rate for decades, and older folks generally have higher health care costs than younger ones do. As a result, the change to a chained CPI will very likely make the gap between income growth and health care spending growth even more painful for seniors on Social Security.

The Big Picture

Still, if slowing the rate of benefit increases puts off the day of reckoning for when the Social Security Trust Fund runs out of cash and slashes benefits by around 25 percent, it may be worth it. That date is currently estimated to be a mere 20 years away -- well within the expected life span of most current workers and even some early retirees. To make it worse, if the CBO's recent release on Social Security is any indication, the next Social Security Trustees' Report may even pull that date even closer.

Given a choice between a slower rate of growth or a hard slash of 25 percent at some point in the not-too-distant future, neither option seems ideal. But still, a slower rate of growth is a lot less painful than waking up one day to find your sole source of income has shrunk by a quarter of its former value.

Gallery: 10 Things You Must Know About Social Security

1. It's an Age Thing2. How Benefits Are Factored3. COLA Isn't Just a Soft Drink4. The Extra Benefit of Being a Spouse5. Income for Survivors

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]]>budget battlechained cpi explainedconsumer price indexcpieconomyEntitlement reforminflation calculationsobama budgetobama chained cpisequestrationsocial securitySocial Security Trust FundChuck SalettaWed, 10 Apr 2013 05:00:00 ESTThe Last-Minute Tax Move That Could Be Worth $100,000http://www.dailyfinance.com/2013/03/20/last-minute-tax-move-worth-hundred-thousand-dollars/http://www.dailyfinance.com/2013/03/20/last-minute-tax-move-worth-hundred-thousand-dollars/http://www.dailyfinance.com/2013/03/20/last-minute-tax-move-worth-hundred-thousand-dollars/#commentsFiled under: , , , ,

Filing taxes online
Alamy
The 2012 tax filing deadline is upon us, and if you haven't filed yet, don't worry -- you're not alone. H&R Block (HRB) estimates that on average, Americans are about two weeks behind last year's filing pace, with about 60 million yet to file as of the beginning of March.

A big part of the delay is driven by the last-minute tax law changes and new reporting requirements that were so complex that even the IRS was forced to delay its typical starting date for accepting returns.

If you've got all the paperwork and are just dreading the effort or the bill you might have to pay, here's something that might motivate you to get moving: There's a last-minute tax move you can make for 2012 that could potentially be worth over $100,000.

The move that can be worth so much? It's simple: Fund your IRA for 2012.
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And exactly how do we come up with the tasty $100,000 carrot to get you to act? Like this: The money you contribute to an IRA (traditional or Roth) grows tax deferred. And if the IRA you fund is a Roth IRA, that growth may even end up being completely tax free.

People under age 50 can contribute up to $5,000 for 2012. If that $5,000 contribution compounds at 8 percent annually for the next 40 years, your savvy tax move you make in the next month winds up being worth $108,623.

That's not a bad haul for a one-time investment, but you've got to get moving.

While the IRS will automatically let you extend the deadline to file your 2012 taxes , the window slams shut on 2012 IRA contributions after April 15. In short, filing extensions do not apply to IRA contributions.

What If You Don't?

Of course, there's nothing forcing you to contribute to your IRA. If you can't come up with the cash or otherwise choose to not contribute, that's fine. But understand what you miss out on:
  • Tax-deferred compounding: You can still invest money outside of your IRA, but you'll likely owe taxes on dividends and capital gains on the returns that money makes, even years before you need to spend it.
  • Creditor protection: Many states shield some or all of your IRA assets from creditors, protecting that money from being seized to satisfy most common debts. Money in an ordinary brokerage account does not enjoy that kind of protection.
  • College financial aid: Money held in an IRA is not counted as an asset for calculating a family's expected financial contribution when calculating federal financial aid for college. Investments in ordinary brokerage accounts reduce the amount of aid a student can receive, whether those investments are held by the student or that student's parents.
  • Penalty enforced retirement focus: With few exceptions, tapping your IRA prior to retirement is a very expensive proposition. Most early withdrawals are subject to being taxed at your marginal income tax rate plus a 10 percent penalty for taking the money out early. If you've ever been tempted to spend a chunk of money just because it's there, that penalty can help you avoid that temptation, giving your cash the opportunity to truly compound for decades on your behalf.

There's Always Next Year (or Is There?)

If you don't fund your 2012 IRA now, of course you can always "wait until next year." Of course, then you'll miss out on the benefits of starting the all-powerful compounding clock right now. Plus, unless you make the commitment to yourself to fund your plan, you may well wind up in the same situation next year, too.

If you wait long enough, the opportunity to invest a little now and let compounding turn it into a comfortable retirement will pass you by. And that would truly be a tragedy.

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]]>Filing taxesFinancefund an IRAIRSretirement planningRoth IRAtax deductionstax formsChuck SalettaWed, 20 Mar 2013 05:00:00 EST3 Ways to Spring Clean Your Portfoliohttp://www.dailyfinance.com/2013/03/18/portfolio-spring-cleaning-investments/http://www.dailyfinance.com/2013/03/18/portfolio-spring-cleaning-investments/http://www.dailyfinance.com/2013/03/18/portfolio-spring-cleaning-investments/#commentsFiled under: , ,

Wealthy man with a feather duster
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With the cold winter weather starting to thaw, it's a great time to tackle those spring cleaning projects -- not just at home, but in your portfolio, too.

The market's recent rise makes it a little easier to tackle the three tasks below. After all, it's much more fun to lock in a gain than it is to admit defeat and settle for the consolation prize of a potential tax loss write-off.

Clean-up tip No. 1: "Sell" every investment you own.

If you've got a life outside of your investments, you may be waking up this fine spring morning to find that your portfolio has become a collection of stuff you picked up along the way, rather than a concerted investment plan.

By acting like you plan to sell every investment, you'll best know which are the ones you're able to part with now, thanks to the market's recent generosity.

To get this perspective, put each investment into context and assess which ones are worth holding, take a look at each position you hold and fill in the blanks: "I own _____________ because of __________. I'd be willing to sell if ________________."

Whatever your reasons for owning each investment, ask yourself if it still makes sense for you to do so. You may find that the market's recent rise has generously given you exactly what you need in order to justify moving your capital to a more productive use. And if some haven't reached your sell criteria yet, you've made a list you can refer to later when they do.

Clean-up tip No. 2: Adjust your investments based on your timelines.

Next, you can use the proceeds from any sales to adjust your holdings based on when you'll need the money. This is important to assure that the cash will be there when it's needed.
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Money you need in the very near future -- in the next year or so -- should be either in cash or in something like a CD or a maturing Treasury bond that will automatically turn into cash by the time you need it. At today's low interest rates, even some bonds can be too risky to own for short term money, especially ones that are years away from maturing.

The longer you have before you need the money, the more risks you can take with it.

Respect the calendar. The market doesn't care when you'll need the money or how much of it you'll ultimately need. It took us more than five years to reset to the market highs from the last time stocks peaked.

Unless you've got somewhere in the neighborhood of that kind of time to wait for the next set of market highs before you need to spend the money, take today's high prices as a gift. As they say, a bird in the hand is worth two in the bush.

Clean-up tip No. 3: Reallocate to balance the risks you face.

By paying attention to how your money is allocated across investment classes, you'll be better able to manage across the variety of risks you face by investing. Remember, over the long run, there's no such thing as a risk-free investment. Here are the key risks facing common investment types:
  • Cash -- Abysmally low interest rates means that holding cash means losing ground to inflation, especially after taxes. And while other countries may have higher interest rates, holding their cash exposes American investors to currency fluctuation risks, as well.
  • Bonds -- Those same low interest rates mean that bonds face insanely high interest rate risks and can lose a ton of value when rates rise.
  • Real Estate -- In spite of the old maxim that they're not making any more land , remember that the recent financial panic and global economic meltdown was started by a real estate crash.
  • Commodities -- As Warren Buffett has famously said, "The problem with commodities is that you are betting on what someone else would pay for them in six months. The commodity itself isn't going to do anything for you."
  • Stocks -- No matter how wonderful the long term wealth creation prospects are in stocks, they can be incredibly volatile from day to day. Also, the company behind any individual stock can go bankrupt, with the common stock investors last in line for any meager recovery.
As a result of that reality that there is no such thing as a risk free investment, the best you can do is balance your risks by reallocating your portfolio across asset classes. It's largely a personal choice how to allocate, but remember to look at your total financial picture -- including your retirement accounts -- when you do.

Put a portfolio spruce-up on your calendar now

Use all three tips together, and you've got a simple portfolio spring cleaning strategy that will help assure your money works for you as hard as you worked to earn it in the first place.

Gallery: These 10 Stocks Missed the 4-Year Bull Market

1. Staples2. Dean Foods3. People's United Financial4. Best Buy5. Exelon

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]]>investing tipsinvestment planportfolio rebalancingretirement planningChuck SalettaMon, 18 Mar 2013 14:01:00 ESTHow Risky Are Your Bonds? Here's How to Tellhttp://www.dailyfinance.com/2013/03/15/bonds-risk-interest-rates-modified-duration-yield/http://www.dailyfinance.com/2013/03/15/bonds-risk-interest-rates-modified-duration-yield/http://www.dailyfinance.com/2013/03/15/bonds-risk-interest-rates-modified-duration-yield/#commentsFiled under: , ,

Wall street bond investments
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At some point, the party is going to end: Interest rates are currently at unsustainably low levels -- levels not supported by natural supply and demand, but by the Federal Reserve's aggressive policies.

Higher rates are generally good for people looking to put new money to work in the bond market. But what about those already invested in bonds?

As Dan Caplinger recently pointed out here on DailyFinance, this is an extraordinarily risky time to be in the bond market. If you're holding onto bonds right now, when rates rise, the price of existing bonds will drop. And that, in turn, will knock out much -- if not all -- of the safety the bond buyers thought they were getting by buying them in the first place.

Just how far will prices fall?

While all standard, fixed-coupon bonds will fall when interest rates rise, each will fall a bit differently based on what's known as its modified duration. It's a formula, available in Microsoft Excel and online calculators like this one that figures out how many percentage points the price of a bond will drop for a one percentage point increase in interest rates.

The bigger the modified duration, the bigger the risk.

When $100 Is Only Worth $90.60

U.S. Treasury Bonds are a potent example of this danger in action. As of this writing, the longest-dated U.S. Treasury Bond matures in November 2042 -- nearly 30 years from now. When those were issued last November, interest rates were even lower than they are today. Those bonds have a coupon rate of 2.75 percent, but their current yield to maturity is closer to 3.25 percent.

A half point rise in rates may not seem like a very big deal, but those bonds have lost nearly 10 percent of their market value on that tiny move. What was issued as a bond with a $100 face value can be picked up in the market for about $90.60.

Oh sure, Uncle Sam still guarantees that investors will get back the full $100 -- in 2042 -- and $2.75 a year in interest payments while they wait. But that guarantee is cold comfort for those who've just seen the value of more than three years' worth of those interest payments vanish in just a few months on a mere half-point rise in rates.

Running the Numbers

Indeed, calculating the modified duration of investment grade bonds from well-known issuers, the numbers right now can be a bit scary. The table below shows the gory details:

Issuer Bond CUSIP Maturity Date Coupon Rate Current Yield to Maturity Modified Duration
US Treasury Bonds 912810QY7 11/15/2042 2.75% 3.25% 19.4
Microsoft (MSFT) 594918AR5 11/15/2042 3.50% 3.90% 17.7
Berkshire Hathaway
(BRK.A)
(BRK.B)		 084670BK3 2/11/2043 4.50% 4.41% 16.4
Boeing (BA) 097023AK1 4/15/2043 7.88% 4.29% 14.7
Kraft Foods (KRFT) 50076QAE6 6/4/2042 5.00% 4.52% 15.6











Data from ScotTrade bond center, as of March 10, 2013. Modified duration calculated by author.

That nearly 10 percent drop in Treasury Bond prices since November could get a lot worse if rates rise another 1 percent. Should such a rise occur, the value of those bonds could fall another 19.4 percent.

And it's not just restricted to government loans, either. As the table shows, even highly regarded corporate issuers can see double-digit drops in their long-term bond prices with just that same small move upwards in interest rates.

What You Can Do

If you're worried about rates rising and punishing your bond holdings, there are some things you can do to reduce the impact to your portfolio. That said, there's no such thing as a free lunch, so there are trade-offs to weigh with each strategy:
  • Trade to shorter-term bonds. The shorter the time to maturity, the lower the modified duration. The trade-off: Shorter-term bonds typically have lower current yields than their longer-term counterparts.
  • Seek out higher yields. The higher a bond's coupon yield and yield to maturity are, the lower its modified duration. The trade-off: Higher yield bonds are typically higher yielding because they're at greater risk of defaulting on their debt than lower yielding ones.
  • Prepare to hold until maturity. Holding a bond to maturity will get you both the face value of the bond and all the coupon payments along the way, so long as the issuer stays solvent. The big trade-offs: You might have a long time to wait before you're made whole. Also, once you are made whole, you might find that the bond's redemption value won't buy as much as it once did thanks to inflation.
In today's low interest rate environment, bonds are nowhere near as safe as they used to be. By calculating a bond's modified duration you can see just how risky they are, and you can figure out where you'd rather put your money other than a risky issue that was once considered a safe haven.

Motley Fool contributing writer Chuck Saletta owns shares of Microsoft. The Motley Fool recommends Berkshire Hathaway. The Motley Fool owns shares of Berkshire Hathaway and Microsoft. Try any of our Foolish newsletter services free for 30 days.

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]]>bond calculatorsBond durationbond yieldsCorporate BondsFederal Reserve SystemFinancefixed-coupon bondsInterest Ratesinvestment grade bondsmodified durationrisky bondsriskybondsScottradeT-BillsTreasury BondTreasury NotesUnited States Treasury securityChuck SalettaFri, 15 Mar 2013 05:00:00 ESTDividend Stocks: The Best Raises You'll Never Earnhttp://www.dailyfinance.com/on/dividend-stocks-investing-high-yield/http://www.dailyfinance.com/on/dividend-stocks-investing-high-yield/http://www.dailyfinance.com/on/dividend-stocks-investing-high-yield/#commentsFiled under: , ,


If you're like most of us, it has been far too long since you've seen a decent raise. In 2012, wages and salaries increased 1.7 percent on average, barely keeping up with inflation. Behind that slow wage growth is the unfortunate fact that unemployment remains stubbornly high -- and has been stuck there for years. With so many people looking for the available jobs, competition for work is high, keeping wages down.

But even with high unemployment and stagnant wages, companies are still making money -- and that money has to go somewhere.

In many cases, where it goes is straight into the hands of shareholders, in the form of dividends.

General Electric Go Where Raises Are Plentiful

While salaries have been stagnating, dividends have not.

According to S&P Dow Jones Indices, dividends increased by 18 percent in 2012. That's a whopping 10 times the rate of salary increases -- and it is some incredible money, if you can get it.

Fortunately, you can get your hands on some of that money -- and the potential raises that come with it. All you need to do is transform yourself from an employee into an owner by becoming a shareholder of a company that pays, has raised, and has the potential to continue raising its dividends.

Invest in Future Raises

In today's era of ultra-cheap commissions and brokers with low minimum starting balances, it's incredibly easy to buy shares in companies that pay out dividends.

Better yet, once you've made yourself a shareholder of a company that pays dividends, you don't have to do a thing to get those raises. It's all the rewards of ownership. And for most people, these dividend payouts also come with the added benefit of lower taxes, as well.

As unearned income, dividends are not subject to Social Security tax, and unless you're making enough to get caught by the new Medicare surtax, they're not generally subject to Medicare taxes, either. Plus, in most cases, dividends are taxed at lower regular tax rates than earned income, as well.

Put it all together and, in a nutshell, it means that you can get faster raises and lower taxes with virtually no effort at all on your part, other than what it takes to save up enough to buy some stock.

That's what makes dividend increases the best raises you'll never earn -- you can get them without having to earn them.

What's the Catch?

Of course, like everything else in investing, there are risks attached.

Dividends are not guaranteed, and companies that fall on hard times can slash their payments. Even General Electric (GE), one of the largest companies around, was forced to cut its dividend in 2009 due to the financial meltdown and its own part in the subprime mortgage mess.

In fact, if a company stumbles badly enough, not only can it cut its dividend, but its stock could fall all the way to $0 in a bankruptcy. Just ask shareholders in the old General Motors (GM), who saw their shares become absolutely worthless during that company's bankruptcy proceedings.

As a result, if you are going to invest with an eye toward finding companies that could reward you with increasing dividends, you absolutely must diversify. If you sprinkle your purchases across industries, you can better protect your overall portfolio -- and dividend income stream -- from the failure of any one company or even industry.

Fortunately for those looking to invest this way, as the table below shows, companies that pay and increase their dividends operate across all sorts of industries, making diversification possible:

Company Industry 1-Year Dividend Growth Payout Ratio Debt-to-Equity Ratio
Microsoft (MSFT) Information technology 19.4% 45.1% 19.6%
BP (BP) Energy 17.2% 45.7% 40.8%
Home Depot (HD) Consumer discretionary 11.5% 41% 42.6%
Union Pacific (UNP) Industrials 29% 29.1% 45.3%
Monsanto (MON) Materials 16.4% 30.2% 16.7%
UnitedHealth (UNH) Healthcare 30.6% 14.8% 50.3%
Costco (COST) Consumer staples 15.1% 24.7% 10.7%
Travelers (TRV) Financials 12.6% 28.1% 25%
Source: S&P Capital IQ, as of Feb. 22, 2013.

With double-digit dividend growth, they've certainly been rewarding their owners well. And with payout ratios below half of their earnings, they've still got room to grow. With reasonable debt-to-equity ratios, they don't appear to be in imminent danger of financial collapse. And of course, since they come from diverse industries, there's little chance that a company or even industrywide failure will take them all down.

What's Keeping You From Investing?

If you'd like to see the kind of raises that investors are seeing, then it's time to make the move from worker to owner and start picking up your dividend checks. It could give you the best raise you'll never earn.

If you're looking for some long-term, income-oriented investing ideas, check out The Motley Fool's special report: "The 3 Dow Stocks Dividend Investors Need." Get a free copy.

Motley Fool contributor Chuck Saletta owns shares of General Electric, Microsoft, and Union Pacific. The Motley Fool recommends Costco Wholesale, General Motors, Home Depot, and UnitedHealth Group. The Motley Fool owns shares of Costco Wholesale, General Electric, and Microsoft.

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]]>dividend stocksHigh Yield Investinghigh yield stocksInvestinginvesting strategylow interest ratesstock market newsChuck SalettaMon, 04 Mar 2013 13:20:00 ESTApple's Scary Stock Ride: Why the 'Jockey' Really Mattershttp://www.dailyfinance.com/2013/02/26/apple-stock-jockey-play-steve-jobs/http://www.dailyfinance.com/2013/02/26/apple-stock-jockey-play-steve-jobs/http://www.dailyfinance.com/2013/02/26/apple-stock-jockey-play-steve-jobs/#commentsFiled under: , , ,

Apple stockApple (AAPL) has been one of the most innovative companies in the world. Its iPod and iTunes changed the way we listen to music. The iPhone made phones incredibly useful for things other than basic calling and texting. And the iPad pulled off the incredible feat of making mobile computing both cool and ultra-portable.

Not only has it revolutionized many parts of our daily lives, it has done so while generally charging premium prices for the products it sells. Darn near every other company on the planet would love to have its track record.

Still, in spite of Apple's incredible run, its shares have been faring rather badly lately.

So what's with its stock?

Since reaching a high-water mark of $705.07 last September, Apples shares have shed about 36 percent of their value, falling to $450.81 as of last Friday's close. That's a sharp retreat from the days when it held the title of "Most Valuable Company in History."

The key issue with Apple's stock today isn't the company's history or reputation -- it's the future.

As Walter Isaacson pointed out in his biography Steve Jobs, the company owes much of its success to the creative genius and exacting standards of Jobs, its founder and longtime CEO. And unfortunately, Jobs is no longer with us.

His death, of course, is old news. But what's is relatively new is that the products in Apple's pipeline are infused with far less of Jobs' direct creative genius. And that has investors worried, especially as the company has recently missed expectations.

At today's market price, Apple is trading as if it has plateaued -- with few prospects for future growth.

Bet on the Jockey or the Horse?

Apple's dependency on Jobs for its creative spark made its stock something of a "jockey play" for investors -- a company that was worth owning because of who was leading it. Jockey plays can make fine investments, but as shareholders in the Jobs-less Apple are finding out, the market can be unforgiving when that jockey is no longer holding the corporate reins.

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Given its strong, debt-free balance sheet with around $40 billion in cash on hand, solid suite of current products, and a still reasonable pipeline, Apple is not in any real risk of going belly-up anytime soon. But the legitimate question investors are asking is whether the company has what it takes to continue to wow consumers again with more must-have products like the ones that fueled its ascent.

As Isaacson pointed out in his biography, bringing that creative genius to life in products was tough enough for a passionate founder/CEO like Jobs. Without his special magic, it may well be impossible. Apple certainly isn't dying, but the market is now valuing it like a maturing, virtually-no-growth company -- which it may well be becoming.

Apple's Not the Only Jockey Play Around

Apple's situation is hardly unique. Mortgage REIT Annaly Capital (NLY) also recently lost founder and CEO Michael Farrell after his battle with cancer. In many ways, Farrell's financial genius mirrored Jobs' creative genius. Farrell, after all, managed to successfully steer his company through the recent financial meltdown, which included some of the choppiest financial waters in generations.

Like Apple, Annaly has seen its share price drop a bit in recent months. In Annaly's case, the concern is partially whether its new leadership will be able to steer it as successfully through the next crisis as Farrell did through the last one. The price drop is also partially due to the fact that ever since the Federal Reserve started aggressively buying mortgage bonds, Annaly must now face the Fed as a competitor.

Either way, the loss of a founding genius has negatively affected both these companies in the eyes of investors.

Which brings us to what many perceive as perhaps the biggest current jockey play around: Berkshire Hathaway (BRK.A) (BRK.B). Warren Buffett has led the company for decades, and many people see Berkshire Hathaway's success as an extension of the iconic investor's investing genius.

There is a difference between Berkshire and those other jockey plays, though. Buffett's genius is his ability to find undervalued companies with solid leadership and add them to Berkshire's portfolio. Buffett also generally keeps the leadership of those acquired companies intact, letting them keep doing what they did to become successful in the first place. That style difference means that when octogenarian Buffett hands over Berkshire's reins, the next jockey won't need to be a financial genius of Buffett's caliber in order for Berkshire to succeed.

What Does That Mean for Investors?

As an investor, it's clearly important to look for great corporate leaders: The best jockeys have the ability to reward their investors incredibly well. Still, you never know when a jockey will be replaced.

So as you consider where to put your money, make sure that you consider what that company would look like after its current leader is gone. It may lead you down a completely different path.



It's always important to assure the companies you own are built to last when their jockeys change. In a sea of mismanaged and dangerous peers, there's one bank that stands out as The Only Big Bank Built to Last. You can uncover the top pick that Warren Buffett loves in The Motley Fool's new report.

Motley Fool contributing writer Chuck Saletta owns shares of Annaly Capital Management. The Motley Fool recommends Apple and Berkshire Hathaway. The Motley Fool owns shares of Annaly Capital Management, Apple, and Berkshire Hathaway.


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]]>Annaly CapitalAppleBerkshire HathawayCEOFinancefounderiPadIPhoneIrreplaceableitunesjockey playJockey stocksREITSteve JobsThe Motley FoolWalter IsaacsonWarren BuffettChuck SalettaTue, 26 Feb 2013 05:00:00 EST3 Social Security Shockers From the CBO's Latest Reporthttp://www.dailyfinance.com/2013/02/08/3-social-security-shockers-from-the-cbos-latest-report/http://www.dailyfinance.com/2013/02/08/3-social-security-shockers-from-the-cbos-latest-report/http://www.dailyfinance.com/2013/02/08/3-social-security-shockers-from-the-cbos-latest-report/#commentsFiled under: , , , ,

Social Security Trust FundOn Tuesday, The Congressional Budget Office updated its annual projections on the health of Social Security and its Trust Funds. In essence, if you're still working and you're depending on that program to cover your retirement -- you'll be in for a shock. Or three.

Shocker No. 1: It's failing faster than even last year's dire projection.

The table below shows the CBO's projections for combined Social Security Old Age, Survivors, and Disability Insurance Trust Fund balances, with the 2012 column showing its projections as of Jan. 2012 and the 2013 column reflecting the current update:

Year 2012 Projection 2013 Projection Difference
2012 $2,709 $2,719 $10
2013 $2,743 $2,748 $5
2014 $2,762 $2,762 $0
2015 $2,775 $2,766 ($9)
2016 $2,791 $2,767 ($24)
2017 $2,807 $2,764 ($43)
2018 $2,818 $2,758 ($60)
2019 $2,817 $2,741 ($76)
2020 $2,802 $2,706 ($96)
2021 $2,768 $2,652 ($116)
2022 $2,713 $2,573 ($140)
2023 N/A $2,468 N/A
Data from the Congressional Budget Office. Dollar amounts in billions.

Based on that newer projection, the combined Trust Fund is expected to:
  • Peak two years earlier -- in 2016 rather than last year's 2018 projection.
  • Have $140 billion less in 2022 than projected for that same period just last year.
  • Drain an additional $105 billion in 2023 alone -- just one decade from now.
The bad news from last year's CBO projection foretold the three-year shift forward in the projected collapse date of the combined Trust Fund in the 2012 Social Security Trustee's Report. This year's downgrade suggests that last year's 2033 collapse date will likely once again be revised closer -- to 2032 or perhaps even sooner.

That 2032 D-Day is less than two decades away, putting it well in the expected lifespan of typical current workers -- and even of some current retirees.

Shocker No. 2: Social Security spending will nearly double over the next decade.

Not only is the trust fund running out faster than anticipated, but spending is on track to skyrocket -- nearly doubling over the next decade to $1.4 trillion from last year's $0.8 trillion.

The table below shows the gory details:

Year OASI Projection DI Projection Combined Projection
2012 $627.2 $135.1 $762.3
2013 $664.0 $141.3 $805.3
2014 $700.9 $147.6 $848.5
2015 $741.7 $154.4 $896.1
2016 $787.0 $160.5 $947.5
2017 $835.9 $166.1 $1,002.0
2018 $888.7 $172.0 $1,060.7
2019 $945.7 $178.5 $1,124.2
2020 $1,007.1 $185.4 $1,192.5
2021 $1,069.2 $194.6 $1,263.8
2022 $1,134.3 $203.8 $1,338.1
2023 $1,203.1 $213.3 $1,416.4
Data from the Congressional Budget Office. Dollar amounts in billions.

Combine the rapidly shrinking trust fund with the escalating expected expenses, and the ugly future becomes abundantly clear. Either taxes are going to skyrocket to cover the costs, or benefits will need to be cut. Neither option looks all that good to anyone who expects to be working more than a decade or so from now.

Shocker No. 3: Disability claims are high -- and rising.

The charts below shows the percentage of working age people by age bracket that are on disability:



Charts from the Congressional Budget Office.

Not only has the percentage of working-age people on disability across nearly all age groups risen fairly steeply over the past two decades, but the CBO is also projecting the levels to continue rising.

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People on Social Security Disability generally aren't working -- and if they are working, they usually aren't earning much in the way of reliable income . As a result, the CBO's projection suggests fewer people will be paying into the system, while more receive benefits from it.

That's not a sustainable situation. It's especially not sustainable when combined with the rapidly shrinking Social Security Trust Funds and the country's quickly aging population.

The Bottom Line

The three shockers from the CBO paint a dire picture, indeed: Social Security's combined Trust Fund is collapsing quicker than anticipated, Social Security costs will nearly over the next decade, and Social Security disability claims are high and still rising.

Take it all together, and it's a stern warning of a pending financial catastrophe for a program that over 50 million Americans currently rely on -- and nearly everyone working in the country expects to receive.

More from the Retirement Center:



There's little you can do to stop the collapse of the Social Security Trust Funds, but you can improve your chances for a comfortable retirement anyway. A strong investing approach is to choose great companies and stick with them for the long term. In our free report "3 Stocks That Will Help You Retire Rich," we name stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.

Motley Fool contributor Chuck Saletta welcomes your comments. Try any of our Foolish newsletter services free for 30 days.

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]]>3 social security shockers from the cbo’s latest re3socialsecurityshockersfromthecbo’slatestreportcbo social securitycbosocialsecurityCongressional Budget Officecongressional budget office social securitycongressionalbudgetofficesocialsecurityFinancehttp://dailyfinance.com/2013/02/08/3-social-security-shockers-frRetirementretirement benefitsretirement planningSocial SecuritySocial Security Disability InsuranceSocial Security trust fundThe Motley FoolChuck SalettaFri, 08 Feb 2013 06:00:00 ESTEmergency Fund Secrets: How He Was Ready for a $5,000 Surprise Billhttp://www.dailyfinance.com/2013/01/30/emergency-fund-savings-tip/http://www.dailyfinance.com/2013/01/30/emergency-fund-savings-tip/http://www.dailyfinance.com/2013/01/30/emergency-fund-savings-tip/#commentsFiled under: ,

Car repairOne of the key reasons we bought our Honda (HMC) Accord in late 2002 was the company's reputation for reliability. For a decade, the car served us incredibly well. Indeed, until the past month, it cost us very little beyond gas, insurance, normal wear and tear, and scheduled maintenance.

And then, over the past month, Murphy's Law applied itself to our car.

First, we busted a tire on a road hazard. Then, the transmission gave out, the battery corroded, and an oxygen sensor went haywire. And as if to add insult to injury, while the car was at the dealer for the oxygen sensor, they discovered that our timing belt needed to be replaced. Of course, they mentioned that the damage if the belt broke would be far more expensive than having them go ahead and take care of it while they already had the vehicle.

It'll Cost How Much?!

All told, in the space of a month, we spent more than $5,000 on unanticipated automobile expenses. On top of it all, this major auto emergency fell right on the heels of Christmas -- not exactly an inexpensive time of the year for our family.

What Amount
Two tires $338.52
Transmission $3,319.44
Battery $132.17
Oxygen Sensor/Timing Belt $1,316.87
Grand Total $5,107.00
Data from author's Quicken records.

A four-figure out-of-the-blue expense is the kind of thing that can easily push even the most frugal family's finances over the edge. It's emergencies like these -- not wanton spending on non-necessities -- that often trigger the downward spiral into overwhelming credit card debt.

Thankfully, we are going to be able to avoid that particularly ugly financial path. We expect to have the credit cards we charged those car repairs on paid in full by the time the bills come due. I'm not saying this to brag; I'm hoping that our story will help you avoid a worst-case scenario, too.

A Simple Strategy for Saving

What kept our car troubles from becoming a full-fledged household financial meltdown was a simple trick that anyone who buys a car (or is paying down any type of loan) can follow: After we paid off the loan on the car, we kept making payments -- only instead of writing checks made out to Honda Financial Services, we made the monthly payment to ourselves.

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Since we had already been making that monthly payment we got used to not having that money to spend on other things. Because of that, we didn't feel a loss when we started directing the same amount into our own savings account. By continuing to make "car payments" over the years, we built up a cushion that could cover that huge car repair bill.

It still won't be fun to raid that account to write the checks to pay off those bills, but it's a whole lot better than not being able to cover the cost at all. And it's all due to a straightforward strategy that you can use to build your own savings cushion to cover your own unexpected expenses.

Keep making the payments to yourself after you've paid off your debts. It's a simple step that makes a huge difference.


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]]>car paymentscar repairsemergency fundemergency savingemergency savingsFinanceHondahousehold budgetsaving moneystart savingsChuck SalettaWed, 30 Jan 2013 06:00:00 ESTThe First Million Dollars Is the Hardest ... But Not as Hard as You Thinkhttp://www.dailyfinance.com/2013/01/18/first-million-dollars-retirement-planning/http://www.dailyfinance.com/2013/01/18/first-million-dollars-retirement-planning/http://www.dailyfinance.com/2013/01/18/first-million-dollars-retirement-planning/#commentsFiled under: , , , , ,

First Million DollarsThere's an old saying about making money that "the first million is the hardest." That may seem pretty obvious, even to those of us who haven't reached millionaire status yet.

Eye-rolling aside, however, it's instructive to examine what it takes to reach that first seven-figure milestone using specific dollar amounts and investing returns. And it's really fascinating to see how quickly one can get to that second million-dollar mark.

Let's start with what you've got and see how far it can take you.

Everyone Plays by the Same Rules

There are three key tools at your disposal to help you build wealth. They are:
  • The cash you invest
  • The growth rate of the investments you own
  • The ability to reinvest the dividends that your investments generate
For that first tool to do you any good, you need to be willing and able to structure your life to have cash available to invest in the first place. Obviously, heirs and Facebook founders have a good leg up on the rest of us in terms of cash on hand. But we've all got to start somewhere. So see what you can scrounge up.

For the other two -- well, it almost goes without saying that the more you've already got socked away, the more these factors help get your fortune growing.

Turn $20 a Day into $2 Million

Say you can come up with $600 a month -- about $20 a day -- to invest. If you reliably sock that money away over a 40-year career, you could end up with a bit over $2 million, assuming 8 percent annual returns.

While that rate of return may sound a bit steep, if it comes in the form of 6 percent growth and 2 percent dividends that are reinvested, it starts looking more attainable. Absolutely key to your success, though, is an "all of the above" approach: Invest the cash, let it grow, and reinvest the dividends along the way. The chart below shows how the three work together:

Power of Compounding
Source: Author's calculations.

Here, again, you see the "all of the above" approach in action:
  • You can end up with nearly twice as much if you reinvest, rather than spend, your dividends.
  • A total cash commitment of around $250,000 over your career could wind up around eight times that size.
  • The earlier you start, the more time acts as your friend.

The cash you add to your nest egg does much of the work to get you started. But along the way toward that $1 million milestone, your invested cash starts doing most of the work for you.

Just look at how much longer it takes to go from $0 to $1 million than it does to go from $1 million to $2 million. Your first million in this scenario takes a few decades to reach. That second million? It takes less than one decade.

Getting Started -- with a Boost

If you haven't been investing before, coming up with that $600 a month may seem daunting. Fortunately, you probably don't have to come up with that full amount from your own pocket to put that kind of cash to work for you. If you're able to invest through a traditional 401(k) plan at work, Uncle Sam and your boss may very well chip in to help you out.

o. Uncle Sam: When you contribute to your traditional 401(k) plan, every dollar you put into the plan reduces the wages that are reported for federal income tax purposes. In effect, if you're in the 25 percent tax bracket, it's as if you kick in $0.75 out of your pocket and Uncle Sam kicks in the other $0.25 of every dollar you invest.

o. Your boss: While it's not mandatory, many companies offer 401(k) matches. In a matching program, the company agrees to contribute to your 401(k) plan alongside you. Formulas vary, but a typical match level is 50 percent of your contribution, up to some cap based on your salary.

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Put those two factors together, and it gets much easier to come up with that $600 monthly investment. If your boss matches 50 percent of your contribution, it only takes $400 from you to hit that total. And since Uncle Sam is willing to forgo his 25 percent of the money you contribute, that $400 only costs you $300 out of pocket. In essence, to get $600 invested, it only depletes your pocketbook by $300.

That works out to a $10-a-day out-of-pocket sacrifice that, in the end, could net you a multimillion-dollar nest egg.

Remember, time is an important factor in any investing plan. The longer you wait to get started, the less time your money has to work for you, and the more of your own cash you need to put up to wind up in the same place at the end of your working life.

You now know how to get there. So start making your money work for you today so that it has ample time to do the heavy lifting down the road.

Making the right financial decisions today makes a world of difference in your golden years, but with most people chronically undersaving for retirement, it's clear not enough is being done. Don't make the same mistakes as the masses. I urge you to learn about The Shocking Can't-Miss Truth About Your Retirement.

Motley Fool contributor Chuck Saletta has no position in any stocks mentioned. The Motley Fool recommends Facebook. The Motley Fool owns shares of Facebook.

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]]>dividend reinvestment plansFinancefirst million dollarsmy first million dollarsretire richretirement planningsaving for retirementChuck SalettaFri, 18 Jan 2013 06:00:00 ESTYear-End Review: Five 401(k) Must-Dos Before 2013http://www.dailyfinance.com/2012/12/15/year-end-review-five-401-k-must-dos-before-2013/http://www.dailyfinance.com/2012/12/15/year-end-review-five-401-k-must-dos-before-2013/http://www.dailyfinance.com/2012/12/15/year-end-review-five-401-k-must-dos-before-2013/#commentsFiled under: , ,

401(k) Must-Dos Before 2013The end of the year is fast approaching, so you've only got a few days left before the window slams shut on your ability to make changes to your 401(k) for 2012.

The five tips below will help you make the most of that limited time, and put you on track in your efforts to make your golden years as comfortable as possible.

1. Make sure you're getting your free money.

Many employers will provide matching money based on the amount you contribute to your 401(k). Check your employer's policy on matches and make sure you're socking away enough to capture every single dime the boss will give you. If you hurry, you may even still have time to adjust your contribution and get the most from your 2012 match.

Why this matters: When combined with the potential tax savings, a 401(k) match may very well let you double your money, instantly. There are very few other investments that give you the opportunity to get that large an instant return, and even fewer that provide that type of return with such certainty.

2. Diversify out of your employer's stock.

You may work for the best company on Earth, but one of the most dangerous things you can do is to have your savings and your paycheck tied to the same business. If the company hits a rough patch, you may find yourself out of work and with a substantially diminished nest egg at the same time. Your own contributions should go into other options in the plan, and if your match comes in the form of company stock, check the rules on when you can sell it and shift your money into a different fund.

Why this matters: Remember Enron? It went from full-fledged Wall Street darling to becoming completely worthless as both an investment and an employer. And it really didn't take long for it to move from the list of "Best Companies to Work For" to the list "Biggest Collapses of the Century."

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3. Make a plan to pay off any loans against your account.

If you've taken out a 401(k) loan, make it a priority to pay it back quickly. The convenience of being able to borrow money with no credit check and the pleasure of paying yourself back rather than sending your money to some faceless bank make 401(k) loans tempting. But the gotchas can be downright ugly if you're unable to repay back the loan on schedule -- especially if you lose your job.

Why this matters: If you lose or walk away from your job, you could be required to pay the loan back in full within 90 days. If you can't, the outstanding balance is treated as a distribution. That means you'll get socked with taxes at your ordinary income tax rate and pay a 10% penalty on top of that if you're under age 59½. That's an ugly outcome, especially since the people facing it are often in a tenuous financial position to start with.

4. Try to invest more.

Most employees are allowed to invest up to $17,000 in their 401(k) plans in 2012, and those ages 50 or higher can contribute an additional $5,500 in catch-up money, as well. (In 2013, the general limit rises to $17,500, though the catch-up limit stays at $5,500.) All else being equal, the more you put away with a decent allocation plan, the better off you will be in retirement, even if your investing returns wind up being somewhat lousy.

Why this matters: The biggest benefit of maxing out your retirement savings plans is the long-term financial health you get from building a decent nest egg. In addition, if your 401(k) nickels-and-dimes you to death with its fees, the more you sock away, the less many of those fees will bite.

5. Take your Required Minimum Distribution, if you need to.

Once you reach age 70½ and are retired, you must start taking money out of your 401(k), even if you don't need to spend it to cover your lifestyle. There are special rules for the year of your first mandatory distribution, but for every year after that, you have to take money out of your account by Dec. 31 of each year.

Why this matters: If you don't, Uncle Sam will tax you at a rate equal to 50 percent of the amount you should have taken out but didn't. That's way too much money to lose for simply forgetting to move your money from one pocket to another.


Chuck Saletta is a contributing writer to The Motley Fool.

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]]>401k401k fees401k loans401K matchesdiversificationemployer stockEnronFinanceinvestment adviceirsRequired Minimum Distributionretirementretirement planningtaxesThe Motley Foolyearend 2012Chuck SalettaSat, 15 Dec 2012 06:00:00 ESTYear-End Review: Simple Ways to Cut Your Budget Before the Fiscal Cliffhttp://www.dailyfinance.com/2012/12/13/year-end-review-simple-ways-to-cut-your-budget-before-the-fisca/http://www.dailyfinance.com/2012/12/13/year-end-review-simple-ways-to-cut-your-budget-before-the-fisca/http://www.dailyfinance.com/2012/12/13/year-end-review-simple-ways-to-cut-your-budget-before-the-fisca/#commentsFiled under: ,

2013 is right around the corner, and coming with it is the looming threat of the fiscal cliff. If a deal isn't reached between now and then, we'll all wake up on Jan. 1 with higher tax rates and lower government spending levels. One way or another, you'll likely have a bit less cash to spend, beginning with your first check in January.

That means the next few weeks would be a good time to figure out where and how to effectively cut back your spending to compensate.

Where Does Your Money Go?

The first step in trimming your personal budget is to understand where your money goes. It's a lot easier to cut your costs when you know what the biggest drains on your cash are. Then you can make plans to address those specific spending areas.

If you use personal finance software like Quicken, built-in reports will let you know where your cash is going. Alternatively, if you run most of your spending through a credit card, that card's website might have spending graphs that you can use to see where your money winds up.

Everyone's situation is different, but depending on your circumstances, your report might wind up looking a bit like this:

Each of these expenses can be adjusted to some extent. It's just a question of whether the benefits are worth the cost and effort to make the changes.

How to Slim Down Those Big Pie Slices

Taxes: The easiest way to pay lower taxes is to earn less income that gets subject to taxation. That doesn't necessarily mean you need to accept a pay cut, but rather that you should look for ways to reduce the tax impact of your earnings.

One of the easiest ways for ordinary wage earners to shelter income from taxes is to contribute to a traditional 401(k) plan. In 2013, most employees will be able to contribute up to $17,500 in their 401(k)s, with those ages 50 and up able to add $5,500 more.

Groceries: If your grocery list is heavy on prepackaged or other forms of convenience foods, you can save a bundle by buying the raw ingredients, and assembling and cooking your meals from scratch -- or something a few steps closer to it. Even simple steps like shopping with a list -- and sticking to it -- or setting a specific weekly food budget can result in significant cost-cutting.

Mortgage Interest: Mortgage rates are near all-time lows. If you have a mortgage and are able to refinance it, taking advantage of today's incredibly low rates can potentially knock thousands of dollars off your annual interest payment.

Household (Maintenance): Other than the medical expenses slice of the pie, this is the big slice that probably has the biggest variability and the biggest "surprise" element. Appliances wear out, basements leak, and roofs need repairing. Don't put off regular maintenance. Spending a small amount up front to fix small problems saves you from shelling out big dollars for big-ticket fixes. Another way to control the impact of maintenance costs is to regularly set aside money to cover repairs. Having cash on hand both improves your bargaining power with vendors and keeps you from having to pay interest on top of the costs of repairs.

Auto: Consider carpooling, telecommuting, and/or using mass transit instead of driving alone. That not only can save you direct commuting costs like gas, parking and tolls, but it can also help reduce the wear and tear on your car, which will save money you on maintenance and repairs.

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Insurance: By shopping around every time your insurance policies are up for renewal, you can guarantee that you're getting the best rates. In addition, consider taking higher deductibles and saving the premium differences versus what you were charged on the old deductible, in case you ever do need to use the insurance. Generally speaking, you'll recoup the increased deductible within a few years of premium savings and be ahead money-wise if you ever do need to use it.

Utilities: Energy and water efficiency is the name of the game here. Low-flow toilets, showers, and sinks can keep your water bills down, and good insulation, compact florescent lighting, and a programmable thermostat can keep the electric and gas bills in check.

Education: Public schools often have fee waivers for those who truly can't afford an otherwise mandatory charge. And remember, there's no shame in passing on the myriad of fundraisers that schools have, especially if you're forced to choose between the fundraiser and your electric bill.

Charity: Charity is a completely voluntary expense. If you can't afford to give as much next year but still want to contribute to your favorite causes, ask what volunteer opportunities are available. Plenty of solid charities would benefit greatly from a donation of your time and talent.

Medical: The key levers you have as far as saving on medical expenses are things like asking for generic prescriptions, making sure you only see in-network physicians, and making use of lower-cost options like in-store clinics for basic care needs.

As scary as the 2013 fiscal cliff may seem, remember that you probably have some sort of wiggle room in every major expense category you have. By planning now, you can make the right choices for you and your family that will enable you to best cope with whatever financially comes your way next month.


Chuck Saletta is a contributing writer to The Motley Fool.

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]]>401kBaseflowbudget cutsCarpoolfamily budgetFinancefiscal cliffHealthhousehold budgethousehold budget cutsinsurancemortgage ratesrefinancingtelecommutingThe Motley Foolyearend 2012Chuck SalettaThu, 13 Dec 2012 06:00:00 EST401(k) Fees: You'll Pay Now or Pay Later, But You Will Payhttp://www.dailyfinance.com/2012/12/01/401k-fees-pay-now-or-later/http://www.dailyfinance.com/2012/12/01/401k-fees-pay-now-or-later/http://www.dailyfinance.com/2012/12/01/401k-fees-pay-now-or-later/#commentsFiled under: ,

401k
For most people, a 401(k) is almost an ideal investment. Simply by filling out the paperwork for a typical plan, you get:
  • Autopilot investing with every paycheck
  • An immediate tax deduction
  • The possibility of an employer match
  • Tax-deferred compounding
  • Decent diversification
Plus, it's all in one convenient package, administered by your employer.

The only problem is the costs. 401(k) plans are not cheap to manage. Unlike with a typical brokerage account or even an IRA, there are some fairly complicated rules your employer has to follow to assure the 401(k) plan stays in compliance with the law.

That costs money -- money that's above and beyond typical investing fees like mutual fund management fees and trading commissions. And guess who frequently gets stuck with the tab for compliance and other administrative costs?

How Do You Prefer to Pay?

While employers are allowed to pass on administrative costs to participants, the big question is how they pass them on. There are generally two methods employers follow. Both methods have advantages and disadvantages, and depending on your personal situation, you'll likely strongly prefer one method over the other.

1. Everyone pays the same amount: The biggest advantages of this method are that it more closely matches what's driving the costs -- the number of people in the plan -- and that it's far simpler to calculate each person's fee. In essence, the statement mailings and the regulatory compliance testing just care if you're participating and how much you're contributing, not what your balance is.

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The effort to comply is essentially the same whether you've got $1,000 or $1,000,000 in the plan.

The key disadvantage of that method? It can be an incredible disincentive to a person who's just getting started in the plan.

Say you're just out of college with a $40,000-a-year salary, and you want to put away 5 percent of your paycheck. That's $2,000 -- of your hard-earned cash -- going toward your retirement. If your employer charges each participant $100 a year, you lose 5 percent of your first year's contribution to that administrative fee. A charge that large might make you reconsider getting started at all.

2. Everyone pays in proportion to his or her balance: The biggest advantage of this method is that it doesn't discourage new investors from participating. If you're just getting started, using the same assumptions as above, your charge might wind up at $4 for the year on a $2,000 balance (0.2 percent of your balance), rather than the $100 price tag from charging everyone the same.

Of course, on the flip side, the disadvantage is that the proportional charge can get downright painful near the end of your career. Say you've amassed a cool $1,000,000 balance near the time you're ready to retire. Using the same 0.2 percent proportional allocation method, you'd be paying $2,000 a year for the privilege of keeping your money in your 401(k). That's a pretty big chunk of change -- even for a millionaire -- to pay for what amounts to some basic recordkeeping and compliance testing.

Go Big or Go Home

For any investor with a long-term perspective, the first option is clearly the better choice. Even a $100-per-person-per-year fee is less than 1 percent of the first-year maximum contribution that person can make (the limits are $17,000 in 2012 and $17,500 in 2013). If you're at all fee-conscious, a flat charge like that would likely encourage you to put as much away as you possibly can, so that a bigger share of your money stays working for you -- rather than getting eaten up by fees.

In many respects, when it comes to your financial well-being in retirement, the act of investing matters as much as the rate of return you earn on your investments. The more money you regularly put away, and the longer you let that cash compound, the better off you'll likely be in retirement, virtually no matter what the market does along the way.

In the end, regardless of how your company's 401(k) charges its fees, it's hard to beat the tax benefits, potential of a company match, and just plain direct-from-the-paycheck convenience of participating in the plan. Because of those benefits, in spite of the fees, your 401(k) remains a great place to amass a retirement nest egg to take you through your golden years.

Chuck Saletta is a contributing writer to The Motley Fool.

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]]>401k401k feesFinanceflat feeHealthretirement planningreturn on investmentROIThe Motley FoolChuck SalettaSat, 01 Dec 2012 06:00:00 ESTAnother Pension Bites the Dust: A Lesson from Hostess' Bankruptcyhttp://www.dailyfinance.com/2012/11/21/pensions-retirement-hostess-bankruptcy/http://www.dailyfinance.com/2012/11/21/pensions-retirement-hostess-bankruptcy/http://www.dailyfinance.com/2012/11/21/pensions-retirement-hostess-bankruptcy/#commentsFiled under:

Hostess Pensions

If you're one of the few remaining Americans with a pension, we've got some good news and some bad news for you.

The good news is that if your pension fails, there's a backstop provided by the Pension Benefit Guaranty Corporation. That U.S. government agency will cover your payments up to a maximum level that's based on your age and accrued benefits when the pension failed. For a 65 year old, that maximum is currently $55,840.92.

The bad news -- pensions are a dying breed. For instance, when Hostess Brands entered bankruptcy liquidation, it became the latest in a long list of companies to terminate its plan. To top it off, while the existing retirees may still be protected by the government backstop, younger Hostess employees aren't so lucky. A 45-year-old, for instance, will be able to get no more than $13,960.20 a year from the guarantee.

The Bigger Pension Picture

Unfortunately, Hostess and its employees are not alone.

There was a time when the concept of a career meant working for a single employer from graduation through retirement, with a lifetime pension and a gold watch awaiting you when you were through. These days, a mere 11 of the Fortune 100 companies offer pensions to new hires, down from 90 as recently as 1998.

In recent years, airlines like Delta (DAL), United (UAL), and US Airways (LCC) have turned pensions over to the PBGC as part of their bankruptcy proceedings. All told, the PBGC manages payments for around 4,500 plans in total. During its Fiscal Year 2012 alone, the agency took over for more than 150 pension plans

With the hopes of a pension dwindling, that leaves you with two tools for your retirement planning: Social Security and your own savings.

Make That One-and-a-Half Tools

On average, Social Security covers around 40 percent of a person's pre-retirement income. That's a government-guaranteed payment, at least until the money in the Trust Fund runs out.

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The Trust Fund is currently expected to be empty in 2033, but thanks to today's remarkably low interest rates, that projection may soon be revised to an even earlier date.

Even when the Trust Fund runs out of cash, Social Security will still be taking in funds and sending out payments -- but at around 75 percent of its promised benefit levels. So in about 20 years, you can expect your Social Security check to be about 30 percent of your pre-retirement income.

If you can live on a third of your salary, or if you're one of the few still covered by a decent pension that will still be around to pick up the slack, then your retirement planning is done. If not, you've got some investing to do.

How Much Do You Need?

With the typical household income around $50,000, a Social Security check covering 30 percent of that level would bring in $15,000 a year. Even if you do have a pension, if it gets frozen -- like American Airlines' (AAMRQ) is -- your benefits will stop increasing.

Say you anticipate getting $15,000 from Social Security and another $15,000 from your frozen pension. If you'd like to maintain your current lifestyle, you'd need to generate $20,000 a year from your investments.

Using the 4 percent rule for retirement withdrawals, you'd need $500,000 saved at retirement to cover that $20,000 annual income gap. That's an achievable amount within a working lifetime, but the longer you wait to get started, the tougher it is to reach.

The table below shows how much you need to sock away each month to reach that goal, based on the annual return rate you earn:
Years to Go 10% Annual Returns 8% Annual Returns 6% Annual Returns 4% Annual Returns
30 $221 $335 $498 $720
25 $377 $526 $722 $973
20 $658 $849 $1,082 $1,363
15 $1,206 $1,445 $1,719 $2,032
10 $2,441 $2,733 $3,051 $3,396
5 $6,457 $6,805 $7,166 $7,542

Source: Author's calculations.

Of course, there are no guarantees in investing, but one thing is certain: The longer you wait, the tougher it gets to reach your target. And if you do start now and things work out better than you expect, consider that a bonus to help your golden years be truly golden.


Making the right financial decisions today makes a world of difference in your golden years, but with most people chronically under-saving for retirement, it's clear not enough is being done. Don't make the same mistakes as the masses. Click here to learn about The Shocking Can't-Miss Truth about Your Retirement. It won't cost you a thing, but don't wait, because your free report won't be available forever.

At the time of publication, Motley Fool contributor Chuck Saletta did not own shares of any company mentioned in this article.


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]]>FinancehostessHostess bankruptcyHostess BrandsPension Benefit Guaranty Corporationpensionsretirement planningSocial SecurityThe Motley FoolChuck SalettaWed, 21 Nov 2012 10:00:00 EST