Public Articles

Make some cash and make a difference

Erin Baehr — Wed, 01 Feb 2012 14:17:00 GMT

The further we get into our national debate about how to help the multitudes who are struggling in this economy and the inability of government to get anything positive accomplished, the more motivated I am to seek out more efficient (aka non-governmental) ways to contribute to a solution.

The socially responsible investing movement is growing in popularity for the same reasons.

Socially responsible investing, or SRI for short, is all about making money while making a difference. Recently I attended the 22nd annual "SRI in the Rockies" conference; a gathering of advisers, investors and experts in the field, held this year in New Orleans. I was inspired by the good that is being done through the investments of individuals as well as large corporations, for the improvement of communities, reduction of our environmental footprint and influencing corporate governance.

It's so easy to become overwhelmed by the bombardment of bad news we see every day, and feel as if the little we can do can't possibly make a difference. While the problems of poverty and environmental sustainability are huge, it was heartening to hear the good things — the measures that corporations, nonprofits and even the military are taking to make a difference. It's especially heartening to know we can be a part of it, by the way we use our money.

By strategically investing money — money we were investing already, anyway — we can support companies that are doing the right things and provide funds for organizations to reach out to the community. But what does that look like, specifically?

Investing in your beliefs

The most common and simplest way to get started in socially responsible investing (also referred to as impact investing, green investing, mission-based investing or faith-based investing) is with mutual funds. If your passion is supporting a green economy, you may wish to choose a fund that invests in companies that are developing alternative energy sources, or one that invests in companies using sustainable business practices.

Sustainable businesses seek to minimize their use of resources through conservation, recycling, growing their own food or developing new technologies. For instance, Dell has been switching from foam and plastic packaging to bamboo and has now developed mushroom-based packaging to ship its servers. Starwood Hotels has also made sustainability a priority, with an internal sustainable practices website and tracking of resource use for employees and guests alike. Working with Clean the World, leftover soaps and shampoo bottles are recycled, sanitized and distributed in the U.S. as well as Haiti, Japan, Zimbabwe, Uganda, Mexico and India. According to Clean the World, 9,000 children die every day from diseases that can be prevented by washing with soap. Other green funds support efforts to provide clean water or advocating for fair access to water.

The flip side to investing to support causes you believe in is choosing not to invest in things you don't believe in or do not want to support. There are SRI funds that specifically exclude companies in the tobacco industry, for example, or depending on which side of the fence your beliefs fall, either excluding companies that do not provide benefits for domestic partners or same sex partners, or excluding those that do.

Think smaller, go local

Beyond mutual fund investing, you can choose on a personal level to do business with corporations that are doing what you consider to be positive things, while avoiding those that engage in activities that are harmful. For instance, without much fanfare, McDonald's has made animal welfare and sustainable food sources a priority. Just recently, Frito Lay opened a "near net zero" plant in Casa Grande, Ariz., meaning they use very little water and energy that they don't reuse, and create near zero waste.

Those are the kinds of companies I want to support. On the other hand, I do not want to support the exploitative payday lending industry, and would not do so knowingly. But I learned that there are several major banks with payday lending arms. I will be sure to avoid providing those banks with any of my business now that I know better.

"Breaking up with your bank" is an idea that is gaining traction, and SRI offers positive alternatives in banking as well. Putting money on deposit with local financial institutions keeps those funds in your local community rather than adding to the bottom line of big banks. Putting money on deposit with community development financial institutions can multiply that goodwill; through these banks and credit unions, your capital provides for job creation, loans for affordable housing, banking for underserved populations, start-up loans for entrepreneurs and community redevelopment, all with competitive interest rates and federal deposit insurance.

Self Help and Hope Federal Credit Union are examples of CDFIs with money market accounts available to out of state depositors. Self Help also offers a Green CD that supports the green economy by lending for recycling and sustainable agriculture, and the building and financing energy efficient homes.

For larger deposits, community investment notes are available in many states (although none that I have found in Pennsylvania). These notes are traded in brokerage accounts, like bonds or brokered CDs, and come in various maturities and interest rates. These are not federally insured and therefore carry risk. The entire amount of your investment is typically lent out for community development projects such as job-creating microenterprises or affordable housing units. The nonprofit Calvert Foundation is the most well-known issuer of community investment notes (this is not an investment recommendation).

Locally, and more directly, we can support businesses that are using sustainable practices, such as restaurants that grow their own food or companies striving to reduce their carbon footprint. We can shop local, and for those products we do need to purchase from major corporations, we can do some homework ahead of time and support those with values similar to our own.

I've learned that so many corporations are doing good things and not just for the PR. In fact, it can be hard to know who is doing business this way, as they are not publicizing it. Greenbiz.com and GreenAmerica.org are great sources of information for choosing businesses that promote social and environmental justice. We support our favorite causes through our words, contributions and volunteer activities; leveraging our support through our investments adds to the impact, doing even greater good.

Erin Baehr is a certified financial planner and owner of Baehr Family Financial, a fee-only financial planning firm in Stroudsburg (www.YourMoneyEveryday.com).

Don't give up on stocks

Dave Gardner — Sun, 15 Jan 2012 14:12:00 GMT

With 2011 behind us, most stock investors will look back upon another subpar year. The S&P 500, the broad index of US large company stocks, ended up about even. While international diversification has been a wise strategy over time, this year the MSCI EAFE international developed market index was down around 10 percent.

Individual investors are largely disgusted with these results and with the overall proposition of investing in the stock market. Much of this disdain stems from the volatility in the market last year. Although the S&P 500 was even for the year, it was flat like a loop trail up Green Mountain. We ended up at the same elevation as we started, but we're exhausted with the ups and downs along the way.

Starting the year with an 8 percent gain, the U.S. market reversed course and was down more than 19 percent from the peak. In the fall, multi-hundred point moves in the Dow were commonplace.

Many of you bailed out of this hilly ramble, with investors cashing out over $100 billion in stock mutual funds in 2011 through the end of November. With investor unease, volatile returns, and a slew of risks including underemployment at home and Euro collapse abroad, many think you would be a fool to stay in stocks. Wait until it starts going up and we can see a trend, they may say.

Over the past decade, the picture does not improve. With the S&P currently hovering below 1300, we are roughly where we were in early 1999. Thirteen lost years. On an inflation-adjusted basis this performance is similar to the Great Depression's and is close to the period between 1969 and 1981 with negative inflation adjusted returns.

Although the future will not mirror the past, let's examine those two putrid periods last century and see how the stock market fared afterwards. Starting in 1982, the S&P 500 returned 17 percent in one year, and averaged 12 percent over three years and 13 percent over 10 years adjusting for inflation.

In 1942 once the Great Depression ended, the market vaulted up 10 percent in one year; it gained 11 percent over 10 years, again adjusting for inflation.

But times are different now, you may say.

You're fearful that the U.S. and the world will be suffering economic doldrums for many years. Capitalism on a global scale is tottering, and the big megabanks have led us into a ruin from which we may never recover.

True, it takes guts to be positive about today's markets. But think about the challenges our parents and grandparents faced at the end of those horrible periods. In 1942, we were facing potential world domination of a fascist regime. It's tough to be optimistic when seeing clips of brigades of goose stepping Nazis at the local movie house.

The early 1980s were not as dramatic, but with interest rates close to 20 percent and inflation in the double digits, there was plenty of economic misery. Imagine affording your house with an 18 percent, 30-year mortgage, and you'll begin to understand how dire the circumstances were.

Those few investors who were able to keep the faith during these dark times were richly paid in the years that followed. We are rarely rewarded for jumping in when everyone else thinks it's a good idea. But being a contrarian has had its rewards over time. While I don't know whether 2012 will be better than last year, it's highly likely that the next decade will be significantly better than our recent past.

Dave Gardner is a certified financial planner with a practice in Boulder and is the president of Alliance of Cambridge Advisors, a national organization of fee-only financial planners. He can be reached through his website at yellowstonefinancial.com.

Year's end is good time to start running family like a business

Erin Baehr — Sun, 01 Jan 2012 14:10:00 GMT

One of my favorite things about the ending of one year and beginning a new one is the opportunity to look over the past year in my business, compare my plans for the year against what actually transpired, and set goals and dreams for the coming year and beyond.

A plan is an essential part of growing a successful business, and when it comes down to it, the same goes for our families and our personal finances. So why not start the year off right and run our households more like businesses?

A good year for a business starts off with a good business plan. A plan for the business of your household doesn't have to be a complicated document; a one page summary of your family's vision and strategy that can be posted on the fridge is just right.

Your mission statement

The first part of the plan is to develop a family mission statement. What is important to your family? It might be "to be thankful people and share with our community" or "we value education and work to provide each member of our family opportunities to learn" or "to achieve financial independence and have the freedom to travel." Take some quiet time to think it through and talk it out together.

Once you have that in place, think about your strategic intent; in other words, where are you going as a family, and what will the numbers look like when you get there? Do you strive to give a percentage of your income? If you want to achieve financial independence by age 50, how much will you need to save? Break your strategic intent into three- to five-year goals. It's easier to focus on a reachable goal than on something that is many years out. Take it one step at a time, working toward that big picture vision.

Annual goals

Now break your three- to five-year goals down further, into a specific goal you can achieve this year, such as reducing credit card debt by 50 percent or increasing profit (savings) by 10 percent.

Then come up with three to five specific, measurable actions you can take to meet that goal, such as increasing your 401(k) contribution, or paying for everyday expenses with cash or debit card instead of credit. Evaluate your progress each quarter, and include a family reward or celebration if you're on track.

Think like a CFO

In most families, one member has more time or inclination to act as the chief financial officer and handle the books. But the CFO can't work alone; the board of directors (aka spouse or partner) needs to be involved as well. While one may handle the day-to-day family finances, the other must be aware of what's going on — so both are on the same page — but also in case something should happen to the family CFO.

Communication is key; both partners should have input into the budget and review a monthly or quarterly profit and loss statement and balance sheet — your list of actual income and expenses, and a list of things you own and things you owe.

Your profit margin is important. Any business needs to operate in the black to be successful, and so should your household. In other words, the money that you save each year is your profit. If you're not saving or are going into debt, your business is stagnating or shrinking. When you make your annual spending plan, include a profit goal.

Cash flow is the lifeblood of business; so too family finance. Control your accounts receivables; don't let insurance claims, rebates or job reimbursements slip by, for example, and keep good records to maximize your tax deductions.

When it comes to your vendors, or the people and companies you do business with, review them periodically. Are you happy with their work? Is it time to have your insurance policy quoted again? How is your credit — do vendors want to do business with you?

In this credit climate, your credit score is one of your most valuable financial assets. If you haven't checked your credit report recently, go now to www.annualcreditreport.com and get your free copy (this is the real free site). Another source to check is www.quizzle.com, where you can get an estimate of your credit score for free (the site is sponsored by Quicken loans). Keep good records, know what you're paying and don't rack up late fees by not paying attention.

Review, redo, renew

One thing is for certain; your plans will not work out exactly as you planned. Life can't be scripted. When I review my plan at year end, I'm pleased to see I've accomplished some goals, and others make me laugh, mostly because I had no idea what life would throw my way.

The most valuable part of this review, though, may be the goals that make me cringe — the ones that could have been accomplished had I not wasted opportunities or been distracted by the tyranny of the urgent. The real failure only comes then from not learning from those mistakes and making changes in the year to come. I'm thankful for a new day and a new year to start again. Progress, not perfection!

If you are interested in getting your finances into shape here is a great opportunity for you to get off to a good start in 2012:

Financial advice

Kiplinger magazine and the National Association of Personal Financial Advisors host a free Web chat, "Jump-Start Your Retirement Plan Days," Wednesday at 10 a.m. and 1 p.m. Get free financial advice from some of the nation's top financial advisers, via the link www.napfa.org/consumer/FreeFinancialAdvice.asp or through the NAPFA or Kiplinger Facebook pages.

On Jan. 12 and Jan. 17 from 9 a.m. to 6 p.m., NAPFA and Kiplinger will offer online chat sessions all day and have a toll-free phone number available to speak with a NAPFA adviser to answer your most pressing retirement questions, from IRAs to estate planning to identifying goals for a comfortable retirement, all for free. More information to come on the NAPFA site above.

Erin Baehr is a certified financial planner and owner of Baehr Family Financial, a fee-only financial planning firm in Stroudsburg (www.YourMoneyEveryday.com).

Clear your financial deck before the holidays

Dave Gardner — Fri, 16 Dec 2011 01:12:00 GMT

Investors have been so preoccupied with the gyrations in world markets that we risk neglecting the end of year financial strategies that can have measurable impact.

Of course, the right moves for your situation may not apply to another investor. Rather than making hasty moves amidst the holiday rush, take action now.

Harvest capital losses

The wildly oscillating market has a silver lining: There may be days when at least one of your taxable investments can be sold for a loss. By selling stocks and mutual funds that have declined in value, you generate capital losses that can offset capital gains in other parts of your portfolio.

You also can use up to $3,000 of capital losses to reduce taxable ordinary income. Whatever capital losses that go unused this year can be carried forward to future years. When harvesting capital losses, make sure you don't buy identical investments within 30 days in order to avoid a disqualifying wash sale.

Roth conversions

Converting a traditional IRA to a Roth IRA introduces invaluable tax diversity into your portfolio. Once you get funds in a Roth, they can grow tax-free as long as you live. Anything left to your heirs will get tax-free growth over their lifetimes.

When you convert to a Roth IRA, generally the amount converted is added to your taxable income. In almost every case, it makes sense to increase your taxable income to at least to the top of the 15 percent tax bracket with a conversion.

For those married filing jointly, this means you can bring your taxable income after deductions and exemptions up to $69,000 for 2011.

Charitable donations

In order for donations to be deducted from your 2011 taxes, they need to be completed by the end of the year. If this is a high income year and you have a charitable intent, you can start a donor advised fund with Vanguard or Fidelity that permits you to donate a large lump sum, take the immediate charitable deduction, and then use this fund for years to come to meet your philanthropic goals.

If you are over 70 and take required distributions out of your traditional IRAs, you have until the end of January to direct those funds to go directly to charity free of tax for 2010.

Gifts

This is the season of giving, and each of us has $13,000 annual allowance for gifts to non-spouses. If you are married and are giving funds to a couple, you can multiply the allowed gift to $52,000.

If you're generous enough to be gifting more than this amount, then you can still avoid usurious estate taxes by using the $5 million lifetime gift limit per individual. Just make sure you file the gift tax return if you go above the annual allowance.

College savings plans

In Colorado we have an unusually generous tax break for putting funds into a 529 college savings plan. You get the upfront state income tax deduction with few limitations, and then when funds are used for higher education expenses, the earnings are not subject to federal and state income tax.

Take required IRA distributions

If you are older than 701/2 and have an IRA or other retirement plan or have a so-called inherited IRA, you should be aware of the required distribution that must be taken from the account by the end of the year. If you fail to do so, the IRS levies a monstrous 50 percent penalty on the required distribution.

At least pay some attention to finances

Erin Baehr — Fri, 02 Dec 2011 02:12:00 GMT

"Don't let a good crisis go to waste."

This has been a popular phrase lately, mostly referring to the debt crisis or the economy, and to gain a political advantage. Politics aside, I've seen it in action lately, too, in a positive way, in folks who are taking a closer look at their own personal finances and want to understand better what they have and how their investments work. Knowledge is power, and even if you have someone managing your investments for you, a basic knowledge and understanding of your finances gives you an advantage. Here are some tips.

First and foremost — it's your money! Not being good with investments or disliking finance is no excuse. Never completely outsource the management of your money and investments to someone else. You may be a do-it-yourselfer who just want a little direction or want to delegate the paperwork and details that go with your investments, but not being involved at all is a mistake.
Ask questions. Understand your investments, why you have them, what type they are, and what kind of expenses they carry so you can make educated choices. Good communication between you and your advisor is crucial; it leaves less room for misunderstanding of your wishes and intentions. The victims in the Bernie Madoff scandal were discouraged from asking questions and hesitated to rock the boat. A good advisor will welcome your questions and appreciate a well-informed consumer.
Open every statement and trade confirmation. Every one. If you don't understand what the transactions are, ask. Dishonest advisors count on those statements going unopened so you won't notice if they make excessive trades or worse, direct funds to themselves.
Know what your account's trading policy is — does your advisor have discretionary authority? That means he or she is authorized to make trades in your account without consulting you first. Nondiscretionary on the other hand, means that all trades must be discussed with you and agreed to. This is an important distinction and investors are often not aware of the terms of their agreement until they suspect abuse.
Make sure your money is being held by a third party custodian, not by your advisor. Checks for investment contributions should always be payable to the custodian. Seems basic, but Madoff's investors were giving him the money personally. The custodian will hold the funds and prevent them from being released to anyone but you at your address of record without your written consent. You should receive statements from that custodian regularly. It's OK for the advisor to create reports, too, but the custodian's statements then provide independent verification. The custodian should also be audited regularly by a reputable firm not associated with the advisor or custodian.
If it sounds too good to be true "¦ well then it probably is. There's always a trade-off, whether in the form of increased risk, decreased liquidity, or fees. The creators of financial products are in the business to make money, not to be charitable to you.
Take your time with new investments. Don't let anyone rush you; investing is not to be taken lightly and you should understand what you are buying. Every day there is a new "once in a lifetime" opportunity to take advantage of. If you're not ready for today's, wait for tomorrow's. High pressure sales tactics have no place in this business.

When presented with an "alternative" investment (meaning not your traditional investment products like mutual funds, stocks, or bonds), it is crucial to ask questions and understand the product. If you want to get out of the investment, is there a market for it? Are there surrender charges or redemption fees? Many alternative investments, such as private real estate investment trusts (REITs) or leasing funds, are not publicly traded on the exchanges, with very limited or no ability to redeem your shares. These typically are better deals for the advisor than the client.

Ask about the life cycle of the investment — does it automatically terminate at some defined point in the future, or an estimated one? How are the financials of the company you are investing in? These investments are not guaranteed, and if the company goes belly up, your shares could be worthless. Are they borrowing to pay dividends, or do they truly represent income? Does the share value on your statement have a basis in reality? Read the prospectus to find the answers yourself, too.

An Internet search can reveal complaints or issues with the investment you are considering. Check the "suitability standards" for the investment in the prospectus as well. The standards will specify a minimum net worth or income/net worth combination, and Pennsylvania adds the additional standard that liquid net worth (excluding house and cars) must be at least 10 times the amount of the investment.

Ask about the risks. Every investment has risks, even stuffing the mattress. Find out what they are and determine with your advisor how and if they fit into your overall strategy.

Know who your advisor works for and how he or she gets paid. The financial services industry traditionally has been very opaque about compensation, and often people think they are getting advice for free. Unless you're working with a volunteer organization, you are paying for your advice somehow. Advisors can be paid by commissions, fees or a combination. They are all viable options, but you should know what and how you are paying.

Commissioned advisors are paid based on the products sold; insurance, annuities, mutual funds or those alternative investments for example. Commissioned mutual funds (load funds) come in three share classes: A, B, and C. With A shares the sales charge is paid as you get in; B shares on the Back end, declining, when you sell, and C shares Continuously, through a higher expense charge all along. Fee-based planners may charge based on a percentage of assets they manage (and sometimes also receive commissions on product). Fee-only planners may work on a percentage of assets, flat fee or hourly fee, with no commissions or sales charges.

Don't be afraid to ask for a second opinion. If you have misgivings, or just want to be sure you're on the right track, check with another reputable advisor. Always research any advisor you are considering working with, be sure to interview more than one, and check registrations as well as complaints and disciplinary actions.

Visit www.sec.gov/investor/brokers.htm for links to the appropriate regulatory agencies and interview questions. You can also request a free background check from the Pennsylvania Securities Commission at www.psc.state.pa.us/investor/check_invest.html.

Erin Baehr is a Certified Financial Planner, the owner of Baehr Family Financial, a fee-only financial planning firm in Stroudsburg (www.baehrfinancial.com).

15 years to owning your home

Dave Gardner — Wed, 16 Nov 2011 02:02:00 GMT

While most investors are distracted with 1 percent stock market moves, a fixed rate mortgage at today's rates may do more for your financial future. The yields on Treasury bonds continue to plummet, bringing lending rates down with them. Bond barons such as PIMCO's Bill Gross bet against the Treasury bond using the heft of his quarter-trillion Total Return fund, only to be whipsawed by a price increase.

Rather than gnash your saver's teeth at puny yields, take advantage of them from the borrower side by locking in historically low fixed mortgage rates. Many of you will find 30-year mortgages to be the most attractive. With rates close to 4 percent for conforming mortgages at low costs, it's hard to imagine them continuing their slide. With a $300,000 mortgage, this translates to a monthly payment of $1,432, not including property tax and insurance.

If you find yourself in a secure financial position, there is an additional option that harkens back to the time when six kids could fit in a station wagon: the 15-year mortgage. Rates trounce those of the 30-year with 3.25 percent available with some lenders. No doubt it's a significant bump in your payment, $2,108 a month for the same $300,000 mortgage. Gulp! Why would you want to do that?

The answer is forced savings and reduced interest. Many embrace mortgage interest, rabidly pursuing it as one of the beefiest federal tax breaks. Those who maximize tax breaks by paying more interest are letting the tax tail wag the dog. No tax-adjusted formulas can save you from the conclusion that you save money by paying less interest.

While the $2,108 payment looks higher at first with the 15-year mortgage, $1,296 of that is toward principal. Three years down the line, $1,424 of your payment is principal pay down. In contrast, when you are three years into the 30-year mortgage only $486 out of your $1,432 payment goes toward principal.

The 15-year mortgage is not for everyone. You need to be very financially solid with ample income and your job situation should be secure. All other debt should be paid off. You should set aside greater emergency savings to cover unexpected breaks in employment. It's best for people whose income makes their current mortgage easy to cover.

Many of my colleagues rail against this advice, saying that you can earn far higher rates of return on your investments than you will save with your mortgage. They argue the tax breaks make 30-year mortgages available at 3 percent adjusted for the tax benefit. It's undeniable that history demonstrates that average total returns of a conservative portfolio have exceeded this rate.

On the other side, you can quibble that the mortgage interest tax break may fade to black with impending tax overhaul. Or that it's of dubious value to high income earners who may see their deductions phase out through the AMT or other means. Also, earnings on investments are taxed as well and few people have the discipline to invest the difference between the two mortgage payments.

The strongest argument for the 15-year mortgage may be behavioral. Rarely do I meet a person who regretted their decision to take on a 15-year mortgage with ample reserves. With a short mortgage, a paid off house seems within reach. In my experience, once that happens their tolerance for the ups and downs of the market improves markedly. Ironically, taking the financial conservative stance of a 15-year mortgage can steel you to be more aggressive with your portfolio. That may be your ticket to financial independence.

5 financial rules for grieving spouses

Erin Baehr — Wed, 02 Nov 2011 01:05:00 GMT

Losing a spouse is one of the most stressful and heartbreaking events of a lifetime, and, sadly, an event that many of us will experience — especially women.

Dr. Kathleen Rehl, author of the award-winning book "Moving Forward on Your Own: A Financial Guidebook for Widows," described this as a "tsunami."

According to Rehl — a widow herself — more than half of women are widowed by age 65, with 56 the average age of widowhood.

Those widows who do remarry may even be widowed again, especially when marrying an older man. The unfortunate reality is that a woman who is widowed will likely experience a decline in financial well-being, making it critical for her to choose well-thought-out decisions to ensure her stability.

Practical considerations

"The early stages of grief bring shock, denial and disbelief," Rehl said.

Even those intellectually aware of these effects can be taken by surprise.

Rehl had worked with many widows in her financial-planning practice in Land O'Lakes, Fla., yet when she lost her beloved husband and business partner, Tom, in 2007, she "really got it."

She went through the same shock and at times couldn't remember things as natural as her Social Security number. Despite knowing cognitively she had a plan in place, still she experienced, however briefly, the normal fear that she wouldn't be OK.

"Every widow who comes to me is afraid she'll be a bag lady," Rehl said.

Rules to remember

These fears can lead to decisions made out of emotion, which leads us to the first rule of protection for widows:

1. No major decisions for one year.

Certified financial planner Karen Folk of Bluestem Financial Advisors in Champaign, Ill., calls this establishing a "decision-free zone."

This is especially true when the deceased spouse handled the financial affairs, and the learning curve to figure out what there is and how the bills are paid can be steep.

This policy also gives the widow the freedom to defer saying yes or no to various financial requests until she is in a better position to evaluate them.

There are still things that need to be done, and some decisions can't wait, of course. While working through those administrative tasks such as filing life-insurance claims, transferring ownership of assets or updating beneficiaries, Folk advised to "get a little notebook, keep it with you at all times, and write down everything you do, who you called and what number."

Grieving spouses are often unable to concentrate or remember details, and this notebook can help you go back and find out what you were working on last.

2. Beware the financial wolves.

Rehl has heard her share of stories of widows who have been taken advantage of by financial "wolves."

She relayed the story of a woman in her 70s who was visited by her husband's agent with her life insurance proceeds: "Before he left, he had sold her a policy on herself and said her husband would have wanted her to have this. He used the whole amount to buy the policy that came with a big surrender charge."

Thanks to a phone call from Rehl, the company refunded the money in full for the inappropriate sale.

Rehl advised listening to your "tummy brain" — your gut instinct. This is also where Folk's decision-free zone policy comes in handy: Your instincts might be numb immediately following a loved one's death.

3 Don't run away from your house.

Again, no hasty decisions. Right now you may be feeling as if it is too painful to stay in your home or that moving in with family would solve your loneliness, but a year can make a big difference.

Are there things you can do in the meantime to feel a little better? Rehl suggested making minor changes in your home, such as selling your husband's chair if it's too hard to be near. She also cautioned against moving out of your community in the early stages.

You may be overlooking such important considerations as your support network, social circle and medical providers.

4. Be realistic and get an objective view of your finances.

One thing that comes in abundance with a life-insurance check is advice about what to do with it. You'll get lots of unsolicited recommendations from neighbors and friends telling you to pay off your mortgage, invest in a hot stock or set up a trust, for instance.

Instead of depending on your neighbor or your neighbor's adviser, Folk recommended looking for your own unbiased adviser, who can evaluate your entire financial situation and give objective advice.

According to Folk, it is common to feel guilty about getting money because someone died. The beneficiary may want to get rid of it right away. This can lead widows to feel as if they have more money than they will ever need and want to make a lot of gifts.

"Maybe they do and maybe they don't," Folk said. "This is why your spouse got this insurance, so you can use it to take the time to figure out what your life will look like."

The sum of money that looked so large may not look as plentiful after taking into account your future needs. If, after doing the analysis, you find you truly do have more than you need, then you can make gifts. Which leads us to our last rule.

5. Don't be a purse for others.

Financial wolves don't always come in the form of advisers. They can also come in the form of family members or new suitors.

Rehl warned, "You may be approached by family members asking for part of their inheritance early," or gentleman callers looking for "a purse, a nurse or a mother."

Enjoy a nice dinner or night out, but be careful of your new friend's intentions.

ABCS OF WIDOWHOOD

Dr. Kathleen Rehl, author of "Moving Forward on Your Own," offers three strategies to new widows:

A = Always ask questions. "Why is that financial recommendation good for me?"

B = Buyer beware. "If it looks too good to be true, it probably is."

C = Care for yourself. "Spend some of your time and your money with inexpensive self-care activities that improve your overall well-being."

Erin Baehr is a certified financial planner at Baehr Family Financial in Stroudsburg and Randolph, N.J. She can be reach at www.baehrfinancial.com.

Four tips to better retirement plan choices

Dave Gardner — Tue, 18 Oct 2011 00:57:00 GMT

When you start a new job or your employer gets acquired, you may need to make retirement plan decisions on the fly. While you probably have the option to change your investment selections at any time, inertia is the most powerful force in personal finance. Your short-term choices may persist for years to come.

Whether your 401(k) plan resembles a Chinese menu with scores of regional dishes or a menu del da with a few selections, choosing the right investments is critical. Depending upon your employer for investment advice is rarely helpful. They may provide generalized assistance after their form identifies you as "aggressive" or "conservative." They rarely have the information and expertise to provide you with adequate guidance.

Finding impartial advice on your retirement plan options can be challenging. Even independent financial planners may be reluctant to delve into the details of your plan, as the investment options can vary significantly from employer to employer. If you're like most investors, you are essentially left to keep your own counsel. To make this task a bit easier, remember these tips.

Consider your whole portfolio. It's natural to mentally segregate our investment accounts and assign a purpose to each one of them. You might say your 401(k) plan is only for retirement and so it should be invested for the long-term. This is relatively straightforward if your 401(k) is your only significant asset.

If you have other investments, you need to consider them as well when devising an appropriate strategy. For example, it could be that it makes sense to concentrate your 401(k) in more conservative bonds for tax reasons.

Low costs predict success. One of the strongest, more reliable predictors of an investment's success is its cost structure. This is one area of your life that you don't get what you pay for. The higher your investment fees are, the more likely it is that you will achieve subpar returns.

Hopefully you can easily determine the fees associated with each investment account. If not you may need to compare the returns of investment options against a relevant index, such as the widely used S&P 500, to approximate the investment fees.

Avoid company stock. You're already invested in your company. After all, you work there! Your future cash flow in the form of income is dependent in part on the future of your company. You wouldn't want to see your company suffer through a downturn, have your investment holdings tank, and then find yourself as the British say being "made redundant."

Watch portfolio turnover. The turnover of a portfolio is expressed as an annualized percentage and relates to the stability of a fund's investment holdings. A fund with 100 percent annual turnover replaces its entire portfolio on average once per year.

It may be that such a fund will hold a favorite stock for five years, but then there will be others that are held for less than a year. Funds with turnover ratios of more than 50 percent have high costs are not included in the widely publicized expense ratios that must be overcome to achieve market returns.

Also when funds purchase and sell stocks, like you they pay brokerage commissions that detract from total returns. Also, the difference between what the stock seller receives and the buyer pays is called "the bid-ask spread," and is another hidden cost that's dearer for funds with higher portfolio turnover.

While there are many factors to be considered when choosing retirement plan investments, these four tips will give you a better chance of avoiding the dogs and getting the right portfolio in place to achieve your goals.

Be thrifty, use caution when it comes to credit

Erin Baehr — Tue, 27 Sep 2011 01:24:00 GMT

In uncertain economic times, it is more important than ever to be efficient with your finances and focus on those things that are within your control. When times are good we tend to pay less attention to the details of our finances. Busy lives can lead to mindless spending and mindless shopping. Now is the perfect time to review our financial habits, and one area that deserves attention is debt. Let's put aside our guilt, denial and defensiveness for now and take a look at debt — the good, the bad, and the ugly.

First, there is such a thing as good debt, most notably reasonable mortgage debt. I recommend my clients keep a mortgage of 50-80% of their home's value, even if they can afford to own a home free and clear. Being "house rich and cash poor" can't help you eat or pay the bills if you have a cash flow problem and no money in the bank.

On the other hand, keeping some of your equity separate and invested, ideally earning more than your mortgage interest rate gives you good leverage. Of course the tax deduction most homeowners are entitled to is a bonus as well. Owning a home and keeping a mortgage is a good hedge against inflation, too; your payment (with a fixed loan) will stay the same, while rent and other expenses increase over time. Education loans, business loans, and auto loans with very low interest rates would also be considered good debt (although paying cash is preferred if possible). Essentially, debt incurred on an appreciating asset is acceptable, and when used responsibly, debt can help you build wealth.

Buying a car with a long term loan and high interest rate is an example of bad debt. Especially for commuters, borrowing to buy a new car that will depreciate much faster than the loan is being paid down is a bad deal. Loans on vacation homes, boats, computers, furniture and the like would also come under this category. Many of these expenditures are large, but small enough that, with some discipline and patience, they can be saved for, saving you interest and possibly giving you negotiating leverage. Still, since they generally do last at least as long as the payments, they don't fall under the ugly category. Ugly is reserved for credit card debt.

Einstein called compounding the Eighth Wonder of the World, and for good reason. It can make a diligent saver rich. Consider the case of Jane and John; Jane saved $2,000 per year from ages 25 to 30, while John waited until age 35 and saved $2,000 a year until age 65. If both accounts grew by 10 percent a year, by age 65 Jane would actually have more, about $377,000 to John's $361,000, since she had time for compounding to work for her. Letting your money earn interest on interest, or growth upon growth, is downright magical.

Compounding works against you, in the form of the interest you pay. It erodes your finances as quickly as it can build them. This is especially true of credit cards where you are carrying a balance, continuing to charge, and only paying the minimum. For instance, on a $1,000 balance, with an interest rate of 17 percent and a $40 a month payment, it will take 31 months to pay off. Continuing to charge on the card, though, will make the payoff much longer and cost a bundle in interest. Credit card debt is the most destructive kind of debt.

If you're serious about getting rid of credit card debt, the first thing to do is to stop using them! And then look at why you have the debt in the first place. Sometimes people accrue debt as a result of uninvited and unpreventable catastrophes such as a long illness or prolonged unemployment. We're not talking about those kinds of problems here. Many times, though, it is a result of spending more than you are earning, or an unexpected repair with no emergency fund to draw from.

If your outflows are more than your inflows, expenses need to be cut or income increased, or the hole will just get bigger. Review your spending, considering the people and activities most important to you. If you find your spending is influenced more by other people, culture or impulse purchases, work to align your spending to reflect what you truly value. If the problem is the lack of emergency fund, it is critical to do whatever it takes to set aside at least $1,000 before working on a debt reduction plan. Dave Ramsey calls it "Gazelle Intensity," the unwavering drive to cut the budget mercilessly until your goal is achieved. If you don't have at least that much to fall back on, I guarantee, something will come up, the cards will come out, and you'll be right back where you started.

Next, make a list of what you owe, to whom, the interest rate and the payment. Seeing it in black and white is not fun, but reality must be faced. I recommend taking whatever extra you can squeeze out, including tax refunds, bonuses, rebate checks, etc, and putting that toward the smallest debt. It may not have the highest interest rate, but the psychological feeling of accomplishment when that debt is paid off gives you motivation to keep going. When you have one paid off, then roll that payment into the next largest debt, and so on. You may also want to contact your credit card companies and ask them to reduce the rate, and then, if the rate is low enough, transfer the balances to the lower rate (provided you are not hit with a large transfer fee).

It may be tempting to borrow from your 401(k) or your home equity to consolidate your debt. I strongly caution against that, except in certain circumstances, and with great discipline. Time and time again, I've seen people do that without dealing with the cause of the problem, and end up with double the debt. It reminds me of crash diets.

Of note is that, in the current credit climate, credit card companies have been quick to lower limits and raise interest rates. Where in the past, you may have done well to call the company and ask for a lower interest rate, it can backfire now.

If you find that your debt load is crushing, and you need assistance managing the payback, seek out the help of a legitimate, non-profit agency, such as our local Consumer Credit Counseling Service of Northeastern Pennsylvania (www.cccsnepa.org). Always check out the agency you are working with, as there are unscrupulous companies out there seeking to take advantage of your misfortunes.

Erin Baehr is a Certified Financial Planner, and the owner of Baehr Family Financial, a fee-only financial planning firm in Stroudsburg (www.baehrfinancial.com).

When the financial driver is gone

Dave Gardner — Tue, 20 Sep 2011 01:08:00 GMT

Every couple seems to have one person in the financial driver's seat. This is usually not a question of power or who earns the most, but a rational response to the complexity of our lives. Today's families deal with several financial companies, and having one person navigate the monetary minefield is natural step.

But this division of labor can be catastrophic when something happens to the financial driver -- unexpected death, inability to communicate or even prolonged absence. The financial passenger in most cases has little inkling of the couple's overall financial picture.

Do we have life insurance policies? What credit cards do we have and how do we get access to the online statement? What investment accounts, work retirement plans and pension benefits do we have? It's hard to fathom, but there are many cases every year where the primary breadwinner dies and the dependents learn about life insurance benefits years later.

This imbalance in financial knowledge can cause tremendous anxiety for the spouse who doesn't focus on these issues. Some clients start working with me in part to ensure that there is continuity if something were to happen to the financial driver.

While it's one answer, you don't need a financial planner to get going on this. You need a "When I'm Gone" file.

It may seem the epitome of financial geekdom to plan for your unanticipated death or disability. However, when you work with widows, widowers and children who were not the financial drivers, you realize this is not doomsday esoterica. For a grieving partner without an aptitude or interest in personal finances, chasing down life insurance policies can seem an impossible task.

The "When I'm Gone" file makes sorting out personal finances an easier task. This file is best kept in a fireproof, locked box hidden somewhere in your home. Safe deposit boxes have their advantages, but I've found that people tend not to keep their information up to date and may forget to return documents to the box.

In this file, you should have:

Insurance Documents. Life insurance companies, contact information and policy numbers should be listed. Disability and long-term care policy information is also important, as is information on insurance you have through work, which is often forgotten.

Estate Planning. Updated copies of wills, health care and financial powers of attorney, medical directives, funeral instructions and trusts should all be available here.

Investment accounts. Taxable investments, retirement accounts, work retirement plans such as 401(k)s, bank accounts, work pensions, annuities, whole life insurance policies, partnership stakes and other information related to your investments should be kept here. A net worth statement of assets and liabilities provides a critical high level view of your finances.

Bills. Credit cards, mortgages, car loans, student loans, taxes and utilities. These are bills that must be paid whether you're here or gone.

Passwords. Countless logins and passwords must be maintained to stay on top of our financial lives. Your bank card has a PIN, but the login and password to online banking is different. Fidelity has a different username that TIAA-CREF. Detailing this information will do wonders for those you leave behind.

Other Documents. These include titles, deeds, birth certificates, LLC and partnership documents.

Of course you want to ensure this information is well hidden and under lock and key. Having copies in your safety deposit box is advisable if you can take the extra step.

It's a morbid task to pull this together on a summer afternoon. But life insurance policies can be like the proverbial tree falling in the woods. If you die and no one knows you have life insurance, does it exist?

Dave Gardner is a certified financial planner with a practice in Boulder and is the president-elect of Alliance of Cambridge Advisors, a national organization of fee-only financial planners. He can be reached through his Web site at yellowstonefinancial.com.

Gen Y's $2 Million Retirement Price Tag

aca_admin — Thu, 15 Sep 2011 14:45:00 GMT

ACA member Joe Alfonso was quoted in the US News & World Report article "Gen Y's $2 Million Retirement Price Tag" by Emily Brandon. In the article Joe recommends funding a Roth IRA or 401(k) as a way to prepay taxes while in a lower tax bracket.

What to do once you get a student loan

Erin Baehr — Tue, 13 Sep 2011 01:19:00 GMT

In a recent column, we looked at options and process for obtaining student loans. But what happens once you get a loan? How will the loan be disbursed, and when the time comes, what are the options for paying the loan back?

How do we get our money?

We left off in the financing process with the student signing a Master Promissory Note and completing Entrance Counseling, which puts the wheels in motion to issue the Stafford loan. Once the school knows the student is accepting the federal loans offered, the amounts are applied to the tuition bill, sometimes marked as "estimated," since the funds may not actually be disbursed by the time of billing. The loan does not come to you, but is paid directly to the school and applied in two installments; one for the fall semester and one for the spring. If for some reason you have already paid the bill, the loan may be refunded to you, typically by request with the Bursar's or Finance office. Any balance not used for tuition and fees may be used for books, room and board, or even transportation or off campus housing.

While the student is in school, no payments on Stafford loans are required, but unsubsidized loans accrue interest, which is added to the principal, or capitalized. Capitalization takes place at the end of the student's time in school or grace period. The student may make interest payments while in school to avoid interest capitalization. On the plus side, depending on income, student loan interest may be taken as an adjustment on the borrower's tax return.

I'm out of school; now what do I do with all of these loans?

Each year the student borrows money, a new loan is created, and each type of loan is created separately as well (the Master Promissory Note is only required once however). Between Subsidized Stafford loans, Unsubsidized Staffords, Perkins and Parent PLUS loans, it is possible then to have quite a collection of loans upon graduation. If keeping track of the lenders and payments becomes difficult, you may wish to consolidate your loans into one loan. The interest rate on consolidation loans is the weighted average of the loans you are consolidating, but cannot exceed 8.25 percent. Subsidized loans that are consolidated retain their subsidized benefits.

Do I have to pay it back all at once?

Most student loans allow you to spread payments out more than 10 years, and there are several options for payment plans. The Standard Repayment Plan, the most common, requires up to 120 equal payments of at least $50 a month. If you don't consolidate, each loan will have its own payment plan. There are no prepayment penalties for paying off the loan early. If those payments are too difficult, you may choose the Extended Repayment Plan, which can give you up to 25 years to pay "» and a lot more interest. You are eligible for this plan if you have at least $30,000 in Direct Loans (loans made through the government), and/or $30,000 in Federal Family Education Loans. Note that while loans are no longer being made through FFEL, you may have an older loan through the program. Another option is the Graduated Repayment Plan, which allows you to make smaller payments early in the loan, graduating into higher payments later (but never more than three times any other payment), when your income will be presumably higher.

But I don't have a "real" job yet; how can I afford even this?

The Income Based Repayment plan may be for you. With this program, your income, family size, location, and amount of loans determine how much you are able to pay. If the standard 10-year payment amount would take more than 15 percent of the amount you earn over 150% of the poverty level, you may be eligible for lower payments based on that income. If your income is less than 150% of the poverty level, the payment would be zero, and otherwise, would be capped at 15 percent of the amount over that amount. As you earn more, the payment would rise. The IBR is only available for federal loans like the Stafford or Perkins, and not for Parent PLUS loans or private loans. Note that the payment amount allowed may not be enough to cover your interest, which in most cases will increase the balance. For Subsidized Stafford loans, the government will pick up the additional interest not covered by your payment for up to three years. You will need to submit documentation each year to prove your continued eligibility, and if you are still in the program after 25 years, your remaining balance will be forgiven. The Income Contingent Repayment plan is a similar program, for direct loans only, which bases your monthly payments on your adjusted gross income and is recalculated each year.

If the financial hardship of repayment is too great, whether from continued unemployment after graduation or other financial difficulties, you may qualify for loan deferment or forbearance to postpone your payments. An unemployment deferment, for loans made since 1993, can last up to three years, for six-month periods at a time. You will need to prove that you are actively seeking work, by registering with an employment agency for example, or providing evidence of unemployment benefits. Deferments are also available for economic hardship, joining the Peace Corps, or being on active military duty during a war or national emergency, among other reasons. Interest will still accrue during periods of deferment. If you don't meet the requirements for deferment, you may apply for forbearance, which can reduce or postpone your payments For any of these options, contact your loan servicer, and don't stop your payments until you are approved.

Isn't there any way to get out of my loan?

There actually are a couple of ways. Loans may be discharged due to the death or total and permanent disability of the borrower, and while not common, in certain cases bankruptcy can discharge a student loan debt. If you are a teacher and opt to work in a designated low income school or in a field with a teacher shortage, your Perkins loan debt may be forgiven and a portion of your Stafford loan also may be forgiven. Public service employees may also be eligible for loan cancellation. The Public Service Employees Loan Forgiveness program provides for loan cancellation of any balance remaining after 120 payments for borrowers working for certain public service entities (such as a school, military, hospital, or law enforcement agency). There are specific requirements to meet, so if you are considering public employment, refer to www.studentaid.ed.gov for more details on this program.

Erin Baehr is a Certified Financial Planner, the owner of Baehr Family Financial, a fee-only financial planning firm in Stroudsburg (www.baehrfinancial.com).

Dollars and sense of long-term care insurance

Erin Baehr — Tue, 30 Aug 2011 01:01:00 GMT

Have you thought about long-term care insurance? Most people don't until they are approaching retirement and the thought of spending their hard earned savings on care drives them to consider it.

Statistics vary from source to source, but some 70 percent of those over age 65 will need long-term care, defined as the services needed when you are unable to care for yourself. Those services can range from help with bathing, feeding and walking in your home to full-time care in a facility. Long-term care insurance can help cover the costs of care, but how do you know what kind of policy to buy, or even if you should purchase a policy in the first place? Here are some tips:

To buy or not to buy

The most typical ways of paying for long-term care are to pay for it out of pocket (self-fund), rely on Medicaid or cover some or all with an insurance policy. Many times people think that Medicare or health insurance will cover their care, but in reality they only cover a small portion of the necessary care, and typically for skilled nursing care, not for the custodial care usually required in the case of a long term illness or condition. Medicaid, on the other hand, will pay for custodial care — most often in a facility. In order to qualify for Medicaid, you may need to pay out of pocket for care until your assets are below the allowable eligibility amount.

As a rule of thumb, those who have $250,000 to $500,000 in assets and don't have the cash flow to afford long-term care insurance premiums may wish to spend down assets and qualify for Medicaid. Those with greater than $1.5 to $2 million in assets may wish to pay out of pocket for their costs (individual cases vary, of course). Those in the middle, for whom long-term care insurance premiums are within their budget, should consider purchasing a policy to cover at least some of the costs associated with care in a facility or home care.

Purchasing LTCI can be viewed as protection for your portfolio in that sense; if you can use your insurance benefit rather than your assets, you have preserved them for yourself or your heirs. Some wealthier individuals who can afford to self-insure may choose to purchase LTCI for that exact reason.

When should you buy a policy? The best time to buy any insurance policy is the day before you need to use it, but since none of us can know that, the next best time would be when you are in your late 50s or early 60s. The initial premiums go up the older you get, so even though you are paying the premium for a longer period of time, sometimes buying earlier can save you money in the end.

What options to consider

Once you decide that LTCI is for you, you will need to choose your options. The choices you make affect the premium, so it makes sense to look at various combinations and see what makes the most financial sense for you.

In choosing your elimination period, or the number of days of care you pay for before the insurance kicks in, you'll need to think about how much you can afford (or want) to pay on your own before then. Typical elimination periods range from 30 to 365 days. Clarify with the insurance company if those are calendar days or days of care. If you start out needing care three days a week, a 30 days elimination period may actually be 10 weeks. Some policies offer a zero elimination period for home care.

The benefit amount is the dollar amount available to pay for care each day you are on claim, in today's dollars. With the high cost of care, it may not be realistic to fund the entire amount with insurance. Some policies aggregate the daily benefit amount into a monthly amount, so when you don't need coverage every day of the month, even if the cost exceeds your daily amount, you still may be covered. For a rough idea of what care costs in different parts of the country (broken down into regions within states), check out Genworth's Cost of Care page: www.genworth.com/costofcare. According to the site, the average annual cost of nursing home care in a private room in the Scranton area is $90,338, and $117,895 in Allentown.

Inflation protected riders are an important part of a policy. Without this kind of rider, your benefit amount may be dwarfed by the quickly increasing costs of care. You may choose a rider that increases your benefit amount yearly by a specified percentage based on a simple interest calculation or a compound calculation. The compound will increase faster and more readily keep up, but it is also more expensive. Some companies offer an increase based on the consumer price index, and others allow you to purchase additional insurance at specified intervals in the future, with those additional benefit amounts calculated on your then current age.

The benefit period is the number of years your policy will pay for, usually between two and 10 years, or even a lifetime. The lifetime benefit, as you might expect, is very expensive. The average nursing home claim is two and a half years, and the average home care claim is about four years. If you have a spouse or domestic partner, a shared care policy may be right for you. These policies combine your individual benefit periods to be used by either one of you or both. Instead of two single six-year periods for instance, you would have 12 years combined; one could use eight, leaving the other four, or any other combination.

Final considerations

To encourage more people to purchase their own insurance and not rely on government aid, many states, including Pennsylvania, are partnering with insurance companies. If you purchase one of the eligible "partnership" policies, for every dollar your insurance policy pays, you are able to retain an additional dollar above the Medicaid guidelines and still qualify for assistance when your benefits run out.

These policies may cost a bit more but I believe are worth it. Be sure that your policy includes 100% coverage for home health care. In many ways, LTCI can be thought of as nursing home prevention insurance, if it allows you to be cared for at home as long as possible. Also find out what you have to do to make a claim; when you are dealing with a health crisis, you certainly don't want the aggravation of fighting an insurance company for your rightful benefit.

When comparing quotes from different companies, besides the premiums, you'll want to consider the financial stability of the issuing company. Before deciding to purchase, make sure your budget can handle potential premium increases. It was unheard of to raise premiums on existing policy holders until recent years, when premiums on some policies increased more than 25 percent. Dropping the policy because you can't absorb the future increases is counterproductive.

Finally, when you are ready to start the buying process, work with an insurance agent or broker you trust, who can explain all of your options and steer you to the policy that is best for your individual circumstances.

Erin Baehr is a certified financial planner, and the owner of Baehr Family Financial, a fee-only financial planning firm in Stroudsburg (www.baehrfinancial.com).

The importance of saving money

Dave Gardner — Mon, 22 Aug 2011 19:38:00 GMT

Why go through the trouble of saving money? Most of us have a natural inclination to spend it now and be immediately gratified rather than sock it away. It seems the siren song of the spendthrift has rarely been so alluring.

Deferring gratification may seem like a good strategy when the payoff is significant and palpable, but with currently low interest rates it hardly seems worth it.

There are three essential ways you can earn money in this world. For most of us, the primary source of income is our work. Others are lucky enough to generate an income by affiliation such as an inheritance, a trust fund or marriage.

Finally, we can have our money make money for us, and therein lies the path to financial independence. If we don't make this shift during our lifetimes, we may never escape being forced to work to support our lifestyles.

For those just out of college, it's natural to have a low level of savings. The wages from your first job may have seemed impressive on paper compared to the campus job, but once your paycheck is reduced by Social Security, Medicare and withholdings, you weren't left with much. You may even question the value of savings in your 20s when your income is relatively low. Perhaps you should leave the 401(k) to those with a higher salary who are closer to retirement.

It's in your 20s and 30s that you set the financial foundation for the rest of your life. That's when you learn that living within your means is a necessary habit for enduring financial prosperity. The money you save in this period will have tremendous impact on your future finances, assuming you invest wisely.

Imagine your friend Emily is 25 and starts annually putting $5,000 in an investment portfolio. She keeps it up for just 10 years. She averages a modest 7 percent annual return on her portfolio. Meanwhile, Will just scrapes by during this time, but gets back on track at age 35 and for the next 30 years saves $5,000 a year, earning the same returns as Emily.

Who ends up with more: Emily, who has put aside a modest $50,000, or Will, who has set aside $150,000? While Will has amassed a decent portfolio at more than $505,000, Emily has beaten him handily at more than $562,000. It's the magic of compounding returns.

What's more, Emily has established a pattern of spending less than she earns that will enable her to be financially independent sooner than Will.

While working to support ourselves is necessary for much of our lives, it does come to an end for all of us. Wouldn't you rather be financially independent, instead of waiting for an inheritance or needing to work for the rest of your life?

Laid Back Portfolio

The Laid Back Portfolio had another solid quarter, helped by impressive performance in the bond market combined with a furious rally in the U.S. stock market over the last two weeks in June.

The Laid Back Portfolio does not use complex investment techniques, but will likely outperform most of its peers over time. It's a simple 60 percent allocation into the S&P 500 and a 40 percent allocation in the BarCap US Aggregate Bond Index.

We use a 1 percent annualized fee deducted quarterly, which is relatively low when compared to mutual funds with sales commissions or higher loads, but can be easily beaten through investment in low fee, no-load funds or ETFs. Laid Back earned 0.7 percent for the quarter, leaving the portfolio up 4.19 percent for the year.

When is the best time to collect Social Security?

Erin Baehr — Mon, 15 Aug 2011 19:17:00 GMT

Once considered the untouchable "third rail" in politics, talk of reforming Social Security is now on the table. Not that much is being accomplished at this time aside from casting blame and using scare tactics, but it does seem that at long last we may see some real reform to keep the system liquid.

Surprisingly, even AARP announced support for cuts in benefits, as long as they take place gradually over a long period of time and don't affect seniors already receiving benefits. So with changes likely to come, should you grab your benefits while you can?

The answer to that question is complex, and unique to each person or couple's life situation. While Social Security was never designed to be the sole source of retirement income, it is a significant income stream, designed to rise with inflation to boot. It should be managed with care.

To be eligible for Social Security, you must be employed in a job that participates in the Social Security system for about 10 years. Your benefit amount is calculated based on your highest 35 years of earnings, indexed for wage increases along the way.

If you haven't worked for a full 35 years, the years you were out of the workforce will count as zero and bring the average down. On the other end, earnings are only counted up to a capped amount that is determined annually, no matter how high they may be. In 2011 that cap is $106,800 (good news there is that the Social Security wage tax also caps at that income "» for now). Those 35 years of earnings are then converted to a monthly amount to come up with your "average indexed monthly earnings," or AIME. That number then goes through a calculation to come up with your benefit amount, or "primary insurance amount," PIA. One way to increase your benefit is to stay in the workforce long enough to replace lower or zero earning years with your current higher earnings.

When it comes time to collect Social Security, age matters. You may choose to claim benefits generally any time after you turn 62, with the actual benefit amount varying with your age at that time. The full retirement age is between 65 and 67, depending on your year of birth. For instance, FRA is age 66 for those born between 1943 and 1954, and 67 for all those born in 1960 and later

If you claim Social Security at your FRA, you will receive 100 percent of your benefit amount. Claiming early results in an actuarially reduced amount, a 62-year-old today would only receive 75 percent of his or her PIA. If that person waits until age 70 instead, the benefit amount is 132 percent. That significant difference is meant to make up for the fact that the recipient will receive fewer checks over the course of his or her lifetime.

Married? You may choose to claim 50 percent of your spouse's benefit instead of your own. If you are divorced, and were married for at least 10 years, you can still claim based on your former spouse's earnings, as long as you are at least 62 or older and unmarried, regardless of whether your former spouse has started receiving benefits or not.

It doesn't matter if you haven't seen your "ex" for many years. You can apply without his or her knowledge or consent; no messy conversations necessary. You do have to be divorced at least two years, though, and your former spouse must be eligible for benefits and at least age 62. If you wait until your full retirement age, you will receive 50 percent of his or her benefit, and if you claim early, you will receive a reduced benefit. It doesn't matter how many ex spouses your former spouse has; they all can claim on his record, without affecting the benefit of any others.

Social Security provides for a survivor benefit for both spouses and ex-spouses. If your spouse (or ex) dies, you may apply for survivor benefits from age 60 on. But again, if you apply prior to full retirement age, your benefits are reduced. At full retirement age the amount is 100 percent of the deceased spouse's. One strategy to explore is to claim a reduced survivor benefit at age 60, and then switch to your own benefit at your full retirement age.

This switching strategy can work for married couples as well. One spouse can file at full retirement age, and then suspend the claim. This allows the other spouse to claim 50 percent of his benefit, while he waits until age 70 to start receiving benefits, when the amount is higher. Or a higher earning spouse may claim on the other spouse's benefit and switch to his own later. You will need to visit your local Social Security office to file this way and make sure it is done correctly.

Is it better to claim as early as possible, in case Social Security runs out of money? In my opinion, we will be able to fix Social Security through means like a higher payroll tax rate, higher wage caps, or reduced benefits for those who aren't collecting yet. I don't believe that retirees or soon-to-be retirees will see a benefit reduction.

Medicare is another story, and one for another column. Setting aside solvency fears, it's best to take a rational, not emotional approach to the timing decision. The main factors to consider are your health and life expectancy, whether or not you are still working, your financial situation and your lifestyle. The first two are fairly straightforward: If you are sick or have serious health issues, then collecting sooner rather than later is probably the way to go.

On the other hand, if you claim prior to your full retirement age and continue to work earning more than $14,160 a year, you will forfeit $1 in benefits for every $2 you earn in excess of that. When you do stop working, at full retirement age Social Security will recalculate and increase your benefit amount to account for the months that you had benefits withheld. Your early benefit will still not equal the benefit you would have received if you claimed at full retirement age. You may also have an increase in benefits due to additional years of higher earnings. There is no reduction in benefit once you reach full retirement age, although there are special rules for the year you reach that age.

Beyond that, you'll need to do a break even analysis, and weigh the merits of collecting an increased benefit through delaying and pulling additional income from your portfolio vs. taking payments early or on time and allowing your portfolio to grow. A key factor is that cost of living increases have more of a compounding impact the higher your starting benefit amount. Your personal tax situation enters into this decision as well. There are a number of calculators and tools available on the Social Security website to give you a start.

Here are just two:

SSA Benefit Calculators: www.ssa.gov/planners/benefitcalculators.htm

Retirement Estimator: www.ssa.gov/planners/calculators.htm

You may also wish to speak with a Social Security representative (they are very helpful) or a financial planner to crunch the numbers.

Erin Baehr is a certified financial planner, the owner of Baehr Family Financial, a fee-only financial planning firm in Stroudsburg (www.baehrfinancial.com).