Concerned about how a business downturn will affect your personal finances? Here are some steps that may help you withstand an oncoming recession as well as any future recessions.
Chapter one of Financial Abundance Guide is entitled “Spend Less Than You Earn.” While this concept appears obvious, many people suffering from personal financial setbacks do not follow this simple precept.
Determine your current financial health
First, prepare an annual budget. For your estimated monthly expenses, track your expenditures for three months. Be sure to include federal, state and FICA taxes. To your estimated monthly expenses add quarterly, semiannual or yearly expenses, such as home and auto insurance, vacations and property taxes. The sum is an estimate of your annual expenses.
Determine your annual “non-retirement income.”
This is your total income less any contributions made to 401(k) plans, IRAs or other retirement accounts. Non-retirement income less annual expenses is the amount of savings that you have available to recession-proof your life.
Ideally, this savings will be at least 10 percent of your non-retirement income. If not, identify some “nice to have” expenses that can be eliminated — like that morning café mocha which can cost over $1,000 per year. In 20 years, with a 5 percent investment return, removing the mocha would provide you with $35,710.
Wipe out any credit card debt
Use savings to pay down one of the most expensive forms of debt available. If you have good credit and equity in your home, consider a home equity line of credit. Use this line to pay off your credit card debt and then pay off your home equity line as quickly as possible.
Get an “emergency fund.”
An emergency fund is a highly liquid account which provides coverage for between six months to one year of your current expenditures. With an emergency fund in place, you can survive a business downturn, job loss or short- term disability without invading your retirement accounts.
Spend that government rebate wisely
If you receive the $600 per person federal tax rebate, use it to pay off credit card debt, increase your emergency fund or to save for educational or retirement expenses. This income can be your first step in recession proofing your life.
Once your credit card debt is eliminated and your emergency fund is in place, use your savings to buy your first house, pay for your children’s education or to better insure an abundant retirement.
When saving for your first house, consider a Roth IRA. Even if you have a company retirement plan, you can contribute up to $5,000 annually to a Roth IRA if you are single and earn less than $101,000 or earn less than $159,000 if you file taxes jointly. Once your Roth IRA has been established for five years, you pay no taxes when withdrawing up to $10,000 of income plus all of your Roth contributions for a down payment on your first house.
If you are saving for your child’s education, consider funding Coverdell Education Savings Plans and Section 529 College Savings Plans. With both plans, the invested funds will grow tax free and can be withdrawn tax free when used for educational expenses.
Most retirement plans provide an immediate tax deduction of the amount contributed and tax free growth of the plan’s funds. If your employer provides matching funds to your retirement plan contribution, always contribute the maximum amount that your employer matches. The matching funds are “free money” that virtually guarantee a high rate of return on your investments.
By following these simple, powerful steps you can achieve financial security. If you do not feel that you can take these steps by yourself, find a knowledgeable and trustworthy financial planner to help you with this journey. While lowering your current spending may cause some short term financial discomfort, the payoff of recession-proofing your life is a reduction of fear and stress.
Concerned about how a business downturn will affect your personal finances? Here are some steps that may help you withstand an oncoming recession as well as any future recessions.
I recently read an article by Henry K. (“Bud”) Hebeler at Bankrate.com. Bud, the former President of Boeing Aerospace, has spent his retirement years helping people prepare for retirement. His popular web site, analyzenow.com, has many helpful retirement tools. Bud was also kind enough to provide a technical edit of my book, before it was published, as well as to write my book’s Foreword.
In his article, Bud shows that the personal savings rates in the US have deteriorated from 10% in 1985 to 5% in 1990 to 2.5% in 2000 to 0 today. Personal savings rates today are the same as they were from 1929 through 1931, after the stock market crash that led to the great depression.
As savings rates have receded, personal consumption has climbed. In inflation adjusted dollars, consumption per capita in the US has climbed 25% from 1985 to today. From these figures, it is easy to see why the average American now saves nothing, compared to a 10% savings rate in 1985.
What you may not realize is why this has occurred. We all know that, until recently, credit was extremely easy to get. Credit cards, interest only mortgages, home equity loans and car loans helped transform us into a society of debtors instead of savers.
Since the vast majority of our GDP now comes from consumerism, US industry wants you to spend. Our financial institutions make significant profits from credit card interest and other forms of personal indebtedness. Even the government encourages spending over savings by providing tax deductions for mortgage interest while taxing savings interest at the same rate as earned income. State and local governments get much of their income from sales taxes that are placed on the goods and services that you buy.
Our President once said that we are addicted to oil. I would take that a step further and say we are addicted to consuming. Look at how often the media refers to you as a “consumer “ and see if you ever see the US population called savers.
If you have an addiction to consumption, now is the time to break it. As I often recommend, when you get your pay check, pay your self first by saving a portion of your paycheck. If, at age 30, you save $50 per week, with a 7% investment return, that $50 payment will be worth almost $400,000 when you are age 65.
As your pay increases, increase your saving amount until you are “paying yourself” at least 10% of your take home pay. By paying yourself first, you will have adequate resources to live an abundant retirement. This approach will also help you overcome the “consumption addiction” that industry, financial institutions and the government are all hoping that you will never break.
In the next few days you may be receiving a tax “rebate.” How are you going to spend it?
While our elected officials want you to go out and spend your rebate to help “stimulate” the economy, you might want to use it to begin to recession proof your life for the present as well as future recessions. If you would like to begin approaching life from abundance instead of scarcity, here are some possible ways to “spend” your rebate.
1. Use it to pay off your credit card debt, one of the most expensive forms of debt available.
2. Begin funding your “emergency fund.” An emergency fund is a highly liquid account which provides coverage for between six months to one year of your current expenditures. This fund will allow you to survive a business downturn, job loss or short- term disability without invading your retirement accounts.
3. If you are saving for a first house, use it to fund a Roth IRA. Even if you have a company retirement plan, you can contribute up to $5,000 annually to a Roth IRA, if you are single and earn less than $101,000 or earn less than $159,000 if you file taxes jointly. Once your Roth IRA has been established for five years, you pay no taxes when withdrawing up to $10,000 of Roth income plus all of your Roth contributions for a down payment on your first house.
4. If your employer provides matching funds to your company retirement plan contribution, use it to contribute up to the maximum amount that your employer matches. The matching funds are “free money” that virtually guarantee you a high rate of return.
5. If you have children that will one day go to college, use it to fund a Coverdell Education Savings Plans or a Section 529 College Savings Plan. With both plans, the invested funds will grow tax free and can be withdrawn tax free when used for educational expenses.
6. Invest it in either an IRA or Roth IRA for retirement. In future posts, I will demonstrate how you can never have too much for retirement.
You have probably heard the expression “use it or lose it.” If you spend the rebate buying another “thing” you will lose it. If you put it to work for you in one of the ways listed above, you will use it now and in the future.
Yesterday was the deadline to pay your 2007 taxes. If you are like most people, you probably feel that you paid too much. If so, now is the time to identify ways to lower your 2008 taxes. Every dollar of reduced taxes can be used to help fund educational or retirement expenses.
In Financial Abundance Guide I devote almost 100 pages to strategies for reducing your taxes. To demonstrate that I “eat my own cooking,” I will describe the approaches to tax reduction that my wife and I used in 2007. In parentheses I will put the page of my book on which the referenced strategy can be found.
1. In spite of receiving significant long term capital gains in 2007, we reported gains of less than $1,000 on our tax return. This was accomplished by keeping most of our equity holdings in our IRA or Roth IRA retirement accounts (pages 125 -126).
2. We were able to deduct $7,250 by fully funding our Health Savings Accounts (HSAs) in 2007. Since my wife and I are both over age 55, by setting up separate HSAs, we could each deduct an additional $800 over the normal family deduction of $5,650 (pages 63-66). In 2008, we will be able to contribute (and deduct) a total of $7,600 into our HSAs.
3. Thanks to the expenses involved in writing, publishing and marketing my book in 2007, I had virtually no earned income. However, my wife had more than adequate income to allow for me to fund my IRA as a “spousal IRA” and receive a deduction of $5,000 (page 44-45). Since our AGI was under $159,000 my wife contributed $5,000 to a Roth IRA, even though she was covered by a company sponsored retirement plan (pages 46-47).
4. Our itemized deductions included a $10,000 gift to our “Donor Advised Fund” charitable giving account (pages 81-83). This was a gift of highly appreciated stock that we bought for $4,000 in 1999. By giving the stock to our charitable fund, the $6,000 capital gain was completely tax free, saving us from paying $900 in capital gains taxes (page 80-81).
5. Our daughter, in her third year of college, had tuition bills exceeding $8,000 in 2007. Thanks to the Lifetime Learning Credit, we received a $1,600 tax credit against actual taxes owed (page 38-39).
6. After all deductions and credits, our tax bill would have been $0. Knowing this was likely, I ran a pro forma tax return in early December. I determined that we could convert a significant amount of our IRA savings into a Roth IRA, and pay very little in taxes (pages 48-50). In December 2007, we converted $55,000 of IRA funds to Roth IRA funds. The total tax bill for this conversion was $2,605 for an effective tax rate of 4.7%. These funds can grow on a tax free basis for as long as we live. If we are able to leave an inheritance for our children, inherited Roth funds can continue to grow tax free for our children (page 176-177).
Minimize your taxes is Step 3 of the 7 Steps to Financial Abundance. As I have demonstrated, active tax management can substantially increase your financial abundance. The next time that you are trying to maximize you investment returns, take a few minutes to consider methods of minimizing your taxes. The time spent may provide an “investment return” that far exceeds your expectations.
Politicians, both Democrat and Republican continue to talk about the need to provide affordable health care for all Americans. However, by preparing your 2007 tax return and using Schedule A to itemize deductions, you get a first hand opportunity to witness the hypocrisy of our political class.
If politicians really wanted to reduce health care costs, their first act would be to remove the 7.5% of AGI deduction penalty for health care expenses. If you are married and your combined Adjusted Gross Income (AGI) is $100,000, your first $7,500 in medical expenses is not deductible from your taxes. Assuming that you are in the 25% federal tax bracket and pay a 5% state income tax rate, this “health care penalty” will cost you $2,250 in additional taxes. Eliminating this penalty would provide a 30% reduction in health care costs.
The political hypocrisy is even more evident when you consider that all of the mortgage interest that you pay for your house is deductible, but you cannot deduct most, if not all of your health care costs. If you agree that health care costs should get as least as favorable tax treatment as home mortgage costs, join me in contacting your representative to congress and your senators.
If politicians really want more affordable health care, they could easily take the first step by eliminating the “health care penalty” in our tax code.
While many opportunities to reduce your 2007 taxes ended on December 31, there may still be some last minute steps for lowering your taxes. If you qualify, taking the following actions by April 15 can reduce your current or future taxes.
1. Fund your IRA – If you are under 70 ½ years of age, have earned income and are not covered by a company retirement plan, you may contribute to a traditional IRA the lesser of your earned income amount or $4,000 ($5,000 if you are at least age 50). The IRA contribution is deducted from total income, which lowers your Adjusted Gross Income (AGI).
If you are in the 25% federal income tax bracket, your income tax savings (combining federal and state taxes) for a $4,000 contribution is almost $1,200. Since the after tax cost for this investment is approximately $2,800, you receive an immediate investment return of 42% on the $4,000 contribution.
Even with a company sponsored retirement plan, if Modified Adjusted Gross Income is under $52,000 ($83,000 for a joint tax filer), your IRA contribution is fully deductible.
2. Fund a Spousal IRA - Are you aware that if your spouse has no earned income, he/she can still contribute up to $4,000 ($5,000 if at least age 50) to an IRA for 2007?
With a Spousal IRA, if either spouse has earned income, both spouses may be able to fully fund a tax deductible IRA. Even if the income earner has a company sponsored retirement plan, the spouse may contribute to an IRA.
If the Modified Adjusted Gross Income (MAGI) on your joint tax return is less than $156,000, the Spousal IRA contribution is fully deductible. If you or your spouse has little or no income, be sure to fund a Spousal IRA.
All IRA contributions grow tax-free until your required withdrawals begin at age 70 ½. If you qualify, fund a traditional IRA by April 15.
3. Fund a Roth IRA – You may contribute $4,000 ($5,000 if at least age 50) to a Roth IRA for 2007, if your AGI is under $99,000 ($156,000 for a joint tax filer). However, the maximum contribution is reduced by any contribution that you make to a traditional IRA.
While funds contributed to a Roth IRA do not immediately reduce your taxes, the contributions will grow tax free and are not taxed when they are withdrawn.
If you hope to leave any assets for your kids, Roth IRAs are perfect. Your children can roll them into an inherited Roth IRA and make withdrawals based on their life expectancy. With this approach, Roth IRAs can provide decades of tax free growth.
If you are over age 70½ or you are covered by a company retirement plan and your MAGI is over $52,000 ($83,000 for a joint tax filer), you may only contribute to a Roth IRA. If you cannot fund a traditional IRA, but qualify for a Roth IRA, be sure to fund it by April 15.
4. Fund a Health Savings Account (HSA) – If you had a qualified High Deductible Health Plan (HDHP) throughout 2007, you can contribute $2,850 to an HSA for an individual health plan or $5,650 for a family plan. You may contribute an addition $800, if you are age 55 or over. For tax payers in the 25% tax bracket, the $5,650 HSA contribution costs only $3,975 after federal and state taxes, providing an immediate 42% investment return.
With an HSA, you may use funds to pay current medical bills or you can invest the funds for long-term, tax-free growth. By investing the HSA funds until retirement, you will have years of tax free growth and can withdraw all of the funds tax-free for medical expenses. The HSA funds could pay for most, if not all of your medical expenses during retirement.
Other savings plans that can be funded between now and April 15 include a SEP IRA, if you are self employed, and a Coverdell ESA for you children’s educational expenses. If you qualify for any of these plans, contributions by April 15 can save on taxes, either now or in the future.
While the market had its usual positive reaction to the Fed lowering the federal funds rate to 2.25%, over the long term, lowering the Fed rate will continue to lower the value of the dollar, leading to higher inflation and a weaker US economy.
In 2001, the Fed began lowering interest rates. By the end of 2001, the Fed funds rate was below 2% and it stayed below 2% until the end of 2004. During that same time period, the dollar went from being worth 1.12 Euros to a value of .75 Euros, a 33% decease in its value. As the Fed raised interest rates in 2005, the dollar increased in value, hitting a high of .85 Euros in late 2005.
Even with higher Fed rates, the dollar continued to decline in 2006, going to .75 Euros in mid 2007. However, since the banking debacle and the recent dramatic lowering of the Fed rates, the dollar is once again in rapid decline, trading at just .64 Euros.
To give a slightly different perspective, if the dollar was as strong today as it was in 2001, we would be paying $62 per barrel instead of $109 and gasoline would be $1.80/ gallon instead of $3.15.
So what can the average investor do in this time of sinking stock prices and short term interest rates that are below the rate of inflation?
Before Christmas, I recommended gold as an inflation hedge and as protection against the continued decline of the dollar. Since the beginning of 2008, gold is up over 17%. With the present Fed approach to devaluing the dollar through lower interest rates, I still believe that gold has upside potential. An easy way to own gold is through the ETF (Exchange Traded Fund) GLD.
Another approach is to buy stocks in high quality companies with high yields. While the stock market will probably continue to decline in 2008, a quality company such a GE, which yields 3.7%, will likely pay off in the long term. In the meantime, you will receive a yield that is higher than money market rates and that is taxed at a maximum of 15%.
I do not recommend buying any financial institutions stock at this juncture. The picture is still too clouded, and no one knows if another Bear Stearns is around the corner. However, if you are willing to take some risk, you might consider a Business Development Company. My favorite is Kohlberg Capital (KCAP). KCAP has an expense ratio of just 2.5% vs an industry average of 5.7%. It is trading at a 35% discount off of its Net Asset Value (NAV) and is yielding over 15% annually.
Regardless of how you decide to invest in these challenging times, remember to stay well diversified and not to chase the latest investment fad.
Until we see a different approach from the Fed, it is wise to plan for a continued dollar deterioration combined with higher inflation. This combination will lead to lower real rates of return on bonds and money market funds, providing a challenge to all investors.
Congress recently approved the “economic stimulus package,” which will provide every single tax filer with adjusted gross income (AGI) of $75,000 or less with $600 and every joint filer with AGI under $150,000 with $1,200. If you have dependent children, you get an additional $300 for each dependent child.
The reason for this program is to get us to spend the funds to help “revive” the US economy. From my perspective, the long term results of this program will not revive the economy, but will serve to put our country deeper in debt.
As one pundit has stated, this should be called the China economic stimulus package. Much of the $150 Billion of additional long term debt that this “stimulus” provides will likely be purchased by the Chinese or other foreign entities. Thus, additional government resources (which come from you and me) will be required to service this debt.
As an added benefit to China, if the money received is spent at WalMart, Target or other large retailer, it will be used to purchase goods that are manufactured in China, increasing our trade deficit. Some “economic stimulus” this program turns out to be.
OK- so our elected officials are scamming us in order to “buy” more votes – what else is new? However, we can take this lemon and make it more palatable.
Here is what you might consider doing. If you have any credit card debt, use the funds that you will receive to pay it off. If you already pay off your credit card in full each month, take the money and use it to pay down some of your mortgage or put it in one of your savings accounts. In 20 years, the $1,200 will be worth over $6,000, if your investments return 8% annually.
We can never keep our elected officials from doing things harmful to our economy, but we can minimize the damage that they do. I hope you will use this “stimulus” to increase your financial abundance.
Faith is defined as a belief that is not based on proof. While we can never have absolute proof of continued financial abundance, by following the 7 Steps to Financial Abundance, we can begin to believe that through our continued commitment to control our finances, our abundance will continue. Our faith in continued abundance is important in conquering the fear of scarcity.
Fear is defined as a distressing emotion, aroused by impending danger, whether the threat is real or imagined. Without faith that abundance will continue, doubts and fears of the unknown and uncontrollable future can become overwhelming. Even though the fear of scarcity may be irrational, it can consume us and leave us unable to live with a sense of abundance.
Living in financial abundance requires controlling consumer-driven consumption, maximizing and protecting financial resources and faith that abundance will continue. By implementing the first six steps, you have done everything in your power to control your financial abundance. The final step, having faith that abundance will continue, is sometimes the hardest step. However, without this faith, fear and doubt can control our financial lives.
The Seven Steps to Financial Abundance are designed to allow you to take control of your financial future. I authored Financial Abundance Guide to provide an easy to understand “guide” for non-financial people to explore their path to financial abundance. You can learn more about my approach to financial abundance at www.finabguide.com
Once you escape the fear of scarcity, you may find true serenity. When living in financial abundance, you may even decide to share more of your abundance with your favorite charitable organizations.
The stock market, tax codes, the economy and negative world events are outside of our control. Too often, the things that we cannot control increase our fear of financial scarcity. When this occurs, it is can be comforting to remember the serenity prayer.
To achieve serenity, we are encouraged to accept the things we cannot change and have the courage to change the things we can. We can control our consumer based spending habits, our prioritization of saving for our family’s future and our decision to plan for our financial well-being. By changing old habits that lead to the fear of scarcity and implementing the practices of the first 5 steps, we are doing everything in our power to control our finances.
With this control, we have significant power over personal finances. Once this power is recognized, the fear of scarcity is diminished and a feeling of financial security begins to permeate our lives, leading us toward financial abundance.
Fear of the unknown can produce a sense of scarcity. Since no one can predict the future, insurance products help protect us from financially catastrophic events. Properly using insurance can protect your financial resources, keeping this fear in check.
For most people, the need for automobile and home owner’s insurance is fairly well understood. However, by increasing your deductibles, you can often cut insurance premiums significantly. As an example, if you have a $500 deductible on your auto insurance policy, you might consider raising it to $1,000.
If you have a loss that is slightly more than $500, it may be better to pay for the loss yourself and not report it. Sometimes, reporting a small loss can significantly increase your future insurance premiums. If you will likely not report a smaller loss, why pay the additional premiums required for the lower deductible?
Life insurance is a requirement for any family member that contributes financially to the family. Typically, term insurance is the most cost effective type of life insurance. Consider a term period which will last until you no longer require life insurance. If you are in your thirties, this may mean a thirty-year term. To determine how much life insurance you require, go to http://www.finabguide.com/ for the free life insurance estimator under the “Advice” tab.
Many people fail to understand the critical need for a long term disability insurance policy. Under age 65, you are more likely to become disabled than you are to die. As Peter Ubel, well known professor of psychology states, “If people are smart, they will invest wisely in disability insurance.” A serious, long-term disability can destroy even the best financial plan.
Another protection to consider is an umbrella liability policy. In our litigious society, the liability limits of your home owner’s and auto policies may not be enough to protect your hard earned assets. For a relatively small additional premium, you can increase your liability coverage by $1 million or more.
Protecting yourself from catastrophic financial risks will help reduce the fear of the unknown, a necessary step to obtaining financial abundance.
Properly managing investments is an important step toward financial abundance. If you manage your own investments, implement an asset allocation that allows you to sleep well at night. While the stock market has consistently out-performed fixed income investments over every 20-year period since the great depression, a conservative allocation of equities to fixed income can often perform better than a more aggressive allocation.
In Financial Abundance Guide, Mary, Nancy and Joan find out that the returns from a portfolio with a 50% equity and 50% fixed income allocation performed better than a portfolio of 80% equities and 20% fixed income over the six year period between January 2, 2001 and December 31, 2006.
Unless you have the time and energy to do a significant amount of research on stocks, low cost, indexed mutual funds or ETFs will usually provide superior long- term results. Be sure that your equity allocation includes small, medium and large cap stocks. Over the past 25 years, mid cap stocks, an asset class that is often overlooked, have out performed both small caps and large cap stocks.
It is also wise to have international equities in your portfolio. While emerging markets have received a lot of press, developed countries equities will provide a safer long-term return. It is wise to also consider small amounts of “alternative investments” such as Real Estate Investment Trusts and gold. These investments can be purchased as Exchange Traded Funds or mutual funds with low fees.
If you have an investment adviser, be sure that their long term returns consistently out-perform the comparable indexes after all management fees are included. Be especially careful in dealing with advisers that are compensated by commissions on products that they sell. Compensation through commissions can sometimes produce conflicts between how an adviser is compensated and your best interests.
If your adviser suggests variable deferred annuities, be especially careful. If you decide that a deferred annuity is the correct product for you, consider buying the annuity through a non-commissioned company such as Schwab, Fidelity or Vanguard. You’ll usually find a better product with much lower costs.
Managing investments requires your active participation, even when the investments are managed by an investment adviser. By participating in all of your investment decisions, you are on the path to financial abundance.
Use every legal method to reduce taxes. If you are married and your spouse has no earned income, you may be able to fund a "spousal IRA." With a spousal IRA, you may deduct an additional $5,000 (or $6,000 if your spouse is over age 50) from your income taxes in the 2008 tax year.
If you have children in college, take advantage of the federal government's HOPE Scholarship or Lifetime Learning credit programs. Both of these programs provide tax credits which can reduce the income taxes that you owe on a dollar-for-dollar basis.
The Hope Scholarships can reduce your tax bill by up to $1,800 in 2008, while the Lifetime Learning tax credits can reduce your tax bill by up to $2,000. If you are eligible for both, you must choose the one that provides the greater tax savings.
Using appreciated long term stock for charitable giving can also reduce your taxes. You pay no taxes on the stock's appreciation and receive a charitable deduction of the stock's full market value. The easiest way to give appreciated stock is through a donor-advised charitable giving fund. This type of fund is free and easy to set up, yet it provides you a giving vehicle similar to a charitable foundation.
Fully funding your Health Savings Account gives you the same tax savings benefit as funding an IRA. Your taxes are reduced even if you don’t itemize your deductions. You can even deduct your HSA contributions when you have no earned income.
In low income years, consider converting some of your IRA assets to a Roth IRA. If you can do so by paying no more than 15% in taxes on the conversion, you will likely save taxes upon your withdrawal of the funds.
If you are in the 25% tax bracket or higher, you will likely receive greater after tax income from tax exempt municipal bonds issued in your home state, than from high quality taxable bonds. Do your calculations before you buy to determine which bonds provide the higher after tax return.
Every dollar saved by reducing your taxes helps build your financial abundance.
The second step on the path to financial abundance is to maximize your financial resources. Venture capitalists know that the best way to maximize their finances is to use OPM (Other People’s Money). We can learn from these successful investors and use OPM for ourselves.
If you have a company-sponsored retirement plan, at a minimum, contribute enough to your account to receive the maximum amount that your company will match. If your company will match 50% of the first $6,000 that you contribute, when you contribute $6,000, your retirement account will receive $6,000 from you and $3,000 from your employer.
The $3,000 becomes “free money” from your employer and provides an immediate 50% return on your investment. On top of this great return, you are also getting a boost from your favorite uncle (Sam). If you are in the 28% tax bracket and pay 5% state taxes, your $6,000 contribution will save you approximately $2,000 in taxes.
Combining the $3,000 you receive from your employer with the $2,000 you receive from Uncle Sam, the $9,000 in your retirement account only cost you $4,000, with $5,000 in OPM. You get an incredible 125% immediate return!
By using Coverdell education savings accounts or Section 529 college savings plans to save for your children’s educations, your educational savings will grow and no taxes will be owed on the earnings from these plans, so long as the money is used for eligible education expenses. This tax savings is another way to use OPM to reduce educational expenses.
A Health Savings Account (HSA) is the only saving vehicle that combines the benefits of an IRA with the benefits of a Roth IRA. When you contribute to your HSA, all contributions are tax deductible as are contributions to your IRA. If you do not use the HSA funds and let them grow until retirement, all withdrawals are tax free, similar to a Roth IRA, as long as the funds are used for medical expenses. Once again, your tax savings provide OPM when you fund the HSA as well as when you withdraw the HSA funds in the future.
In “Financial Abundance Guide,” I cover many other methods of maximizing your financial resources by using OPM. When we get an immediate increase in the amount of our saving through company matching funds or tax savings, we have increased our investment return before even deciding upon our investment approach. That is what is “maximizing your financial resources” is all about.
The first step on the path to financial abundance is to spend less than you earn. While this may seem simplistic, a large portion of our consumer based society does not follow this step. While some people, living in true poverty, cannot follow this step, many Americans have simply chosen not to follow it. Because of this choice, the average American family now has over $10,000 in credit card debt.
Financial abundance is a product of our choices. If we choose to take the path to financial abundance, the first step must be to create “excess earnings” by spending less than we earn. “Excess earnings” are simply the amount of earnings that remain when yearly expenses are subtracted from yearly income. For most people, “excess earning” amounting to 15% of after tax income is sufficient. If 15% is not possible, start with 5% and add at least 1% more every three months. In 2 ½ years, you will reach the 15% goal.
To assure that you meet your “excess earnings” goal, I recommend that you “pay yourself first.” If less than 15% of after tax income is withheld for your company retirement plan, on each payday “pay yourself first.” Into your “excess earnings” account, put the difference between the15% total and the amount withheld for your company retirement plan. The “excess earnings” account helps begin your journey to financial abundance.
If you have any credit card debt, the first use for your “excess earnings” is to pay this debt. This will require a consistent application of these funds to your debt, combined with a significant reduction or elimination of further credit card purchases. Remember, if you have $1,000 in credit card debt, you likely pay $200 or more per year and receive nothing in return.
Once you have paid off your credit card debt, the next use for “excess earnings” is to build an “emergency fund.” This is an account, with highly liquid assets, that can provide 6 to12 months of income when a short term emergency occurs. With an emergency fund, if you are laid off from your job or are temporarily sick or disabled, you will have adequate savings to withstand this “emergency.” Without an emergency fund, you might be required to prematurely withdraw funds from your retirement accounts. This approach has short term tax penalties as well as the long term consequence of diminishing the funds available to fund your retirement.
Once you have paid off your credit card debt and built an emergency fund, the excess earning fund can be used for a down payment on your first house, for your children’s education or to help fund retirement. The next steps on your journey to financial abundance can only begin after you take control of your spending.
As we start a new year, it may be helpful to analyze strategies for taking more control over our financial health. By taking a more active role in our financial life, we begin to escape the fear of financial scarcity and start living with a feeling of financial abundance.
For some people, fear of financial scarcity controls their lives. When the fear of scarcity is controlling us, we will often either 1) Do nothing, out of fear that anything we do will be wrong or 2) Try “get rich quick” schemes which may leave us in a worse financial position.
To help my clients escape the fear of financial scarcity, I developed:
The Seven Steps of Financial Abundance
1. Spend Less Than You Earn
2. Maximize All Financial Resources
3. Minimize Taxes
4. Actively Manage Investments
5. Protect All of Your Assets
6. Keep Control Over Your Finances
7. Have Faith in Continued Abundance
These steps are basic tools to help control our financial lives. These tools are designed to help you “get rich slowly,” by using strategies to minimize your tax burden as well implementing techniques to manage and protect your financial assets.
In future posts, I will provide more detailed information on each step, including specific implementation strategies. Hopefully, this will help anyone who is interested in finding their path to financial abundance.
As 2007 comes to a close, your still have time to take actions that could save you taxes either now, or in the future. Some ideas to consider include:
1. Last minute charitable gifts. If you use a credit card to provide a gift to a charitable organization, as long as the charge is made by December 31, you may deduct the charitable gift in 2007. This allows you to take a year end tax deduction without paying for it until 2008.
2. Roth conversions. If you have an IRA and a Roth IRA with the same brokerage house, they can usually make an immediate conversion from on account to the other. If your income was lower than usual in 2007, you may find that a Roth conversion is in your best interests. If so, this must be completed by December 31.
3. Capital losses. If you have stocks or mutual funds that have experienced a loss since you bought them, you may want to sell them by December 31. The loss can offset realized capital gains and may be used to lower your total 2007 income by up to $3,000.
4. If you have a large estate and are worried about paying “death taxes,” provide year end gifts of up to $12,000 ($24,000 for a couple) to your heirs. Your family members will appreciate receiving the gifts now and you will keep these gifted funds from possible future estate taxes.
If any of these ideas are appropriate for you, do them now, before the year ends and you have missed the opportunity.
In the biblical story of the birth of Christ, the Magi gave Jesus gold, frankincense and myrrh. As many of us celebrate the Christmas season, perhaps we should consider giving ourselves one of these gifts, the gift of gold.
While I have never been a gold enthusiast, gold can be an excellent hedge against insipient inflation. In the 1970’s gold was a good investment during the extended “stagflation” that the US experienced.
The nominal price of gold has increased by approximately 75% over the past five years and is now trading at approximately $800 per ounce. However, the Euro has also increased in value against the dollar by approximately 40% over the same 5 year period. Thus, more than ½ of the increase in the price of gold can be attributed to the declining value of the dollar.
With the recent recognition that the CPI is dramatically increasing, it is possible that the US economy may soon face an extended period in which the economy is flat to negative and inflation is above the historical 3% average. If this occurs, it is likely that gold will once again become more valuable as a hedge against increased inflationary pressure.
You may be thinking that gold is already near its all time high of $850/oz. (reached in 1980), so where is the upside of buying gold at $800/oz. ? While in nominal terms that thinking is correct, in inflation adjusted dollars, the $850/oz in 1980 is actually $2145/oz. in 2007 dollars. Thus, on an inflation adjusted basis, gold is now trading at $317/oz. in 1980 dollars.
I am not suggesting that anyone sell all of their stocks and bonds and use the proceeds to buy gold. However, proper asset allocation requires us to look at present economic conditions. If inflation does increase in 2008 and if the dollar remains weak, the odds are high that the price of gold in US dollars could increase. Thus, it may be prudent to put a small amount (5% or less) of your liquid assets into gold, until economic conditions change.
If you decide to add gold to your portfolio, one of the easiest ways of owning gold is through Exchange Traded Funds (ETFs). One such ETF is the streetTRACKS Gold Shares ETF, with the call symbol GLD. This ETF is traded like a stock and is easy and inexpensive to buy and sell through a discount brokerage house.
Gold investments are not for everyone. However, if you think that inflation will rise in 2008 and the dollar will remain weak, adding to your portfolio the “Magi’s gift” may increase your portfolio returns in 2008.
I hope that you have a joy filled Christmas and a Happy and Prosperous New Year.
With the turmoil in the mortgage industry, many people think that this is the worst possible time to consider refinancing their home. However, if you have good credit and if you have an adjustable rate mortgage (ARM) that is scheduled to adjust in the next 2 - 3 years, now might be a perfect time to consider refinancing your home.
The November CPI was recently shown at .8% over October and 4.6% higher than November 2006. The Fed is admitting that they must get serious about curbing the increasing inflationary pressures. If inflation continues to increase over the next one to two years, interest rates and mortgage rates will rise to reflect this increased inflationary risk.
Currently, if you have good credit, a 30 year fixed rate mortgage can be found with an interest rate of 6% or less. A fifteen year mortgage can be found with interest rates as low as 5.625%. If you have a $200K mortgage, the 30 year loan payments will be $1200 and the 15 year payments would be $1650.
With an ARM that will reset in 2009, if increasing inflation persists, fixed mortgage rates could easily hit 7.5%. By waiting to refinance in 2009, you could end up paying $1,400 per month for he same $200k mortgage that you could get for $1200 per month now.
If your finances allow, consider a 15 year mortgage. Not only will you pay less than 1/2 of the total interest paid on a 30 year mortgage, in 15 years you will completely own your home. When you no longer are paying $15,000 -$20,000 per year in mortgage payments, you will be surprised at the flexibility you have in your career and retirement choices.
All indicators are pointing toward significantly increased inflationary pressures in the coming years. When inflation increases, interest rates, including mortgages, increase. If you have an ARM, you are at risk of paying much higher mortgage payments in the future. It may be in your best interests to refinance your ARM with a long term, fixed rate mortgage now.
As discussed in the Financial Abundance Guide, if your marginal federal income tax rate is 25 percent or higher, on an after tax basis, you will save money with a High Deductible Health Plan (HDHP), when you fully fund your Health Savings Account (HSA). In 2007, if you are single and your Adjusted Gross Income (AGI) is over $31,850 or filing jointly with an AGI over $63,700, an HDHP/HSA combination will save you money, as long as you fully fund your HSA.
For many people, the ability to fully fund their HSA may be a challenge. “Fully funding” requires that a single person deposit $2,850 or that a family deposit $5,650 into an HSA. To help solve this problem, the Tax Relief and Health Care Act of 2006 allows you to do a one-time funding of your HSA by rolling over IRA funds into your HSA.
This rollover is similar to doing an IRA to Roth IRA conversion. However, with an HSA rollover, you are not required to pay taxes on the funds transferred to your HSA (as long as you maintain your HDHP for at least 12 months). Like a Roth IRA, all HSA funds grow on a tax free basis and can be withdrawn tax-free, as long as the funds are used to pay for health care related expenses.
Another one time funding source for your HSA is a rollover from an employer-sponsored flexible spending account (FSA) or health reimbursement account (HRA). Your rollover is limited to the account balance on the date of transfer or on September 21, 2006, whichever is less. The rollover must also be made before January 1, 2012. If your yearly FSA contributions will not be consumed, this approach may keep you from losing the remaining FSA funds.
If you have a High Deducible Health Plan (HDHP), fully fund your Health Savings Account (HSA). By doing this, your total after-tax health care costs are virtually guaranteed to be lower than they would be with a comparable “low deductible” health care plan.
If your company offers a Flexible Spending Account (FSA), consider signing up for it in 2008. With an FSA, you request a “salary reduction” to fund the FSA. The FSA funds can be used to pay for qualified medical expense and/or for dependent care. Dependent care is usually used for child care expenses, but may also be used for adult day care for senior citizen dependents, such as parents, if they live with you.
The advantage of using FSA funds to pay for qualified expenses is that the amount used to fund your FSA is not subject to federal, state or payroll (FICA) taxes. If you are in the 25% federal tax bracket, with a state income tax of 5% and a payroll (FICA) tax of 7.65%, you will effectively be able to buy your health care and dependent care services at a discount of 37.65%.
The maximum funding amounts allowed by the IRS are $5,000 for medical care and $5,000 for dependent care. Assuming you are in the 25% federal tax bracket and have 5% state taxes, $10,000 total funding would yield a tax savings of $3,765, providing a 37.65% “discount” on the purchase of these services.
Be careful not to overestimate your FSA requirements. Any funds remaining in your FSA, at the end of the benefit coverage period, will be forfeited back to the company.
If you are planning on making charitable gifts at the end of the year, to support your favorite charities and be able to claim a 2007 tax deduction, now is the time to consider setting up a Donor Advised Fund.
You may already know that giving appreciated long-term capital gain stock to a charitable organization gives you a double tax savings. You may deduct the full market value of the stock as a charitable deduction plus you are not required to pay capital gains taxes on the stock’s appreciated value. However, to give stock directly to multiple organizations can be both cumbersome and time consuming.
To overcome the problems of directly gifting appreciated stock, you can create a Donor Advised Fund. These are qualified, private, non-operating foundations that pool their donations and allow donors to select qualified charities for gifts.
Donor Advised Funds are simple to establish. Fidelity, Schwab, Vanguard and other brokerage firms offer these accounts. You may even deduct more in a given year than you actually grant to your chosen charitable organizations, with any excess available for future charitable gifts.
Donor Advised Funds are similar to having your own charitable foundation, without the overhead and legal expenses required to establish a foundation. If this approach seems appropriate for you, either visit on-line or call your brokerage firm today.
Did you know that you could earn no income and still contribute up to $4,000 ($5,000 if you are over 50) to an IRA in 2007?
With a “Spousal IRA,” if either spouse has earned income during the year, both spouses may be able to use the income to fund their own IRA. Even if the income earner has a company sponsored retirement plan, the other spouse may fully contribute to an IRA.
The only limitation with a spousal IRA is that the Modified Adjusted Gross Income (MAGI) on the joint tax return must be less than $156,000 to be fully deductible. The IRA is partially deductible if the MAGI is between $156,000 and $166,000.
If you or your spouse have little or no income in 2007, consider contributing to an IRA. As long as your joint income exceeds the total amount contributed to both of your retirement accounts and your MAGI is below the maximums mentioned above, you may fully fund and IRA with no personal income.
In the November 28th Wall Street Journal, Jonathan Clements seems to suggest that investors increase their yield on the fixed asset (bond and bond funds) portion of their portfolio by buying stocks (especially banking stocks) with a high dividend yield.
What his column seems to ignore is that a significant reason to buy fixed assets is to provide diversification and protection for when the stock market tanks. High yield stocks have a high yield because the company can find nothing better to do with their income than to redistribute it to their shareholders. Stock holdings in these companies can often be a high risk investment.
Often, high yields occur when a stock price falls precipitously. Consider Washington Mutual (WM) which currently yields around 13%. This stock has fallen approximately 60% since June, when it’s 5% yield was considered high. In WaMu’s present financial condition, the odds are very high that the dividend will receive a substantial cut in the near future.
The reason to diversify into fixed assets is not for your fixed income investment to outperform the equity market. You diversify to lower your overall investment risk. Short term bonds, CDs and money market funds will hold most, if not all of their value when the stock market sinks. High yielding stocks will fall with a falling market, often at an even faster rate than the overall market.
If you choose to chase high yields, be sure that you do not confuse stocks with bonds. Keep your high yielding stocks on the stock side of your portfolio. They are NOT fixed assets that will hold their value when the market declines.
A Coverdell Education Savings Account (ESA) is an ideal way for young families to save for their children’s educational expenses. With a Coverdell ESA, you are able to save $2,000 annually, for each of your children, from the time they are born until they reach age 18. The Coverdell ESA deposits may be made by anyone, providing a great way for grandparents to help in fund their grandchild’s education.
You may set up a Coverdell ESA account at any institution that offers IRA accounts. A Coverdell ESA has tax advantages that are similar to a Roth IRA.
While the initial contribution to the account is not deductible, all growth and income from the account escapes taxation, as long as the withdrawn funds are used for education related expenses. These expenses can include tutoring, computer equipment, room and board and even school uniforms.
Funds from a Coverdell ESA may be used to pay for educational expenses from kindergarten through graduate school. The longer that the funds are allowed to grow, the greater will be your financial benefit.
Your may fund both a Coverdell ESA and a Section 529 College Savings Plan in the same year. A Coverdell ESA has Adjusted Gross Income limits for the contributor of $190,000 for couples or $95,000 for individuals.
If your income exceeds that limit, perhaps your parents or even your child’s godparents might be willing to make the contribution. Remember, you can always gift up to $12,000 to anyone, without any gift tax consequences.
If the funds in a Coverdell ESA are not consumed before the beneficiary reaches age 30, the beneficiary receives the remaining funds and must pay both income taxes and a 10% penalty on the remaining funds.
To avoid this problem, you may rollover the remaining Coverdell ESA assets to a sibling, a niece, a nephew or even the beneficiary’s child.
Start a Coverdell ESA as early as possible in your child’s life to help fund their education. As Robert and Cindy find in Financial Abundance Guide, the $2,000 per year that they invest for each of their children grows to $54,300 by the time the child is 15, with an 8% annual return on the invested funds.
Tax free income makes the Coverdell ESA an excellent vehicle for educational savings.
As 2007 comes to a close, now is the time to decide on strategies that can save on taxes, either now or in the future.
If 2007 has been a year in which your income is lower than your normal income and if you will have significant “Schedule A” income tax deductions, you may want to consider converting some of your traditional IRA funds to a Roth IRA .
Using your 2006 tax return as a guide, determine your approximate 2007 income. Reduce your income by contributions made to your Health Savings Account, IRA contributions, self employed health insurance and 1/2 of any self employment taxes paid. The remainder will be your approximate Adjusted Gross Income (AGI) for 2007.
If your AGI is over $100,000, you are not eligible to make a Roth conversion in 2007.
If your AGI is under $100,000, determine what your approximate “Schedule A” itemized tax deductions will be in 2007. Schedule A includes home mortgage payments, medical expenses, charitable gifts and state and local taxes plus any property taxes.
Your next step is calculate exemptions by multiplying your total number of claimed dependents (including yourself) by $3,400.
Subtract both your approximate Schedule A deductions (or the Standard Deduction, if that is greater) and your exemptions from your estimated 2007 AGI. The remainder is your approximate 2007 taxable income.
As a single filer, subtract your taxable income from $31,850. The remainder is the approximate amount of your IRA holding that you can convert to a Roth IRA at a 15% tax rate.
As a joint tax filer, subtract your taxable income from $63,700. This is the approximate amount that you can convert to a Roth IRA at a 15% tax rate.
Once you have converted IRA funds, they will grow tax free until they are withdrawn. When they are withdrawn, the withdrawals will also be totally tax free. The small amount of taxes that you pay now will keep you from paying significantly more in taxes when you retire.
There is one caveat. This approach should only be used if you have adequate non-IRA savings to pay for the increased taxable amount. However, if you are able to pay the increased taxes, your long term tax savings can be significant.
2007 Roth IRA conversions must occur before December 31, 2007. If this approach may be appropriate for you, do your homework now, so the conversion can be completed before the end of the year.
Joint Tenancy with Rights of Survivorship, commonly call JTROS, is considered a “will substitute.” When you own property in JTROS, you own an undivided equal interest in the property with the other joint tenant(s). If an owner dies, the property passes to the surviving owner(s), without going through the deceased’s probate estate.
Many people use JTROS ownership to keep property out of the slow and often costly probate process. When a JTROS property owner dies, the remaining owner(s) has immediate access to the property and can use it or sell it at his/her discretion. The ability to avoid probate and to provide your surviving spouse with immediate access to the JTROS property makes this a very popular form of ownership between spouses.
Some of the risks associated with JTROS ownership are estate planning risks. Since the JTROS property passes outside of the deceased’s estate, it cannot be used to fund a “Bypass Trust” or any other type of estate planning device. If the JTROS property is owned by a married couple, ½ of the value of the property is included in the deceased spouse’s estate. If the other owner is not a spouse, the full value of the property is included in the deceased’s estate, unless the other owner(s) can prove that they contributed to the purchase of the property.
Other risks, associated with JTROS property, come from the fact that the owners have an “undivided equal interest” in the property. As described in detail in Financial Abundance Guide, this type of ownership can lead to unintended consequences. A lien can be placed on the property by one of the owners, without your knowledge. The property can also be sold and all of the funds taken by one of the JTROS owners, even your spouse. Finally, since JTROS property passes outside of probate, any disposition of the JTROS property that is included in your will is ignored.
Own property with your spouse in “tenancy by the entirety” instead of JTROS, If your state provides for this type of ownership. With “tenancy by the entirety,” you and your spouse must jointly consent before the property can be sold or gifted.
There are many situations where joint tenancy with rights of survivorship may be the best form of property ownership. However, it is important to understand the risks associated with using JTROS property ownership as a “cure all” for estate planning.
You recognize that you need help with financial planning and advice on the investments required to meet your financial goals. How do you find an advisor that is right for you?
The way an advisor is compensated can influence the advice that they provide. Let’s look at compensation methods for financial advisors.
Commissioned based advisors – These advisors typically sell both insurance based financial products and load mutual funds. They will often state that their financial planning services are “free” and that you will pay no commissions, as long as you hold the product for a period of five years or more. Always ask the advisor what they will receive in commissions for each product you are offered. Once you know what their commissions are, you know how much you are really paying for their advice.
Fee based brokerage advisors – To join the popular trend of charging fees instead of commissions, brokerage firms are offering “fee based” accounts. You pay an annual fee, based on a percentage of the assets in the account. For this fee, you may make unlimited trades without paying any brokerage commissions. Commissions on mutual funds (such as the 12-b1 annual load) and certain proprietary products may also compensate the broker.
Fee only assets based advisors – These advisors provided professional asset management and financial advice and typically offer products that pay no commissions. Their compensation is based on an annual percentage of the assets that you place with them to manage.
Fee only financial planners – Fee only financial planners provide financial planning and investment advice for an hourly fee and/or retainer. They sell no products and receive no commissions. Since they are advising you on all of your financial resources, there is no incentive to have assets under management.
On the surface, advisors that sell commissioned-based products appear to charge less than fee only advisors. However, when you “look behind the curtain,” you will often find that the commissions paid are more than you would pay for fee only based advice.
To demonstrate this, ask a commissioned based financial advisor about variable annuities. Then compare their product with a similar product from Schwab, Fidelity or Vanguard (all non-commissioned brokers). You will always pay more for the variable annuity from a commissioned broker than you do from a non-commissioned brokerage firm.
Financial advisors are legally required to tell you how they are compensated. Always ask how they will be compensated for financial advice provided. Once you know how they are compensated, you can determine if any conflicts of interest might arise. With this knowledge, you can make an informed decision on the type of financial advisor that is best for you.
As you may already be aware, a Section 529 College Savings Plan is an excellent method of saving for a child’s college education.
The funds invested in a Section 529 College Savings Plan will grow on a tax-free basis and, when used for secondary educational expenses, can be withdrawn with no taxes ever paid. By never paying taxes on the plan's income, you are effectively buying educational services at a “discount”, equal to the combined federal and state taxes that you would have paid on the plan’s growth.
What you may not know are the benefits that Grandparents have when setting up a Section 529 Plan. The person that sets up the plan is the plan owner, with another person named as the plan beneficiary.
Setting up the plan is considered a completed gift to the beneficiary and is covered by the federal gift tax annual exclusion of $12,000. However, with a 529 Plan, you may elect to make a gift of up to 5 times the annual exclusion rate, allowing up to $60,000 to be given to each beneficiary or $120,000 if your spouse agrees to “gift splitting”.
If you or your parents or grandparents are concerned that their estate may someday be required to pay estate taxes, this is an excellent way of removing up to $120,000 for each grandchild from the estate, and avoid all gift and estate taxes.
The unique part of a 529 Plan for Grandparents is that, even though the funding is treated as a completed gift, the owner has virtually complete control over the 529 Plan funds. In the future, the owner can change the beneficiary to anyone in their direct family tree.
The owner can even ask for the money back, if their finances change. If the owner asks for the money back, they must pay ordinary income taxes plus a 10% penalty on the 529 Plan’s gains and income. However, all of the money in the plan will come back to the owner.
The Section 529 College Savings Plan is the only plan that I know of which allows giving money away as a completed gift and still maintaining virtually complete control over the funds. The owner can even choose the successor owner of the plan, if the owner dies.
For more information on the benefits of a Section 529 Plan and how to choose the best plan for your needs, go to www.savingforcollege.com.
Disability is a risk that many people underestimate. While most people have life insurance, health insurance and property/casualty insurance, many people fail to carry adequate disability insurance. Some people believe that the risk of becoming disabled is so small that they can afford to ignore it. Others believe that they will get enough through Social Security, if they become disabled. If you believe either of these to be true, you might want to reconsider.
A U.S. worker, under the age of 65, has a considerably higher risk of being fully disabled for over six months than she does of dying. Why is it that many more workers have life insurance than have disability insurance? Can you financially afford the consequences if disability occurs?
Perhaps you are planning to rely on Social Security if you become disabled. The Social Security administration states that “you can receive disability benefits after six months if you have a physical or mental impairment that’s expected to prevent you from doing substantial work for a year or more or result in death.”
However, virtually no one begins collecting Social Security benefits before they have been disabled for at least one year. Combining the long “lead time” to begin collecting Social Security benefits, with the relatively low monthly payments is a recipe for financial disaster. Just as you are not planning on receiving 100% of your retirement benefits from Social Security, you should not depend on Social Security alone to take care of you if you become disabled.
If your employer does not provide you with long term disability coverage, you should seriously consider buying a personal disability policy. If you pay for the policy, the disability income will be tax free. Combining the tax free disability payments with Social Security payments will allow you to buy a policy that covers less than your current total income.
There are many decisions to make with a disability policy such as a “noncancelable” policy in which payments never rise versus a “guaranteed renewable” policy where the insurer may increase premiums over time. Before buying any disability insurance policy, find a trustworthy insurance agent who will explain the costs and benefits of all of the policy options. Choose the policy with the coverage amount, benefit period and policy options that meets your current financial
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