Why Choose the Alabma 529 College Savings Plan?

I am often asked the question, “What’s the best way to save for my child’s college education?” My answer is invariably the same, “Your best strategy is a 529 College Savings Plan.” Here’s why:

College funding costs a lot of money. If you plan to pay for college for your child, the costs can be staggering so one of your greatest allies is to start early. For a four-year-old who will attend private college, the average costs of tuition, books, transportation, room and board is about $400,000. At seven percent earnings, you’d need to save $1300 per month for the next fourteen years. If your child attends an in-state public college, you’ll cut those costs by about half but we’re still talking about a lot of money.
Federal tax benefits. While you don’t receive a tax deduction for contributions to a 529 plan, all earnings grow tax deferred and distributions that are used for qualified expenses are federally tax free.
You maintain control of the money. As the person funding the 529 plan, you can maintain both ownership and control of all the funds.
529 plans are highly flexible. So if you’ve overfunded one child but underfunded another, transferring funds is not a problem. Funds can also be to pay for graduate school expenses, even if those expenses are for you. You can even take back the money for your own use. However, any earnings will be taxed as ordinary income and a 10% federal penalty will be imposed.
Large contributions are allowed. Everyone is eligible to make contributions to a 529 plan without tax consequences or restriction up to the annual free gift amount…currently $13,000 per person per year. So parents could contribute up to $26,000 in any one year. But it gets even better than that. The law allows you to give up to five years of annual gifts. That means you could front-load college funding with up to $65,000 as an individual or $130,000 as a couple. Note that these ‘gifts’ use up your allowed annual gifts for the respective years.
Simple investing strategies. Most plans offer an ‘age-weighted’ investment strategy whereby the mutual fund manager automatically becomes more conservative as your child approaches college age. This takes a lot of the guesswork out of investing.

All states offer their own version of the 529 plan so how does the Alabama plan stack up against the competition? In August 2010, Alabama revamped their plan to make it one of the most competitive in the country. There are a number of investment options but I recommend that you stick with the low-cost Vanguard mutual funds which offer age-weighted investment strategies as described above. In addition to low fees, for Alabama residents, the Alabama plan allows a state income tax deduction for your contributions and waives the $12 administrative fee.

In prior years, many Alabamians invested in other states plans because they were more competitive. Well, now’s the time to bring that money back to Alabama. All plans allow you to transfer funds between plans once every twelve months. So come on folks, here’s an opportunity to fully support Alabama with pride! For more information on 529 plans go to the “Resource Tab” on my website

Strategic Planning for Unemployed Workers

While there are multiple signs that our economy is on the upswing, over fourteen million people remain unemployed. There are indications that re-employment will be a slow process because many corporations have excess production capacity and federal, state and local governments will be under increasing pressure to cut expenses…including labor.

Many out-of-work people make the mistake of continuing to live the lifestyle they had while they were employed, oftentimes riding out a severance package, burning through personal savings and allowing credit card debt to rise.

If you or someone you know is out of work, here are some commonsense tips for creating an effective financial management plan:

Make it a team effort. The first important step is to acknowledge your situation and realize that you’ll need to make significant lifestyle adjustments, even if it’s only temporary. Make sure you get the support of your key family members including your spouse and children who are old enough to understand the situation. Give everyone an opportunity to pitch in and offer suggestions for cutting expenses. In my experience, people are far more willing to help when ‘asked’ for their ideas and support.
Create a ‘Zero-Based Budget’. Managing cash is never more critical than in the middle of a financial crisis. The concept of the Zero-Based Budget is to review all expenses and separate expenses that you have no choice but to pay versus all other expenses. The purpose is to get a clear picture of how much money is needed to cover your most basic expenses. This can be quite revealing as many people find that much of their spending is discretionary. To assist you, I’ve developed a Zero-Based Budget form that ties into a user-friendly on-line money management system. Visit; click on ‘Resources’; then ‘Zero-Based Budget” form.
Preserve your retirement accounts. Unemployed workers will sometimes invade their retirement plan for needed cash. Taking money from your retirement plan triggers both a federal penalty of ten percent (for people under 59½) as well as ordinary income taxes on the proceeds. A $10,000 premature withdrawal could cost $4,500 or more…making this the most expensive money you could access. Retirement plan funds are also shielded from bankruptcy. Think of this as your ‘start-over’ money should you be forced into bankruptcy.
Get or create a job. First, if you are out of work, realize that you still have a 40-hour per week ‘job’. It’s to get a new job! Stay in your work routine but use the time to build your resume, network, go on interviews, meet with recruiting firms and search the want ads. If I’m right about a slow re-employment rate, you’ll want to consider accepting a ‘suboptimal’ job in order to generate cash flow while you continue to search for your best job. Alternatively, you could use this as an opportunity to start your own business. Take out a piece of paper and make three columns. In one column, list all of your strengths. Examples might include: detailed oriented; analytical; task oriented. In the next column, list all the things you are passionate about. Examples might include cycling, fitness, investing or teaching. In the final column, make a list of all the possibilities for making money…drawing from your ideas from the fist two columns. This exercise could help you launch your own business.

Where to Invest in 2011

Last week I offered my prognosis of things to come in 2011. This week I’ll discuss where to invest now to take advantage of opportunities or avoid pitfalls in the year ahead.

Stocks. The stars appear to be aligned for double-digit returns in the stock market over the next twelve months. Retirees seeking cash flow and more conservative investors should consider investments in blue chip dividend-paying stocks. Companies such as AT&T, Southern Company, McDonalds, Con Edison, Royal Dutch Shell, Kimberly Clark and Paychex offer robust dividends while you wait for stock prices to move up. Make sure that you have a minimum of twenty different companies that are spread between a minimum of six different industry sectors.

An approach requiring less effort would be to invest in a basket of dividend-paying stocks using an Exchange Traded Fund (ETF). Two to consider are iShares Dow Jones Select Dividend Fund (symbol DVY) or Vanguard Dividend ETF (symbol VIG).

U.S. small cap stocks should also excel as America bounces out of the recession. Because these smaller companies are also more volatile, buy big baskets of stocks through mutual funds or ETFs. For low fees, consider Vanguard Small Cap Index Fund (NAESX) and iShares Russell 2000 Index ETF (IWM).

Emerging market stocks are another category that I expect to perform well this year. Many of these countries managed to side-step the financial crisis that hit the U.S. and Europe. Your best bet is to invest using mutual funds or ETFs. Two to consider are Vanguard Emerging Index Fund (VEIEX) and iShares MSCI Emerging Index ETF (EEM).

Bonds. The bull market in bonds appears to have run its course. Now’s the time to become more cautious. I expect short-term interest rates to remain relatively flat this year while longer term rates move up. To protect yourself from falling bond prices, consider shortening your maturities to five years or less. One excellent choice is Vanguard Short-Term Investment Grade (VFSTX). It has low fees, average maturity of its holdings of less than three years and currently yields just over three percent.

There is a lot of concern about the tax free bond market. Some states like Illinois and California and many municipalities are in deep financial trouble where their financial obligations (pension funding, etc) far outpace their revenues. Solutions include federal or state bailouts, extreme cost cutting measures or bankruptcy. Review any municipal bonds or bond funds you own and make sure they are of very high quality. One fund to consider is Vanguard Limited Term Tax Free (VMLTX).

Inflation. Inflation has been benign for years. In fact, for the past two years Social Security recipients have not received a cost-of-living increase. That should begin to change this year although I do not expect for inflation to significantly ramp up for eighteen to twenty-four months. Conservative investors who want to build some inflation protection into their portfolio should consider TIPS bonds. As inflation rises, the principal value of these bonds rises also. You can learn more or buy them directly from the U.S. Treasury at You could also buy a basket of TIPs bonds using an ETF such as the iShares TIPs (TIP).

Next week, I’ll discuss investments in real estate, gold, and commodities. Be sure to seek advice from your own professional advisor before acting on these suggestions.

Opportunities Abound in 2011

As we make the transition from 2010 to 2011, what can we expect for the coming year and how can we, individually, benefit from the opportunities that lay ahead? The extension of the Bush tax cuts, increased tax deductions for businesses, payroll tax reduction and raising of the estate tax exemption has created a pivotal change among business owners, executives and investors. The markets that once were driven by pessimism and fear have given way to optimism and hope.

Here’s a summary of my outlook for 2011 along with how you can best benefit from the opportunities presented:

Stock Market. The stock market peaked in October 2007, then came crashing down in 2008 losing 37% by year end as the financial markets side-stepped a near Armageddon. In 2009, the stock market rebounded sharply gaining 26%, followed by a strong year-end performance resulting in a 15% gain for 2010. Even with excellent returns for 2009 and 2010, the stock market remains 14% below its October 2007 peak.

All signs point to excellent returns for 2011. Both public and private companies have used this recession to slash expenses and raise cash. As the economy improves increased revenues should quickly translate into increased profitability. One of the nations largest investment firm’s prognosis is for a 15% return.

Opportunity: Review your investments with an eye towards stocks. Dividend-paying blue chips; small caps and emerging markets should do well.

Bond Market. At some point during 2011, longer term interest rates are likely to begin a multi-year trend towards rising rates. As interest rates rise, bond values will fall. Couple this with rising default risks for lower quality municipal bonds suggests caution for the bond market. Many states such as California and Illinois as well as cities across the country are facing serious financial peril and will either be looking for federal bailouts, extreme expense cutting or bankruptcy. We expect the Federal Reserve to stand pat on short-term rates during 2011.

Opportunity: Review your fixed income investments to make certain you are holding higher quality bonds. For mutual funds, consider funds where average maturity is less than five years.

Inflation. The Federal Reserve is pumping billions of dollars into the system. Historically what follows this quantitative easing is inflation. You’ll likely notice it first at the grocery store and the gas pump. Runaway inflation is unlikely as long as employment remains at the current levels.

Opportunity: If you believe inflation will rise significantly over the next several years, conservative investors should consider TIPS bonds. These are treasury bonds whose total returns are tied to inflation.

Housing. It will take a number of years to solve the current problem of oversupply in the housing market. However, expect the turning point to occur during 2011.

Opportunity: Housing prices remain extremely competitive. If you’re in the market for a new home, now’s a good time to buy.

Unemployment. Expect little improvement in reemployment during 2011. As companies see revenue growth, many will look to technology solutions rather than human ones.

Opportunity: If you are unemployed, develop a financial crisis management plan immediately. Cut expenses and consider starting a business or taking a ‘suboptimal’ job until the job market improves which will likely take 2-4 years.

2011: Turning Dreams into Reality!

Few of us take the time to stop and take stock of our lives but if you take a moment to reflect, you will find that you, in fact, accomplished quite a lot in 2010. But did you achieve your full potential? It’s likely that your full potential is much greater than even you recognize. I’m reminded of the story of the dog whose owner always kept him in the backyard on a 25 foot chain. The owner fed and cared for him and sometimes even played with him. But the dog was always chained. After a time, the owner unbuckled the chain but the dog never ventured beyond the 25-foot perimeter- now shackled by an artificial chain and collar. What’s holding you back from achieving your full potential? Have you created your own artificial chain and collar? For each of us, our destiny is to have an extraordinary life. Yet, it is up to us to claim it. For 2011, commit to break the chains that are keeping you from achieving your true potential.
Read more

Hard Choices – Tackling the National Debt

President Obama appointed a bipartisan National Commission on Fiscal Responsibility and Reform with instructions to develop recommendations to balance the budget, excluding interest on the national debt, by the year 2015. That commission issued its preliminary report earlier this month and what is painfully obvious is that there are no painless solutions. Proposals include:
• Raising the age of full Social Security eligibility from sixty-six to age sixty-eight by 2050 and sixty-nine by 2075.
• Cutting defense spending by $100 billion.
• Eliminating interest deductions on mortgages over $500,000.
• Limiting future Medicare benefits.
• Slashing the federal workforce by ten percent.
• Eliminating $3 billion in federal farm subsidies.
• Making more workers subject to income taxes while reducing the number of tax brackets to three: 9%, 15%, and 24%.
• Increase the gas tax by fifteen cents.
• Tax dividends and capital gains as ordinary income.

Just how big is the problem? Our national debt is currently $13.7 trillion and climbing at a pace of $1.3 trillion per year. Of the $3.5 trillion our federal government spends each year, more than 60% goes to Medicare/Medicaid benefits, Social Security benefits and defense spending. An additional 12% goes to welfare programs; 5% goes for interest on the national debt and another 5% for government pension payments. The total of all these items is more than 80%. I think you can see where this is headed. You are not going to solve this problem without significant cuts to many programs for which many Americans now feel that they are entitled.

I recently returned from a vacation in France where citizens held violent protests over the government’s plan to raise the minimum retirement age from sixty to sixty-two. How are American’s going to react to the massive cuts that will be required to solve the growing crisis of our growing national debt? You can bet it’s not going to be a celebration. The final decision will be made by a relatively small group of career politicians, most of whom have never had to meet a payroll and who have voted special benefits for themselves. They have their own pension plan versus Social Security and their own health insurance plan versus the one they want us to accept. Unfortunately, many career politicians see their primary job is to get re-elected. How do you get re-elected? You need to be popular with the voters. What makes you popular with the voters? You become popular by giving stuff away, not taking it away. My best guess is that, collectively, they lack the will and courage to make these difficult decisions until they are faced with a crisis that demands action.

We all know something must be done to solve our national debt problem before it turns into a disaster. Too often we want our congressional representatives to do what is necessary as long as it doesn’t affect our wallets. We too, need to muster the courage and be willing to make financial sacrifices while holding the politicians’ feet to the fire for the way they manage our money. It’s a job that must be done and the time is now.

Election Rout Suggests Stock Market Gains

Republicans gained sixty seats in the House of Representatives, the largest gain since 1938 while also gaining six seats in the Senate. If nothing else, the mid-term elections have sent a clear message to all of our congressional representatives, “We don’t like what we’ve been seeing!” Republicans now have control of the house while the Democrats maintain control of the Senate and Oval Office…in other words, ‘gridlock’. How will these changes impact the economy and your investments? Generally speaking, gridlock will be a good thing for both the economy and the stock market. Uncertainty has been one of the major roadblocks to economic recovery as corporations have been reluctant to invest in expansion, technology and people under the cloud of uncertainty regarding future regulation and taxation. Instead, they have focused on the pieces of the puzzle for which they have the most control…expenses. The results have included substantial layoffs and the storing up of cash. Gridlock tends to create greater certainty regarding future legislation because any changes must be worked out through a process of compromise. The new mix of congressional representatives will give corporations the confidence to use their resources to seek out opportunities.

How can you use gridlock to advance your own financial situation?
Invest in blue chip stocks. While the stock market will always remain volatile, now would be a good time to begin to shift some money from fixed income (CDs, bonds, bond mutual funds and money market funds) to stocks. An excellent choice is blue chip stocks that are paying a dividend. Many of these companies are paying a dividend that is substantially higher than the interest currently being offered on high quality bonds. Good examples include AT&T and Verizon who each pay a dividend of about 5.8%; Southern Company whose dividend is approximately 4.8%; and Eli Lilly paying a 5.5% dividend. As the fear that has driven the stock market over the past twenty-four months gives way to optimism, investors, particularly retirees, will begin searching for conservative investments with higher returns and blue chip stocks will be in that ‘sweet spot’.
Invest in small company stocks. Smaller company’s, while typically more volatile, may benefit more than the Fortune 500 companies as they are able to react and deploy resources more quickly. You’ll want to own a big basket of stocks for this category. Consider a no-load fund like Vanguard’s Small Cap Index Fund (VSCIX).
Invest in international stocks. As the U.S. economy goes, so goes the rest of the world. More undeveloped countries such as Brazil, Russia, India and China are likely to outperform the more developed countries of Europe, but all should benefit as the U.S. economy improves. Again, you’ll want a large basket of stocks so consider a fund like Vanguard Total International Stock Index (VGTSX) or Vanguard Emerging Markets Stock Index (VEIEX).

Your allocation between stocks and bonds will continue to be of vital importance and must be tailored to your particular facts and circumstances. Consider seeking professional counsel before making substantial changes to your investment strategy.

Year End Tax Planning

With less than three months remaining in 2010, now is the time for year-end tax planning. Most people can exert some degree of control over their tax bill if they maximize certain tax strategies available to them this year. Here’s a checklist of items you should review now:

Green Home Improvement Credit: You can get a tax credit for making green home improvements through the end of this year. You can get a 30% tax credit, up to $1,500, for making small energy efficiency upgrades such as adding insulation, replacing windows, getting duct seals and adding energy efficient doors. If you make a big upgrade, such as solar panels or a wind turbine, you can get a 30% tax credit — no limit or cap on how much.
Invest in your 401k plan: Make sure you are deferring either the maximum or the most that you can financially afford. Many companies match employee’s contributions up to a certain percentage so you want to make sure you are deferring enough to receive the full match. That is free money! The maximum contribution in 2010 is $16,500, plus individuals age 50 and over can make an additional catch-up contribution of $5,500.
Donate to Charity: All gifts must be made by year-end to receive a deduction in 2010. In addition to checks or cash, consider giving appreciated stock from your portfolio to avoid capital gains tax on the sale.
Required Minimum Distribution from IRAs: If you are age 701/2 or older, then required minimum distributions (RMD) are back! If you have to take a distribution from your IRA and you have charitable contributions to fulfill then I recommend you give part or all of your RMD directly to the charity. NOW… Congress has not passed this into law for 2010 and no one knows if they will but there is no downside to doing this right now. The pro for giving your RMD directly to charity is it will reduce your Adjusted Gross Income. A lower Adjusted Gross Income can reduce your exposure to phase-outs on your Itemized Deductions and can lower your Medicare Part B premiums if you are subject to the Income-Adjusted Part B premiums. If Congress does not pass this then you would just have to report the RMD as income and then take the charitable gift deduction your Schedule A as an itemized deduction.
Manage your capital gains: Many people have loss carry forwards from the previous years due to the market conditions. If you have capital gain income this year then make sure you have enough loss carry forward to offset this plus enough to take $3,000 against ordinary income. If you don’t have a loss carry forward from last year then consider selling any positions you have with losses to offset the gains.
Sell Investments for Long-Term Capital Gains: If you’ve been holding on to some investments with gains, now might be a good time to sell them. Through the end of 2010, there is no long term capital gains tax for those in the 10% and 15% tax brackets. For everyone else, capital gains top out at 15%. Next year though, capital gains tax might shoot up to as high as your marginal tax rate!

Because everyone’s facts and circumstances are different, you should meet with your tax advisor now to determine what other strategies might help cut your tax bill this year. Next week I will have Part II of Year End Tax Planning.

My thanks to Kimberly Reynolds, M.S., CFP®, for her assistance with this article.

You Could Have Been a Millionaire

Years ago a group of tobacco executives appeared before a congressional hearing, placed their left hand on the Bible, raised their right hand and swore that tobacco products were neither addictive nor harmful to your health. Of course everyone including smokers knew this was a big lie. Unfortunately, many young people still believe that smoking cigarettes is ‘cool’ and makes them feel (and look) like adults. That is –until their teeth turn yellow, they figure out people are keeping their distance because of bad breath and they realize that they can no longer control the habit. I remember once being in a quick mart and having someone come in and order a carton of cigarettes. He was on oxygen and toting an oxygen bottle at the time. One of my associates who quit smoking five years ago based on my challenge (with a monetary reward!) said that she occasionally still has urges to smoke a cigarette, “As long as her leg!” Tobacco is as addictive as any drug.

We all know that smoking is a universally bad idea, but did you ever stop to think about the true costs of smoking? Is it nothing more than the cost of a $5 pack of cigarettes per day? Here’s a partial lists:
A twenty-year-old who gave up a $5 per day habit and invested the money at 7.5% would have $1 million by age 70. Reverse thinking would suggest that continuing smoking costs this person a million dollars over their lifetime. And this assumes the cost of cigarettes stays constant.
Research indicates that smokers on average die nineteen years sooner than non-smokers.
In Alabama, research suggests that for every pack of cigarettes sold, and additional dollar will be spent on healthcare treatment related to tobacco use.
There are fewer job opportunities for smokers as many employers avoid hiring smokers for a number of reasons. First, smokers tend to need to take ‘smoking breaks’ throughout the workday which is both unproductive and unfair to non-smoker employees. Second, smokers tend to have greater health related illnesses causing greater absenteeism and higher healthcare costs.
Life insurance premiums are much higher for smokers than for non-smokers. For example, a $1 million 20-year term policy on a 30-year old smoker cost $1,500 versus $435 per year for a non-smoker.

These are just some of the personal costs of smoking. There are also the health-related side effects to unborn children as well as people exposed to second hand smoke. Tobacco is clearly one product with virtually no redeeming personal or social values. Research does suggest that the rising cost of cigarettes does cause decreased use. If, at the state level, we were to raise the tax on cigarettes and ban use in all public places we could positively impact health, healthcare costs and our economy. With elections right around the corner, this would be an excellent topic to add to the list of issues for our legislators.

If you have avoided the habit or beaten the habit, pass this article along to a smoker that you care about. You may just save their life and make him or her a millionaire!

Unintended Consequences

You may have heard of the ‘Butterfly Effect’…a butterfly flaps his wings here in America and sets off a tornado in Japan…or so the saying goes. It’s a metaphor used to explain how small changes can create large unintended results.

The greed and mismanagement that dominated the executive offices of America’s largest banks over the past decade caused what is now called The Great Recession. The banking industry was brought to the verge of collapse; unemployment rose well above 10%; consumers and businesses severely curtailed spending and our economy came to a screeching halt. Our government leaders hopped on white horses intent on ‘saving the day’ with an array of new legislation, regulation and corporate quasi-takeovers. Enter, the Butterfly Effect. Let’s look at a couple of the unintended consequences of government intervention.

Extension of unemployment benefits. With so many people out of work and unable to find jobs, it makes sense to extend the period of time people can receive unemployment benefits, right? A business owner tells this story. “On a weekly basis, I have people coming in asking if we are hiring. If I say ‘no’, then they ask me to sign a form indicating that they sought employment which is one of the requirements to remaining on unemployment benefits. If I says ‘yes’, the person asks if he can be paid in ‘cash’. If I say he’ll receive a payroll check, he moves on to the next business. Why? Because he wants to keep his unemployment check coming in and hopes to earn some ‘non-reported’ income.” Many others who are receiving benefits have found that they can manage on the unemployment checks so, ‘Why work if you don’t have to?’ So by extending unemployment benefits, the ripple effect is that unemployment itself is also extended. Now it is true that there are lots of people who are trying very hard to find a job, but as long as you extend benefits, you can bet re-employment will be a slow process.
Lowering of interest rates. When the financial crisis began to unfold, our government reacted by lowering interest rates to zero (Federal Funds Rate). The idea was to slash interest rates in order to encourage borrowing and spending by businesses and consumers. In addition, the government jumped in bed with our largest bankers and loaned them an unprecedented $700 billon dollars to keep them afloat and allow them plenty of cash to lend…which is their primary function. So how did it work out? Well, the bankers hoarded their new-found cash and eighteen months later, they’re still not lending. They can borrow at 0% and earn a spread investing in treasuries or commercial paper without taking any risk. A VP of the Southeastern Business Division of one of the nations largest banks said that from January through August of 2009, they made no loans and that for 2010, they had made only 18 loans. Worse, current retirees who depend on interest income to pay their bills have seen their cash flow slashed and as a result…are not spending money!

So how do you jump-start an economy where the banks aren’t lending money to businesses so that they can expand and hire new workers; retirees can’t afford to spend money; and many unemployed workers are gaming the system? One answer is for the government to spend more money. But at what Butterfly Effect?