Newsletter for September 2001

Article Briefings
Money and You: Some Advice Worth Saving
Long-Term Care Insurance Extends Retirement Income Protection
401(k)s Have Lost a Step
New Directions in Post-Retirement Planning
Education Failing to Overcome Employees' Inattention to 401(k)s
Retirees Create New Demand for Homes in Natural Settings
Social Security, is it Really in Trouble?

Featured Question
The New "Catch Up Contributions" for IRAs

Resource Links
The Largest Financial Glossary on the Internet
Online Financial Calculators

Money and You: Some Advice Worth Saving
By Ann Perry, Copley News Service: Vol. 158, No. 6, Pg. H01, 08/06/01.

Retirement authority Lynn O'Shaughnessy says people sabotage their retirement planning efforts by making expensive mistakes. According to O'Shaughnessy, workers often make the mistake of cashing out their 401(k) retirement plans when they switch jobs. After withdrawal penalties and federal and state taxes are added up, workers end up paying 40 to 50 percent in taxes, netting losses of thousands of dollars. Investors also lose money by not tracking their investment costs closely enough. People can avoid this trap by scrutinizing the costs of their retirement fund investments. Other bad habits to avoid include failing to diversify, loading up on company stocks, failing to double check statements for mistakes, and borrowing against 401(k)s.

Long-Term Care Insurance Extends Retirement Income Protection
By Jay Menario, Employee Benefit News: Vol. 35, No. 32, Pg. 6, 08/01/01.

New studies show that healthy retirees have longer life expectancies. In light of this, workers need to ensure that they do not outlive their resources. Employers are trying to help by offering long-term care (LTC) insurance as supplemental insurance. Costco Wholesale added LTC coverage to its benefits plan four years ago. Jay Tihinen, assistant vice president of benefits, said the favorable tax treatment of LTC plans that resulted from the Health Insurance Portability and Accountability Act of 1996 played a role in that decision. Costco prepared its employees for the new offering by informing them about the need for LTC insurance and the benefits it provides.

401(k)s Have Lost a Step
By Paul J. Lim, U.S. News & World Report: Vol. 131, No. 6, Pg. 37, 08/13/01.

Employers do not offer enough variety in their 401(k) plans to protect employees from a faltering economy, which is why many accounts lost money for the first time in 2001. Of every five 401(k) plans, only two have a small-stock fund option, which includes small caps, bonds, and value funds. For instance, while S&P 500 blue chips were losing 17 percent of their growth, investment-grade bonds were increasing by 11 percent. Investment advisors often state that a portfolio should have 30 percent of its funds invested in small-cap funds; since the economic crisis, many employers have indeed begun adding more investment options. However, many employees should lobby their finance and human resource departments for better options for their retirement plans in order to prevent large losses in the future. Those employees with fewer options can still invest in small-cap funds by declining the "in-service withdrawal" and reinvesting the money in either an IRA or a Roth IRA.

New Directions in Post-Retirement Planning
By Barry Higgins, National Underwriter (Life and Health Financial Services Edition) Online, 08/06/01.

New post-retirement planning options look to prolong the quality of life for retirees. Retirement planning expert Dawn Fredette, second vice president of retirement and investment services at Travelers Life and Annuity, says people planning for retirement who have not "focused on their longevity as a risk" should consider annuitization, which insures against the threat of people outliving their assets. For the individual who has planned for retirement but is concerned about market volatility, Fredette says an indexed-based investment or fixed-income portfolio may be in order. Another area of concern is long-term care (LTC). To alleviate some of the anxiety surrounding this issue, financial institutions have dedicated themselves to developing new, innovative annuities, riders for life insurance policies, and enhanced LTC benefits.

Education Failing to Overcome Employees' Inattention to 401(k)s
By Arleen Jacobius, Pensions & Investments: Vol. 29, No. 16, Pg. 34, 08/06/01.

Plan sponsors say that, despite education efforts, employees are turning a deaf ear to calls to dedicate more attention to their 401(k) plans. According to a survey on participant activity by the Investment Company Institute, almost 60 percent of employees never make allocation changes from the time they first enroll. When they do, most of the allocations are transferred to riskier investments, and nearly 60 percent of those are reallocated only once or twice during the life of the account. Indeed, financial consultants like Lori Lucas with Hewitt Associates says the results are consistent with her observances of 401(k) plan participants. "We learned over time, through the Hewitt 401(k) index, that 401(k) participants are relatively inactive investors," Lucas says. She adds that plan sponsors should have a plan in place that addresses this behavior. For automatically enrolled participants, Lucas recommends that plan sponsors raise the default deferral to the level of the company match and change the default investment option to a balanced fund with some equity exposure.

Retirees Create New Demand for Homes in Natural Settings
By Andrew Goldstein, PR Newswire, Vol. 158, No. 6, Pg. 48, 08/14/01.

Affluent retirees and semi-retirees are younger, hipper, more active, and more interested in purchasing a home with natural surroundings than reserving a room in a retirement village, says David V. Johnson, chairman of Victor International, a developer of environmentally sensitive homes. Wealthy seniors are increasingly overlooking historical retirement destinations like Florida, Arizona, and California in favor of environmentally protected home sites in Washington, Michigan, and the Carolinas, with the intent of passing them on to future generations. Johnson says today's buyer wants a somewhat smaller home sitting on a spectacular piece of land, but with amenities such as concierge services, fine dining, shopping, and recreational facilities. Mixed communities--which combine young families, empty nesters, singles, and career couples--are popular with the emerging retiree demographic. Well-off seniors and near-seniors are more interested in living near people with their own interests than living in a community with solely their own age group. A Wall Street Journal survey of the top five towns attracting such retirees includes the Petoskey/Harbor Springs area of Michigan; San Juan Island, Washington; Destin/South Walton Beach, Florida; Corolla, North Carolina; and Kailua-Kona, Hawaii. Johnson says guaranteed low density and design controls are essential to attracting affluent seniors interested in protecting both their lifestyle and their investment.

Social Security, is it Really in Trouble?
By Fred Brock, New York Times: Pg. 9, 08/05/01.

California State University professor Theodore Roszak says social security is not nearly as bad off as people are led to believe. In his book, Longevity Revolution: As Boomers Become Elders, Roszak claims that social security does not need to be "saved," and that the effort to make the public believe that the system is in jeopardy is nothing more than a conspiracy led by two powerful forces. The first is Wall Street, which Roszak says is after the business and stock trading commissions that would be generated from privatization. He identifies conservatives as the second group, arguing that they have never liked the concept of government social insurance. Another group he blames for perpetuating the idea of a nearly bankrupt social security system is the media, which he says often does not check its figures against those of the Social Security Administration.

Q. I haven't always made the maximum contribution to my IRA. I'm wondering if the new "catch-up" contributions will help me make up the difference. What are these catch-up contributions, and when do they take effect?

A. The tax relief act of 2001 makes provisions for so-called "catch-up" contributions to IRAs, which will indeed benefit many individuals. In short, "catch-up" contributions potentially allow people aged 50 and older an increased annual contribution limit, in addition to the increases scheduled for IRAs in general. The result is that people closer to retirement age can accumulate IRA savings at a significantly faster rate than others. Assuming a 10% rate of growth, a person making the maximum contributions under this new provision for five years could potentially accumulate twice as much money as he or she could under the old law.

However, the term "catch-up" is a misnomer. The amount of your previous IRA contributions has nothing to do with your qualification for making "catch-up" contributions. Whether or not you made the maximum contribution in the past, eligibility for this new increase is based solely on your age and whether you meet other, standing, income limits on IRA participation. If you meet those requirements, you will be able to make increased contributions beginning in tax year 2002. For 2002 through 2005, the regular contribution limit will be increased by $500; for 2006 and after, it will be increased by $1,000. The following table outlines the new scheduled maximum contributions.

Tax Years Age 50 and Under Age 50 and Over
2002 $3,000 $3,500
2003 $3,000 $3,500
2004 $3,000 $3,500
2005 $4,000 $4,500
2006 $4,000 $5,000
2007 $4,000 $5,000
2008 and after $5,000 $6,000

You should consider this increased contribution limit if you are nearing or beyond age 50. Remember, though, that other limits on IRAs still apply. For example, you must have earned income in order to contribute to an IRA. If your earned income is less than the contribution limit, you can only contribute up to the level of your earned income. Also, income limits for participating in a Roth IRA still apply. Single individuals must have an Adjusted Gross Income (AGI) of less than $110,000 per year in order to contribute to a Roth IRA. Married couples filing jointly must have an AGI of less than $160,000. Be sure to consult with your financial advisor to be clear on which options are available to you.

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http://www.duke.edu/~charvey/Classes/wpg/glossary.htm

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The American Savings Education Council (ASEC) and the Employee Benefit Research Institute (EBRI) have established the Choose to Save(r) Education Program to help you plan for tomorrow. This section of their web site offers more than 100 online calculators to help you make wise financial choices regarding retirement, credit cards, home mortgages, car loans, insurance and more.


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