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moneywise winter 2002
-charity update;
-you WILL be able to retire;
-a brief primer on long term care insurance;
-understanding bonds;
-Coverdell (Education IRA) savings accounts;
-a few short topics.


Three months have passed since the WTC/Pentagon disaster. I wrote about the GENIE FOUNDATION serving as a conduit for getting money directly to the families of victims identified by contributors. Unlike most of the larger organizations, the money has flowed quickly to families identified by the contributors. I am pleased with our results. If you know a family of a disaster victim that is in need of support, please contact me. I will be happy to prepare the tax return (no fee) for any family who survives a victim of the attack. I want to take this opportunity to thank Lorraine Tozzo, president of the GENIE FOUNDATION, for her tireless effort administering this campaign.

On November 26, Kenneth R. Feinberg was appointed as "Special Master" of the September 11 Victims Compensation Program. This is the program that was passed by Congress to provide an alternative to law suits for the families of victims of the disaster. The law provided that regulations had to be issued by December 21, 2001 and the program had to be completed within two years. It is important for affected families to become familiar with this program. You can follow developments by reading the WTC tab on my web site on a regular basis.


You have money saved for retirement. How should you be using that money to support your new life? This is a question many of us are struggling with in the light of a declining stock market. Your savings will supplement other retirement income, including Social Security and perhaps a pension from an employer.
There are four questions you must ask before you can compute the amount of money you can draw each year (this is also referred to as an annuity).
- How long will you live?
-.What assumption are you going to make about the investment return on funds in your accounts?
- Are you planning to spend all of your money, or will you allow a cushion in the event that you outlive your assumption, or the return is lower than you expected?
- Do you want to leave money to someone after you die?

After you have considered your answers to these questions, the rest is just arithmetic. We apply the concept of "present value" to figure out how much you can withdraw each year using your assumed rate of return on the inspect funds for a finite period of time.

Next, we design a portfolio that should assure your objectives are realized.
On the spending end, you must build a realistic budget of your needs.
After you have completed the above exercise, you need to compare your projected income to your projected expenses. In many cases, you will find that your income potential will exceed your projected expenses. Congratulations, we are done!

If you find that you do not have the income to support your projected expenses, we need to make some decisions. You can reduce your spending, keep on working, increase your return on investment assumptions or reduce you life expectancy. The third and fourth are very dangerous approaches.

Working with many clients over the past years has led me to an approach that seems to work well. First, we spend our non-retirement assets. This allows you to continue the tax-deferred accumulation on your savings while spending the money that has already been taxed.

We take money that you will need over a five to seven year period and put that money into fixed income investments to assure that the money you expect to spend will be there for you without worrying about market fluctuations. The money that will not be used for at least five to seven years should be invested in a conservative equity portfolio in the hope that we will be able to earn a little more than we could have expected from a fixed income investment.

Your broker or fund company can make a direct deposit to your checking account of the money you will be withdrawing. I can help you to get a handle on the income that your investments can yield. Telephone me if you want to discuss your situation.


Many of you have been telephoning to ask about long term care insurance (LTCI). When the question is whether or not you should be purchasing the insurance, my answer has been that I can't answer that question. Unlike auto insurance, which is mandated, or life and health insurance, where the need is often obvious, the decision to buy long term care insurance is usually not so clear. I can help you understand the options available and give you some advice about researching the cost of policies. This article gives very superficial view of the topic. My intent is to outline the issues you should be considering. Please telephone me if you want to discuss this topic in greater detail.
First, LTCI is not medical coverage. It provides for your personal care. You can be purchasing LTCI that will pay for some or all of the cost of institutional care, home care, or both.

One year of private pay nursing home care in New York can cost as much as $110,000. This is about $300 per day. Some home care will cost less, but will still be very expensive. The issue we must deal with is how to pay these bills if they ever materialize. If the patient has no money, the answer is simple. The government will pay for appropriate care through the Medicaid program. If the patient has money he/she will need to pay his/her own bills until he/she has no more money. Then Medicaid will pay for the appropriate care. If the patient has income, such as a pension or Social Security, this income will need to be used to contribute to the cost of care.

LTCI is typically purchased by people who are concerned that they will need care and want to insure against this risk to either mitigate the diminution of their fortune, or to allow them to plan for Medicaid qualification.

The older you are when you buy a policy, the higher your premium. The larger the daily benefit you desire, the longer the length of time the company might need to pay; the shorter the elimination period (how many days you must be in need of service before the company must begin to pay), the higher the premium will be. If you ask the company to increase the benefit as inflation rises, the premium will be higher. The more restrictive the conditions under which the company needs to pay you, the lower the premium will be.

You must qualify before a company will sell you a policy. If the insurer thinks it will actually need to begin paying you a benefit, it will not insure you. An important and interesting exception to this common sense rule is when a policy is offered by a large group, such as an employer. I (think I) have seen provisions in a group policy that allow an employee to purchase insurance at a prescribed rate for him/herself and family members, including parents without medical qualification. In this situation, the decision to buy insurance can be made when you know they need this benefit. Now the buying decision becomes a no-brainer.

There are many very respectable insurance companies selling this type of policy. When you finally decide what you want to buy, you will need to compare premiums. You must be careful to get proposals that insure the exact same contingencies and the exact same amount.

The premiums are tax deductible as a medical expense on the federal return. This deduction has no value for most of my clients. New York allows a direct credit of 10% of the premium. This is a wonderful thing. Here is one company's quote for an individual in good health, and requesting $150 per day for care (nursing home, home care or assisted living facility), a three year benefit period, a 90 day elimination period, and an inflation rider: at age 55, the premium would be $803; at age 80 the premium would be $4,382.

I have many clients who have purchased a LTCI policy, paid the premium for a few years and then dropped the policy.


In these troubled times, many of you are considering moving your investments from equities (stocks) to fixed income (bonds, fixed annuities or CDs). Before you decide what to buy, you should be aware of your options and the risks associated with the choice you make. Any of the investments described below can be owned in tax-protected accounts such as IRAs. If my very broad treatment of this topic sparks some interest, you can learn more by requesting Bond Fund Investing from Vanguard's Plain Talk Library. Telephone (800) 647-9998 and request this free booklet. Please telephone me if you'd like to discuss fixed income investments.

CDs are guaranteed (at least up to $100,000 per institution). You can be certain of a guaranteed compounded rate of return for the period you own the CD. The interest is taxable as it accrues. You will need to pay taxes on the interest before you actually get the money.

A "deferred" fixed annuity is a product sold by insurance companies. The interest accumulates on a tax-deferred basis until you begin to withdraw money. The annuity usually carries a low guaranteed rate of interest (compounded) and holds the promise of larger returns if the company succeeds in achieving favorable investment results with the money you have given them. These annuities are not officially guaranteed by anybody, but the insurance industry has never allowed a particular company's default to penalize the holder of the annuity.

Treasury securities are issued for face value and generally pay a non-compounded rate of interest. You are responsible for investing the interest at the current rate of return each time you receive the money. If you buy "E Bonds," you will receive a compounded return. Treasury securities are the safest investment in the universe (that is some claim). You will pay federal taxes on your interest but no state tax. With "E Bonds" you will not pay tax until you cash them. This can give you up to 30 years of tax deferral.

Bonds are another form of fixed income securities. They are very different from CDs and annuities. Bond prices fluctuate based on changes in the current market rate of interest. There is no compounding effect. Interest must be reinvested as you receive it. You can buy bonds that are exempt from federal tax (bonds issued by state, local and special approved authorities). If they are issued by the state where you live, these bonds are also exempt from state and local taxes. Bonds are also issued by corporations. Interest on corporate bonds is taxable. Buying individual bonds can be much more difficult than buying individual stocks.

Bond investment requires knowledge that most of us don't have. The three ways to purchase bonds are: buy the bond, buy a fund that buys bonds, or buy into a unit investment trust that buys the bonds.

If you will be buying a bond at face value and you hold it to maturity, you will get the face value of the bond. There is no capital gain or loss. The issuer may have reserved the right to redeem the bond before the maturity date. In that case, you may get an amount different from the face of the bond. If you decide to sell before the redemption date, your proceeds will be determined by the current rate of interest in the market for that type of bond. Unlike securities, you don't really know how much the commission is on a bond. You can be sure that you are paying more to buy a bond than a knowledgeable trader at a bond fund will pay for the same bond.

If you buy a bond fund, you are getting the benefit of professional management. The price of the fund changes daily based on the portfolio and market rate of interest. There are all types of bond funds: corporate, government backed securities, and municipal bonds funds. You can buy long, intermediate, or short em funds. Funds designated as long-term will have more price volatility than short-term funds. The manager of a bond fund is trading the bonds in the fund on a regular basis, seeking to improve the performance of the portfolio. You can use the income generated by the fund to buy additional shares (reinvestment).

Unit investment trusts are different from bond funds. The vendor of a trust puts together a portfolio of bonds at a given time. Shares representing a specific fraction of the funds are sold to the public. The bonds in the trust are not traded. They are held to maturity. Assuming there are no defaults, you will collect your share of the interest and return of principal from the portfolio. When the last bond in the fund matures, the trust is closed. You have the responsibility for deciding how to invest the interest and return of principal.


I never recommended the Education IRA. It was not really an IRA, the amount of allowed contribution was only $500, it could only be used for college expenses, it was only available to lower earning families, and there were tax consequences on withdrawal.

The new plan is referred to as the "Coverall education savings account. The contribution (beginning in 2002) is $2,000 and all layouts used for tuition are tax fee. The money can be used for k-12 education at private and parochial school.

If you are interested in opening an account for your child, grandchild, or my grandchild phone one of the mutual fund companies or visit you bank. Telephone me with any questions you might have.


-The Social Security wage base will be up to $84,900 for 2002, an increase of $4,500. The rate will remain at 6.2%. A Medicare tax of 1.45% applies to all wages. This means that if you are working and earning at least $84,900, you will be paying at least $279 more in 2002 ($558 if you are self-employed). Recipients who continue to work between 62 and 64 lose $1 of benefits for each $2 earned over $11,280 (or $940 month). There is no reduction from the date of your 65th birthday. Ask me about the special rules that come into play in the year you are 65.

-The maximum contribution to a 401(k) plan will be $11,000 for 2002 (additional $500 if you will be 50 or older in '02). Maximum IRA contribution for '02 is $3,000 (additional $500 if you will be 50 or older in '02).

-All Social Security recipients receive a 2.6 percent increase in their monthly benefits. Medicare premiums will increase by $4.00 per month to $54. For 2002, the maximum benefit for a worker retiring at age 65 is $1,660 monthly.