Paul Ferraresi

The September 2009 issue of Investment Advisor portrayed how much it costs to raise a child. The report from the Department of Agriculture child-rearing study will take your breath away.

A two-parent, middle income family (with income from $56,870 to $98,470) can expect to spend $221,190 ($291,570 inflated) to raise a child born in 2008 for the next 17 years. This amounts to $11,610 to $13,380 per year based on the child’s age.

The USDA states that a family with income over $98,470 can expect to spend $366,660 raising a child for 17 years. This does not include any private school or college costs.

You can see the full report and online calculator at www.cnpp.usda.gov.

And don’t you love it when your children say to you … “what have you done for me?”

What if you could retire early and still get full retirement benefits??

It is not a new concept but many people do not know about it. The current Social Security system allows individuals to claim reduced, early retirement benefits beginning at age 62. Individuals who wait until their full retirement age to collect and receive about 30% more in monthly benefits. If they wait until age 70 to collect, their benefits will be about 60% larger than at age 62. So what should you suggest your clients do?

Assuming a normal life expectancy and using the interest rate on government bonds, the actuarial present value of lifetime benefits are the same for those taking early retirement as for those waiting to take benefits at a later age. Of course, if one’s life expectancy is not normal (due to illness or bad luck or particularly good genes or good luck) one retirement age will look more attractive than another.

Look at going for the best of both worlds: retire at age 62, then pay back and reapply for Social Security benefits at age 70 if you come to regret your early decision.

A couple claimed their Social Security benefits at age 62 and now they each receive reduced benefit of $13,250 annually (in 2008 dollars). If they had waited until their normal retirement age (65) to collect benefits, the couple would each receive $18,928 a year. If they waited until 70 (this year) to apply, their benefit in 2008 would have been $20,693, thanks to the delayed benefit credit. If they choose to pay back the Social Security benefits they have received over the past eight years, they will each receive the much higher benefit for the rest of their lives. If they take this option, each would repay $94,556 to Social Security. They would then each begin receiving $20,693 a year (the same as if they had waited until age 70 to begin receiving benefits); and as a result, they would have approximately 56% more in real Social Security benefits every year for the rest of their lives. “Essentially, the government has given them an interest-free loan.”

No, I do not mean the TV show. If you or your children enjoy watching the stars in the sky, you have a few options. Sure the old telescope or binoculars are a good standby. A good computer astronomy program can cost more than $200.

I found a FREE downloadable alternative … Stellarium (www.stellarium.org). It shows the sky as it looks now from any point on Earth that you specify. You can go back and forth in time and even see displays from other planets.

The site is a work-in-progress and improves every day. It is really power packed. So, instead of watching the “stars” on TV as they make millions, visit the “heavens” with your family and you may all learn something.

Now, do I hear Tony Bennett singing … “climbs halfway to the stars”?

Enjoy!

Are IRAs Safe?

Retirement accounts are federally insured up to @250,000 per account at every bank. Congress raised the limit from $100,000 in 2006. This insurance is only for federally insured deposits.

The $250,000 limit for federal deposit protection applies to retirement accounts at banks and savings associations insured by the FDIC, as well as credit unions insured by the National Credit Union Administration (NCUA). (For non-retirement accounts, the FDIC or NCUA limit temporarily increased to $250,000 from $100,000 as part of 2008 Economic Stabilization Act, effective Oct. 3.)

The federal insurance coverage for retirement accounts applies to traditional and Roth IRAs, simplified employee pension (SEP) IRAs and savings incentive match plans for employees (SIMPLE) IRAs. In addition, the coverage also includes self-directed Keogh accounts, 457 plan accounts for state government employees and self-directed employer-sponsored defined contribution plans, including 401(K) and SIMPLE 401 (k) accounts.

DEFINING SELF-DIRECTED

For purposes of FDIC insurance, self-directed means that the plan participant can instruct administrators how his or her retirement funds are to be invested, including the ability to direct those funds to an FDIC-insured account. A retirement plan whose only investment option is the deposit accounts of a specified bank is not considered a self-directed account and is not covered by FDIC insurance. A plan for a single employee/employer can limit investments to a single option and will still be a self-directed plan under the insurance rules.

Under the FDIC/NCUA rules, all of an individual’s retirement accounts at the same insured bank are added together and insured up to a limit of $250,000. Thus, if you have $200,000 in a traditional IRA and $100,000 in a Roth IRA at ABC Bank, federal deposit insurance would cover $250,000 of those accounts, leaving $50,000 uninsured.

BENEFICIARY ISSUES

If an individual has a personal IRA and an inherited IRA at the same bank, they are insured separately for $250,000 each. Naming different beneficiaries on an individual’s retirement accounts will not affect the coverage limits for the individual, according to the rules.

If someone is a beneficiary of an account and not an owner, They have up to $250,000 in coverage on this account in addition to the $250,000 in coverage on their own personal IRA account. Retirement accounts are separately insured from any other deposits you may have at the same institution.

MOVING PARTS

For each IRA, you can do a rollover no more than once every 12 months (the once-per-year IRA rollover rule). If someone has done a rollover to or from an IRA within the past 12 months, they must wait until 12 months (365 days) have passed before doing a rollover from the same IRA. What happens if they violate the 12 month rule? They will owe income tax on the second withdrawal, plus 10% penalty if they are under age 59½, and those funds are no longer IRA funds.

The bottom line, then, is that you must check the history of each IRA account before determining whether you can do a rollover from it. Without this careful due diligence, you risk paying taxes and penalties on your retirement funds.

When a bank fails, depositors usually want to get their funds out as quickly as possible. That could mean receiving a check or cash. If the account is an IRA, a check made out to you is considered a rollover, and the 60-day rule and the once-per-year rollover limit both apply. If other IRA funds were rolled to or from the IRA account within the past 12 months, the depositor will have a taxable distribution.

To add insult to injury, if the funds come from an IRA at a failed bank and the balance is over $250,000, then, the depositor might only be able to withdraw $250,000 (the FDIC insured amount). But since that $250,000 cannot be rolled over to another IRA (because IRA funds were already rolled to or from that IRA within the past 12 months), then the entire $250,000 will be taxable and possibly subject to the 10% withdrawal penalty.

NON-BANK PROTECTION

Remember that FDIC/NCUA insurance applies only to bank deposits such as checking accounts, savings accounts, CDs and others. There is no federal deposit insurance for IRA investments in mutual funds, stocks, bonds and annuities; even if they are purchased from an FDIC- or NCUA- insured institution.

However, there is some protection for investments through the Securities Investor Protection Corp. (SIPC). Virtually all securities brokers belong to this organization. SIPC members contribute to a reserve fund that will reimburse investors up to $500,000 per customer, including up to $100,000 in cash.

Of course there is no SIPC reimbursement for investments that lose money.

In our Western culture, we take many things for granted. We take comfort in the fact that the laws of gravity will not be surreptitiously repealed while we sleep, catapulting us and all we have into the ever-expanding universe as dawn arrives. The sun will rise and set each day. When it comes to retirement planning, we mentally quote Scarlett O’Hara from Gone with the Wind: “I can’t think about that right now. If I do I’ll go crazy. I’ll think about that tomorrow.” In essence, we expect a fair amount of certainty. This shared deception about retirement planning is what keeps our existential crises at bay as well as present retirement planners with their greatest challenge: How to create in clients a realistic sense of urgency without inviting panic. To address this conundrum you might want to revisit some ideas and retool your approaches.

Smarter or wiser. An old saying states that smart people learn by their mistakes. That should bring us some comfort, since we all like to fancy ourselves as smart people! But another saying shares a different pearl of wisdom: wise people learn by the mistakes of others. No wonder we have heard that “experience is a dear teacher and only a fool will learn by it.” As part of the retirement planning process, planners can assist their clients by pointing out the errors of the past so as to guide future directions and decisions so clients will not have to repeat mistakes of the past. What are these mistakes and can we avoid them?

• Living without a spending plan
• Using credit to expand standard of living far beyond income
• Believing that good times will roll on forever

• Save- save for the rainy day, save for the big-ticket purchase, save just to have some extra cash on hand.
• If it doesn’t make sense, then it probably doesn’t make sense.
• Learn more about how money works. Ignorance is not bliss!
• Strive for modest, steady returns on investments.

None of these require advanced education to understand, nor do they imply a high level of sophistication; rather, because they are so self-evident, they may have grown dim in our memories and relegated to a time long past and regarded as ideas that were part of the horse-and-buggy era- certainly not part of the great complex financial system we see today. It just may be that in our sophisticated world, there are more people who can claim the label “smarter” than those who would call themselves “wiser.”