Lydford Financial, PLC Monthly Newsletter
Publisher LF, PLC Volume No. 5 Issue No. 4 Date: April 2008
Mission Statement
Lydford Financial, PLC is dedicated to providing individual middle income and small business clients with a financial plan that will assist them in achieving their financial and personal goals. Work can be done on an hourly basis, a project basis, or comprehensive plan basis. I am willing to help anyone with aspects of their finances, or to offer a sounding board for financial issues that come up in every day life. Contact me with your financial planning needs at (602)510-7484, or by e-mail at georgelydford@cox.net and refer me to friends, family, and acquaintances.
around, then they have a used SUV or van for long trips or transporting the kids around town only. This will balance the need for a vehicle that will fit the whole family with the high price of gas.
Kids Corner
If your children are close to college age and you have little education savings, but you have a large amount of equity in your home and you are also close to retirement what should be your priorities. You should not sacrifice your retirement savings to pay for a child’s education as there is no way to borrow your retirement needs, but college expenses can be covered by other options. Some options available to pay for college include attending a less expensive school for the first two years, having the child take out a student loan, tapping your home equity, scholarships (need and merit based), and the child can earn some of the funds needed for college. Many parents want to help their children with college, so they have to balance the conflicting priorities. If you are going to tap the home equity to help with college costs then you should set a reasonable limit that you can afford to pay back between now and your retirement date, then stick to that limit on borrowing for the college expenses. Remember to pay yourself first by contributing to your retirement savings before you take on any other actions.
Planning Basics
The economy continues to show signs of recession and financial instability due to the mortgage crunch, the high fuel prices, the lower dollar compared to other currencies, and the stock market struggles. The best approach you can take is to not overreact, but rather stay in diversified investments continuing to invest in the stock market at the current discounted prices. You will want to be careful about your personal spending to ensure you do not become overextended by incurring large debts. You may want to put off that foreign trip as the low dollar is causing everything to cost a substantial amount more than it will when the dollar against other currencies is higher. You may want to purchase your vehicles based on the type of driving you do instead of purchasing a large SUV that will cost over $100 to fill up. Some people are purchasing a hybrid to be used for their every day commute and running
Retirement Planning
If your goal is to save over $1 million by age 65 and you are 35 years of age there are some planning actions that you can take to maximize your retirement and overall financial security. You may be starting a family, buying a home, and
have other short term needs for your money, but do not short change your long term goals. -If you have saved $0, then you need to save $671 per month. -If you have saved $50,000 then you need to save $304 per month. -Your goal should be to contribute 15% of your gross income including the employer match in your 401(k). It is suggested that you contribute the amount to secure the maximum company match, then begin contributing to a Roth IRA until you reach the 15% goal. -Contribute to a spousal IRA if one parent leaves the work force. Set up a monthly contribution of $416.67 per month into a Roth IRA to contribute the maximum amount of $5,000 in 2008. -Shift the investments in your retirement funds to 90% stocks and 10% bonds. -Invest in a 529 college savings plan for each of your children. Many states allow a tax deduction for your contribution and distributions are exempt from federal taxes.
health care costs is changing rapidly, so you will want to know some of the newer health care terminology. -Flexible spending account (FSA) – you estimate out of pocket health care expenses and your employer deducts the money from your paycheck and puts it into an FSA account before you pay taxes on it. If you do not spend the money that is set aside by a date set by your employer, then you lose the money. You want to estimate out of pocket costs conservatively. -Reasonable and customary – if you go out of your health plan network, your insurer may pay a percentage of what it thinks is a “reasonable and customary” rate for the procedure. Unfortunately, this could be less than the doctor or hospital charges. -High-deductible health plan – an insurance policy that forces you to spend a large amount of money (typically $1,000 to $10,000) before it kicks in. Some plans will fully cover some preventive care or drugs regardless of the deductible. These plans are usually linked to health savings plans such as an HSA or HRA. -Health savings account (HSA) – If you have a high deductible plan that meets the federal requirements, you can open an HSA to help you pay your bills. As with an FSA, the money you put in is pre-tax. The money is also not taxed if it is used for qualifying medical expenses. The money is yours to keep until you need it unlike the FSA where it has to be spent by a specific date. After age 65, there is no penalty for spending this money on nonmedical expenses, but you will have to pay taxes on the withdrawals. -Health reimbursement arrangement (HRA) – it is similar to an HSA, but only your employer contributes and it isn’t yours to keep if you don’t spend it.
Tax Issues
There is a special situation with capital gain and qualified dividend tax rates for the 2008-2010 tax years for individuals. If you are in the 10% or 15% tax brackets (with taxable income, including capital gains, up to $32,550 on single returns or $65,150 on joint returns for 2008), the tax rate on long term capital gains and qualified dividends is 0% in 2008, 2009, and 2010. All other taxpayers will pay a maximum capital gain rate of 15% in those tax years.
Insurance Planning
The health insurance industry and how you and your employer cover rising
Investing Basics
There are three sectors of the stock market that have beaten and battered in the last couple of years which presents a buying opportunity for investors. The financial industry stocks have lost a lot of value due to the sub prime mortgage crisis. The Federal Reserve has slashed interest rates to try to reduce the chances of recession. Historically, following the start of Fed rate cuts in interest rates, financial stocks have benefited with double digit returns. The financial stocks to focus on include ones that have already been beaten down so they are at a low point and other companies that have avoided the mortgage mess. Another area of investments that have been reduced to a point where they are a good buy is REITs. They are generally invested in commercial real estate and are affected by a slow economy. They are a good buy right now as they are trading at a 20% discount. REITs are a natural hedge against inflation and many companies sign up to a 10 year lease giving them stable tenants for many years. The last area of opportunities is in the home building industry where they have been beaten down due to high inventories and a drastic slow down on home sales. The home building stocks may still be too early to invest in based on the expected direction of home prices. The experts expect home prices to fall through 2009 possibly as much as 15%. Therefore, this is an industry to keep an eye on, but it may be a bit too early to invest in home builders. At the first sign of a turn in the home prices, this would be a good place to invest as the stock price will be adjusted based on the tremendous slow down and will be cheap in comparison to the past.
Budgeting and Debt Management
The lowering of the Fed interest rate has not transferred to the mortgage interest rates completely due to the ongoing problems with the sub-prime mortgage crisis. However, interest rates that are tied to the prime rate plus a factor have been coming down to reasonable rates. These are generally credit cards, auto loans, personal loans, and home equity loans. This may be a good time to refinance your auto loan if you are paying 8% or more and the current rates are 5%-6%. The refinancing of a vehicle loan usually does not have any fees attached to it, but you will be penalized in effect if you extend the remaining time frame for the loan by paying interest for a longer time. There are two ways to take advantage of lower vehicle loan rates. One approach is to refinance for the same timeframe as you have left on the existing loan at the lower interest rate available from the bank or credit union. You should shop around for the lowest possible interest rate for the period of time you want to pay off the vehicle. If you tend to buy a new car before completion of the loan term, then refinancing will not be much of a benefit. The second approach is the best way to take advantage of a lower vehicle loan rate is to keep your payment the same assuming you are easily able to afford the amount and refinance for a shorter term to pay off the vehicle sooner. Home equity loans are relatively inexpensive now based on lower rates than the maximum hit in 2007, so it may be a good time to lock in a fixed rate instead of the variable rate. Assuming there are minimal costs and no prepayment penalties to refinance your home equity loan, you will want to lock in the current low rates.