January 12, 2010
Vol 3, Issue 1
Jean Keener
Jean Keener
Happy new year! 
U.S. stocks finished the year strongly, with the S&P 500 gaining about 6% in fourth quarter, to finish 2009 with a 26.5% gain.  International stocks were up 37% for the year, with emerging markets even higher.  The bond market also gained for the year, particularly in the high-yield sector which even outpaced stocks. 
In spite of these glowing numbers, we all know that much uncertainty remains with unemployment, consumer spending, and household and government debt all giving pause.  It continues to be time to measure risk carefully and consider the long-term. 
In this newsletter, we have an update on the estate tax, tips on recovering financially from unemployment, how to decide if pension max is right for you, and more.  You may have noticed this newsletter is arriving during the second week of the month.  This will be the new schedule for 2010, which makes my data gathering a bit more efficient.  As always, feel free to e-mail me at [email protected] with requests for newsletter topics you'd like to see covered.  Thank you, and live well.
In This Issue
Estate Tax Update
Recovering from Unemployment
Pension Max: Is it Right for You?
Conducting a Home Inventory
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Estate Tax Update
Estate Tax Update2009 ended without congress completing legislation on the estate tax. That means that for right now there is no estate tax in 2010 and the tax is set to revert back to the $1 million exemption next year.   Some believe that Congress will act quickly to reinstate the tax, but we really don't know what will happen.  There's also a question regarding the constitutionality of making any reinstated tax retroactive to January 1.
On the surface, it might seem like not having an estate tax is beneficial for the families of those that die in 2010.  Unfortunately, that's only true for about 2% of the population (based on 2009 exemption levels) who are subject to the federal estate tax.  The other 98% will actually be negatively affected by lack of legislation because the inherited assets will not receive a step up in basis.  A "step up" in basis means that any assets passed to heirs will be valued based on the date of death versus the original purchase price.  The step-up usually results in significantly lower taxes if the heir sells the asset because it makes the taxable gain much smaller. Not receiving the step-up can also create a significant record-keeping challenge -- figuring out how much your grandparents or parents paid for something purchased years ago may be all but impossible.
This uncertainty presents a challenge for planning purposes.  For most people right now, taking a wait-and-see approach makes the most sense.  It doesn't mean that you should delay updating wills and other planning documents if they don't reflect your current wishes or family situation -- keeping your documents and beneficiary designations up to date is always important.  But it does mean that updates for tax planning purposes are best postponed in all but the most urgent situations.  Stay tuned!
Recovering from Unemployment
Recovering from UnemploymentIf you've been out of work for a period of time, it's a huge relief when the paychecks start rolling in again.  Depending on how long you were unemployed, what your finances were like before the job loss, and other sources of income in your household, getting back to work could be just the beginning of a long recovery process for your finances.
But here's the good news.  While you were unemployed, you and your family probably got used to spending less.  Those habits can now be a huge benefit to your finances long-term, in some cases even allowing you to be stronger financially within a couple of years than you were before the lay-off.
To make this work, you need to resist the status quo expectation that your spending "should" return to former levels.  This doesn't mean you can't celebrate the new job or enjoy a few small additional luxuries.  But, if you can consciously choose to maintain a lower level of spending, you will have a powerful tool to quickly rebuild.  With the cash you're saving, here's a 6-item priority list to tackle:
1)     If your emergency fund is completely depleted, rebuild a small buffer first (start with $1,000 to one month's expenses).   See my blog post on 10 tools to build an emergency fund for tips on this.
2)     If debt has been accumulated, create the typical debt "snowball" program by paying off highest interest rate debt first.   See my December 2008 newsletter for details on this strategy.  See my December 2008 newsletter for details on this strategy.
3)     If you borrowed from retirement plans, be mindful of the plan's rules for repayment to avoid a taxable distribution which could trigger taxes and penalties that would hurt your recovery efforts.  These rules could trump the ideal strategy of paying back the highest interest debt first.
4)     If you let critical insurance lapse, get your insurance back to the needed levels.  This is also a good time to re-assess your insurance needs.  It's possible to be over-insured, and there may be some policies you let lapse that you're better off without.
5)     As the worst debt is eliminated, start adding to the emergency fund to get to 3-6 months' expenses while paying off the last of the debt.
6)     Update your retirement or other goal projections to determine what your contributions need to look like to make up for the lost time.

Once you've accomplished these 6 priorities, you will be well on your way to creating your desired financial future.  You'll probably be used to living on less by this point.  And you'll have created the freedom to choose when you'll indulge in a splurge that you'll really enjoy, as opposed to feeling trapped with a high level of fixed expenses. 
Pension Max: Is It Right for You?
Year End Tax-Saving Investment MovesIf you're near retirement and have a pension, you may be considering a pension max strategy.  With all the variables involved, it can be challenging to determine if it's really in your best interest. 

First - what is pension max?  
Pension max is used by married couples to increase their net retirement income while still protecting the surviving spouse's income in the event the pension recipient dies first.  Basically, the pension recipient elects a single life pension instead of one with a survivor benefit for their spouse.  This results in a higher monthly pension benefit.  Then the pension recipient purchases life insurance to allow the surviving spouse to replace the pension income in the event that the pension recipient dies first.  In some situations, this approach can result in a higher net retirement income if the cost of the needed life insurance is less than the increased pension benefits.
Pension max always results in more premiums for the insurance company, but doesn't always result in more income for you.  How do you decide if it's in your best interest?
First - at the risk of stating the obvious - if you're not married, there's no reason to consider it.  Depending on your estate goals and health, there may be other strategies that make sense.

Second - the health and age of the pension recipient matters a great deal.  If the pension recipient is in excellent health and can likely qualify for preferred life insurance rates, pension max has a lot better chance of being a good idea.

Third - you need to determine how much and what kind of life insurance is needed to replace the income.  As the pension recipient gets older, less life insurance death benefit will be required to replace the pension income.  Usually some combination of tiered term-life policies and a small amount of permanent insurance fit the bill.
Fourth - the surviving spouse should have an idea of how they will use the life insurance death benefit to replace the pension income.  For many, a single-premium immediate annuity makes the most sense, however other draw-down investment scenarios can also be considered.  
Fifth - you need to consider taxes in your calculations on both the life insurance benefit and the increased pension benefit.  
  • Life insurance death benefits are generally not subject to income taxes.  With an unlimited marital exemption, the estate tax will not be an issue when the first spouse dies.  However, depending on the overall size of the estate and the death benefit, it could be an issue when the second spouse dies.
  • The increased pension benefit will be subject to income taxes.  So when you're comparing the net effect on your income, you need to calculate how much your pension will be worth after taxes because you will be paying the life insurance premiums with after-tax dollars.  This is an easy area to ignore, but depending on your tax bracket the effect of taxes can make or break the plan.
Sixth - consider the convenience factor.  If there's just a very small financial benefit to using a pension max strategy in your situation, it may still make sense to forego it.  You need to weigh the simplicity of just taking the pension against the extra effort of going through life insurance underwriting and paying the premiums ongoing.

If you're seriously considering using a pension max strategy, it's a good idea to have an uninterested third party talk through the analysis with you.  A fee-only financial advisor who doesn't have a big insurance commission at stake based on your decision will be able to offer objective advice.  And even though you spend some money on the advice, it may help you save much more over the long term and at very least feel confident that you made the right decision based on your unique situation.
Conducting a home inventory
Creating a Home InventoryJanuary is a good time to update your home inventory.  Or if you don't have a home inventory, to create one for the first time.
A home inventory is a complete and detailed written list of all your personal property that's located in your home and stored in other structures like garages and toolsheds. It should include your possessions as well as those of family members and others living in your home. You should prepare an inventory whenever you move into a new home. To keep track of new additions and discarded items, be sure to update it every year.

Wasn't there a vase on that table in the study?
It would be quite an accomplishment for any of us to recall all of the contents of any one room, even at the calmest of moments. Remembering everything that's in your house and garage after a fire, theft, or other calamity would be virtually impossible. Yet that's what you'll be asked to do when you submit a claim on your homeowners insurance, unless you've already prepared a written inventory of your possessions.
Omitting items or failing to include an adequate description of an item may prevent you from receiving full compensation from your insurance company. Since the whole point of buying homeowners insurance is to be compensated for a financial loss, why bet everything on your memory? You'll also find that a detailed inventory helps when filing a police report or when trying to prove a loss to the IRS.

 With a home inventory, the more detail the better.  However, it's better to complete at least a basic inventory than to not do it at all because it seems too detailed. 
For those of you with a high tolerance for detail:
Include everything but the kitchen sink. Under the terms of your homeowners policy, your claim for damaged or stolen property should show the quantity, description, actual cash value (i.e., the depreciated value of an item), and amount of loss associated with each item. You're also asked to provide copies of bills, receipts, and other documents that support the figures in your claim. If possible, keep copies of these documents off-site, too. It's also important to include the purchase price and purchase date of every item and to note the serial numbers and model numbers of any appliances and electrical equipment.
Listing the contents of each room and building separately promotes thoroughness and will help you organize your inventory. Make sure you catalog all the contents of every room, including rugs and carpets, wall hangings, curtains, blinds, and draperies. Be descriptive--refer to colors, dimensions, manufacturers, and composite materials whenever you can. Make sure you include component parts and the contents of drawers, shelves, closets, storage boxes, and built-in cabinets. Describe not only the bed but also the headboard, mattress, and bedding. Try to identify every item that you would have to box or carry out if you were to move out of your home. The only things you should leave out of your inventory are the four walls, the ceiling, the floor, and the fixtures (e.g., toilets and sinks).
Give a full description of any expensive clothing items, such as leather or wool coats, boots, suits, or formal wear. If you'd rather not describe every item of clothing, at least list quantities (e.g., six wool sweaters, two pairs of sneakers, two pairs of corduroy trousers).
Make sure to include the items stored in your attic, basement, garage, or outbuildings. Sports equipment tends to be expensive and should be described in as much detail as possible. The same goes for jewelry, furniture, antiques, collectibles, and other expensive items covered by your policy. Don't forget tools and outdoor equipment like lawn furniture and barbecue grills.
For those of you that want the "lite" version of the home inventory:

Take the time to jot down any items valued at $100 or more, and/or consider walking through your house with a video camera.  Provide a running commentary describing every item (e.g., date of purchase, price) that comes into view. Make sure to date-stamp the video, and take a shot of that day's newspaper. Contact your homeowners insurance agent; some offer a videotaped inventory as a free service to their customers.

Keep your inventory safe

Remember the purpose of your inventory. If there's a fire or catastrophic event, it'll do you no good if it's burned up in the fire or washed away with the flood. Regardless of whether the inventory is recorded on film, videocassette, computer software, a sketch pad, or the back of an envelope, keep a copy of it stored somewhere safe, like a safe-deposit box at a bank, or your desk at work.
I hope you found this newsletter informative.  KFP offers a free, no-obligation initial consultation to start the financial planning process for new clients.  To learn more or schedule a time, call 817-993-0401 or e-mail [email protected].
Jean Keener, CRPC, CFDP
Keener Financial Planning

Keener Financial Planning is a fee-only financial planning and investment advisory firm working with individuals at all financial levels.
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