February 9, 2010
Vol 3, Issue 2
Jean Keener
Jean Keener
Good morning.  I hope you're managing to stay warm and dry during these long winter days.
January was a rough month in the stock market.  The S&P 500 fell 3.6% for the month. Foreign stocks fared worse, with the Vanguard Total International Stock Index Fund falling 5.1%.  U.S. fixed-income did better as the intermediate-term, investment-grade Vanguard Total Bond Market Index Fund gained a robust 1.6% for the month, the Barclays 7-Year Municipal Bond Index rose 0.9%, and high-yield bonds, as measured by the Merrill Lynch U.S. High Yield Cash Pay Index, returned 1.5%. Foreign developed and emerging-markets bonds were both barely in the black.
For long-term investors, January's losses remind us that if we want the benefits of the upside of the stock market we have to tough out the downswings.  That said, some of you found yourself fundamentally uncomfortable with the level of risk you were taking during the market downturn of 2008 and early 2009 but wisely waited to make changes to your portfolio until after your investments had a chance to somewhat recover.  If this describes you, now may be a good time to re-evaluate your allocation for the long-term.  You should understand the range of potential gains or losses for your portfolio in real dollars (not percentages) in the most likely economic and market scenarios that could develop.  Then you'll be in a position to decide if you're comfortable staying the course or want to reduce your risk.  Please give me a call if you'd like to discuss your situation.
In this newsletter, we have information on the unique opportunities of saving for college in Texas, how to get the most of employer matching, and using your home as a source of income in retirement.  I've also provided a brief preview of a new financial planning service that will be available starting this month -- Ongoing Planning.  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
Your Home as a Source of Retirement Income
Saving for College in Texas
Avoiding the Traps in Employer Matching
Reach your Financial Goals: New Service Announcement from KFP
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Your Home as a Source of Retirement Income (Part I of II)
Your Home as  Source of Retirement IncomeCreating a retirement income formula is unique to each of us.  While many emotions can be interwoven with our homes and having them paid off, a home can also be a very significant source of retirement income.  The equity in your home could be one of your largest financial assets, and it makes sense to at least consider it as an option in your retirement income planning.

How do you tap your home equity?
There are two ways to tap your home equity if you're approaching retirement (or already retired) and don't want to make mortgage payments: You can trade down, or you can use a reverse mortgage. Trading down involves selling your present home and replacing it with a smaller, less expensive home. A reverse mortgage is a home mortgage in which the lender generally makes monthly payments to you, rather than you making monthly payments to the lender. Both of these strategies can give you substantial additional income during retirement.  (Note: You could get money from your home by taking a home equity loan, where you place a regular mortgage on your home. But you must repay the home equity loan, with interest, like other regular home mortgages.)
We're going to look at reverse mortgages this month and considerations in trading down next month.

If you are at least 62 years of age or older and have substantial equity in your home, a reverse mortgage can give you a valuable supplemental source of retirement income. You can receive this income based on the equity that you have built up over the years in your home--without having to repay the reverse mortgage during your life. The amount of the monthly payment you receive from a reverse mortgage depends on four factors:
  • Your age
  • The amount of equity in your home
  • The interest rate charged by the lender
  • Closing costs
The older you are and the more the equity in your home, the larger your monthly payments will be. Also, a lower interest rate and lower closing costs will increase your payments.  Reverse mortgages make the most sense for singles and couples where both spouses are over age 62.  If one spouse is under 62, it's still possible to use a reverse mortgage, but it becomes more complex and risky and is generally not advisable.
In some situations, a reverse mortgage can also be used to allow you to stop making mortgage payments without receiving a monthly check back from the equity on your home.  In those cases, it's the elimination of the mortgage payment that results in more spendable income.
With a reverse mortgage, you can continue to live in your present home for life. Even if all the equity in your home is exhausted, you will not lose your home as long as you continue to live there.  The mortgage typically becomes due when you no longer live in the home on a permanent basis.  You may experience hospital or nursing facility stays that are temporary in nature that do not cause the mortgage to become due.   
A reverse mortgage is not without drawbacks. 
With a reverse mortgage, you must mortgage your home to the lender. Each payment that you receive from the lender increases the amount of principal and interest that you owe on the mortgage. The equity value of your home is reduced by fees and each payment that you receive which will likely reduce the value of your estate to your heirs.  If you face a retirement income shortage, this equity reduction may be preferable to a reduction in your standard of living. Also, in the rare case where the value of your home appreciates more rapidly than the mortgage loan increases, equity reduction does not occur.
A reverse mortgage may have other drawbacks, including:
Up-front costs: The closing costs for a reverse mortgage normally exceed the closing costs for a conventional mortgage. This means that a reverse mortgage may not be cost effective if you plan to remain in your home for only a few years.
No reduction in homeowner costs: Unlike trading down to a home with lower housing expenses, a reverse mortgage does not reduce your housing costs. Since you stay in your home, you still face real estate taxes, insurance, repairs, and other costs associated with the home. 
Saving for College in Texas
Saving for College in TexasMany states provide an incentive for their residents to use their state's 529 plan through use of a state income tax deduction.  Because Texas doesn't have a state income tax, your options are really completely open in terms of what state's 529 savings plan you use.  You can go shopping for the best options and lowest costs for your particular situation.  You can also use any state's plan regardless of where your child plans to attend school.
Understanding the pros and cons of 529 plans

529 plans represent a solid savings opportunity because of the opportunity for the money to grow tax-free over an extended time horizon.  Funds are deposited after tax.  Principal and earnings may be withdrawn for qualified educational expenses tax-free.  The more time you have, the more beneficial the tax-free growth is.  But even within a year or two of starting college, 529 plans can be helpful.

There are also drawbacks to 529 plans. You lose flexibility in how you use the funds - if you withdraw funds for non-qualified expenses, you will be subject to income taxes and a 10% penalty on the portion representing earnings.  529 plans also carry increased investment expenses and have fixed investment options. 

Selecting the Right Plan for you
In determining which plan is right for you, there are some factors that matter to everyone and some unique to your situation.  Everyone's consideration should include review of:
  • quality of investment options offered in the plan
  • costs of the plan - both administrative fees and investing costs (these vary widely from state to state)
  • ease of access in opening your account, recurring deposits, withdrawals, investment changes, and reviewing statements
Most states also offer a direct plan option and an advisor option.  The direct option allows you to open an account directly with the state's plan without paying any investment sales commissions.  The advisor option generally results in you paying investment sales commissions up to 5.75% on all deposits into your 529 plan.  These commissions can require you to save a lot more to reach your savings goals.  You can still use the direct plans and receive advice from an advisor on college planning and investing by working with a fee-only advisor.

Other factors that may be relevant to your particular situation:
  • specific plan rules around which relatives can be named as a beneficiary in the event you want to transfer your 529 account balance to a different beneficiary.
  • Contribution maximums
  • time limits for using your 529 account balances
  • investment options that match your particular needs:
  • for a child close to college a guaranteed principal plus interest option is a must
  • for someone who doesn't want to monitor and adjustment their investments on an ongoing basis, a target-date investment program may be attractive that gets more conservative as the child get closer to college (although you need to exercise caution in selecting these) 
One of my favorite sites for comparing different 529 savings plan options is www.savingforcollege.com.  Providing recommendations on how much you need to contribute, how your contributions should be invested, and which plan offers the best balance of low fees, features, and investment options for your situation is also one of the services that Keener Financial Planning provides.
Avoid the Traps: Getting the Most of Employer Matching
Getting the Most of Employer MatchingMany employers have reduced or eliminated matching in the past several years.  If you're fortunate enough to still have a match, you want to take full advantage of this potentially significant boost to your retirement plans.   Every dollar your employer contributes toward your retirement is a dollar you don't have to.
To make the most of employer matching, you need to answer two questions:
  1. What's the formula?  
  2. How does my employer handle "maxing out" - reaching the federal limits of $16,500 for 401(k) plans for those under 50, and $22,000 for those 50+ - before the end of the year?
The first part - understanding the formula - is usually the easy part.  
Once you know the formula, you need to contribute at least as much as they match if at all possible.  A common formula is 100% up to 3% and then 50% on the next 2% - so you would need to contribute a minimum of 5% to get the full match.  Other times, employers match up to 6%, 10% or more, so your contributions to make the most of the match are higher.

The next part - answering the max out question - can get more complex.  
Sometimes the most aggressive and well-intentioned savers actually hurt themselves by completing their full contribution before the end of the year.  Companies have several choices in how they approach calculating your match, and it all really depends on your plan's summary plan description. 
Here are some of the ways it's handled:
  1. If you don't make a contribution in a particular pay period, no match for that pay period. This way can result in forfeited matching contributions if you don't spread your deferrals out over the whole year.
  2. The employer spreads your "earned" match out over the entire year regardless of how early in the year you max out your contributions. This way never results in forfeited matching.
  3. Employer stops matching when your contributions max out, but then "trues up" their match early the following year.
As you can see, front-loading your contributions doesn't hurt you in the second and third scenarios, but can reduce your match significantly in the first scenario.  To find out how your company handles it, read your plan description or make a call to your 401(k) provider or benefits departments.  Then make sure you time your contributions to comply with your company's practices on awarding the full match.  It's also a good idea to monitor your paycheck stubs and retirement plan account statements to ensure that matches are happening correctly.  
With saving enough for retirement an increasingly big challenge, it's important to take full advantage of every bit of help we can get. 
Ongoing Planning: New Service to Help You Stay on Track with Your Financial Goals
Achieving your Financial GoalsBeginning this month, Keener Financial Planning clients will have access to a new service to support them in achieving their financial goals. Ongoing Planning provides clients with the ability to engage in discussion about financial decisions throughout the year without the clock ticking on hourly fees.  Clients will have two in-person meetings per year -- one a major annual review to update their financial plan and rebalance their portfolio, and another mid-year check-in meeting to discuss progress and review any new issues.  There's also an open phone and email line for questions that come up in between meetings, plus a quarterly investment market update. 
Fees for Ongoing Planning will be a flat monthly rate based on the complexity of each client's situation, and will save an average of 30% off the regular hourly rate.  For clients wanting to continue with the existing hourly model, that's still available.  It's your choice which program is best for your needs.
I'm very excited to offer this new service because it means that I'll get to spend more time working on issues that are most important to you, and can become even more of a partner in helping you achieve your goals for your finances and your life.  Clients, please watch your mailbox for a packet providing more details on the service and how to sign up.  If you're not a client and would like more information, please feel free to contact me.
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 with offices in Keller and Dallas, TX.
All newsletter content Copyright ©2010, Keener Financial Planning, LLC.