June 17, 2011Vol 4, Issue 6
DFW Financial Planning

Jean Keener, CFPHappy Friday!


The last month in the market has been rough.  Since my last newsletter on May 16, the S&P 500 is down about 4.7%.  We're still slightly up for the year, but there's a lot of uncertainty about the economic recovery, debt issues, and the end of QE2.  We have seen the benefits of diversification during this period as bond funds held their own.  The Vanguard Total Bond Market Index is actually up close to 1% in the last 30 days and 2.7% for the year.


In this month's newsletter, we have a link to bankrate's guide on how long to keep financial records, some perspective on the debt ceiling debate, and more.  I will be out of the office next week, so this month's personal finance workshop at the library is moved to the 4th Tuesday in June. As always, feel free to e-mail me at jean@keenerfinancial.com with requests for newsletter topics you'd like to see covered or to discuss concerns or questions on anything in the financial world.  Thanks, and Live Well.

In This Issue
How Long to Keep Financial Records
Debt Ceiling Debate
Net Price College Calculators
Veterans Pension
Life and Disability Insurance Workshop
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Quick Links
How Long to Keep Financial Records
Keep financial recordsI am sometimes asked what financial records should be kept and for how long.  No one wants to keep mountains of paperwork longer than necessary, but it's even worse to lack needed documentation when a tax or insurance issue arises.  Bankrate recently published a pretty comprehensive list of which documents to keep, how long to keep them, and why.  Click here to see it.  I hope you find it helpful!
Debt Ceiling Debate

Sometimes it's nice to hear an insider's perspective on a major political issue that also affects our investing and financial lives.  Last month at the NAPFA national conference, David Gergen, who has worked for both Democratic and Republican presidents, offered his take on the ongoing debt ceiling debate.  I found Gergen's perspective informative, and am pleased to share the following synopsis of his remarks by financial writer Bob Veres (used with permission).   


David GergenAccording to Gergen, is it really as bad as it seems?

Gergen told the audience that, despite all the bickering, both sides of the aisle see the current debt crisis through the same basic filter. "People in Washington basically agree on the nature of the problem and its consequences," he said. "which are outlined in the theories proposed by economists Ken Rogoff and Carmen Reinhart."

Rogoff and Reinhart's influential book, entitled "This Time It's Different," looks at various debt, fiscal and economic crises in different countries around the world over a period of several hundred years. Their conclusion is that the most crippling economic scenarios play out over a familiar pattern. First, you have a financial crisis, and the government throws a ton of money to end it. "But then," said Gergen, "you have thrown so many resources at the problem that it moves from a financial to a fiscal crisis, because the government had to borrow so much to stop the financial crisis. And it is how they handle the fiscal crisis that determines their long-term well-being as a country."

The book also outlines some danger zones. If public debt grows larger than 60% of the size of the country's economy, you start to enter a danger zone. "At that point, you really need to deal with the problem or you are moving into deeper water," said Gergen.

If the debt level reaches 100% of GDP, the country moves into the danger zone. Its economic growth rate goes down at least a percentage point, and creditors (think: China) begin to get nervous and demand higher rates on their government bond investments. Borrowing costs go up, adding to the problem, and the lower economic growth rate lowers tax revenues, making it harder to pay down the debt, which and sends the whole situation into another round of still higher borrowing costs and lower economic growth.

Gergen noted that since World War II, U.S. government debt has generally run about 38% of America's Gross Domestic Product--what Rogoff and Reinhardt would call a healthy range. This last year, we reached the 60% level. Under the government's current trajectory, we might hit that 100% level in less than a decade.

Both Republicans and Democrats want to avoid that scenario, which is the good news. The bad news is that they disagree on how to do it. "There are two ways to address the problem," Gergen told the audience. "You can cut spending, or you can raise revenues. Spending is 25% of GDP right now. The Republicans want to get that down to 21%, the Democrats want to cut but not that far, and they both want to cut different things." To make up the difference, the Democratic leadership wants to raise taxes on upper-income Americans; the Republicans want to maintain the current tax rates.

Is there any hope? Gergen noted that a bipartisan committee headed by Republican ex-Senator Alan Simpson and Democratic former White House chief of staff Erskine Bowles has mapped out a way to reduce total government debt by $4 trillion, cutting spending by two dollars for every dollar of tax increases. A so-called Gang of 6 in Congress that included both liberal Democrats and Conservative Republicans was working on an alternative proposal, but that fell apart a week before Gergen spoke. A third group, chaired by Vice President Joe Biden, is still holding meetings.

Overhanging any negotiations, and making them more complicated, is the debt ceiling limit, which will be breached on August 2, throwing the U.S. in technical default on all of its bond obligations. "[U.S. Treasury Secretary Tim] Geithner would like to get this resolved well before August 2, so as not to rattle the markets," Gergen told the audience. "The Wall Street folks are warning the people in Washington not to play with the debt ceiling, that any loss of confidence in the U.S. could be a big deal. Meanwhile, the Republican leadership thinks they'll get a better deal as they approach August 2, and some Republicans think there may not be a problem if the negotiations go past August 2."

The silent party to these negotiations, the general public, seems not to understand the severity of the issue, Gergen said. "In recent polls, 60% of them think we should not raise the debt limit," he told the audience.

In the long run, Gergen said, if Congress manages to address the debt issue responsibly, it could make America stronger. "Otherwise," he said, "it will be very bad news." Because the political risks of taking action that might alienate the public, both Congress and the White House seem to prefer kicking the government debt issue down the road for 18 months, deferring any serious action until after the 2012 elections, which Gergen finds dismaying.

"We're playing right close to the edge on this," he told the group. "This is dangerous stuff for our politicians to be playing with." He described it as one of the most serious issues he has seen in Washington in the last 30-40 years.

Net Price College Calculators

Net Price College CalculatorIn the world of higher education, it's common to hear industry experts say that few students attending college pay full "sticker price," which is the official version of a college's total costs. Yet with nothing else to go on, many students end up basing their college search, and ultimate school selection, on just that--pure sticker price. But this may be about to change.


The Higher Education Act of 2008 requires colleges to install "net price" calculators on their websites by the fall of 2011. "Net price" is what a student actually pays to attend a college, after subtracting merit aid and need-based grant aid from the sticker price. The government's intent in mandating net price calculators is to provide students with a more accurate picture earlier in their college search of what they will likely need to pay at specific colleges based on their own financial and academic circumstances.

The problem

Each year, colleges publish their sticker prices on their websites and written materials. In a typical scenario, a college's sticker price may cause a prospective student (and his or her parents) to cross that college off the list early in the selection process, even though the student may have had a very good chance of receiving merit or need-based grant aid that would have resulted in a much lower net price.


This scenario is likely to play out more frequently as more colleges surpass the $50,000 mark. According to the Chronicle of Higher Education, 100 colleges charged $50,000 or more for tuition, fees, room, and board in 2010/2011. And more colleges will join their ranks next year if costs increase at the typical rate of about 5% per year.

The net price difference

The idea behind net price calculators, which are expected to take about 15 minutes to complete, is to give students information at the beginning of their college search about the merit and need-based aid they are likely to receive from a particular college based on the student's own financial and academic position and the college's specific criteria for awarding grant aid. The intended result is a closer estimate of the true costs of attending a specific college, as compared to the figures provided by a general college cost calculator or the federal government's aid application, the FAFSA, which provides families with their expected family contribution but does not take into account the aid awarding criteria of individual colleges.


In the typical financial aid cycle, high school students don't find out about their net price costs (and out-of-pocket costs) until spring of senior year, when colleges send out their financial aid award letters to accepted students. But by then, it's too late to plan. The hope is that by using a net price calculator much earlier in the process, students can make more informed decisions.


Tip:  "Net price" cost is different than "out-of-pocket" cost. Net price equals sticker price minus merit and need-based grant aid, while out-of-pocket cost equals net price minus work-study and federal student loans.

The calculator source

One final thing to consider: The federal government has created a net price calculator template that colleges can use on their websites to meet the calculator requirement. However, the early buzz from industry experts is that the government's "one-size-fits-all" calculator template doesn't always provide an accurate estimate of net price, especially for colleges that distribute a large amount of scholarships and merit aid. Rather, a calculator that is specifically tailored to a college's own aid awarding and packaging criteria is likely to offer a more accurate net price estimate. So if you run some numbers on a net price calculator, consider asking the college if they developed it or if they are using the federal government's calculator template.

Veterans Pension

Veterans Pension InformationDid you know that honorably discharged veterans who have limited incomes and nonservice related health problems may be eligible for a pension from the Department of Veterans Affairs?


To be eligible for this pension, you must be age 65 or older, or you must be permanently and totally disabled; you must have limited income and assets; and you must have served a minimum of 90 days of active duty with at least one day of active duty during wartime. If you entered active duty after September 7, 1980, you must have served at least 24 months, or the full period for which you were called to active duty.


Your countable income must be below an annual pension limit set by law. This pension limit is higher based on whether you have a spouse and/or dependents. You can reduce your countable income by deducting unreimbursed medical expenses that exceed 5% of the appropriate annual pension limit.


While there's no stated limitation on your net worth in order to qualify for pension benefits, the VA states that net worth can't be excessive. Generally, you may not be eligible for benefits if your net worth is large enough to live on for a reasonable period of time.


Your benefits are calculated by totaling all of your countable income reduced by eligible unreimbursed medical expenses. This figure is subtracted from the appropriate annual pension limit to determine your total annual pension, which is then paid monthly. For example, assume the appropriate annual pension limit is $11,830; you have unreimbursed medical expenses of $1,500 and countable annual income of $8,500. Your countable income ($8,500) is reduced by your unreimbursed medical expenses that exceed 5% of the appropriate annual pension limit ($1,500 - $592 = $908). Your countable income ($8,500 - $908 = $7,592) is then subtracted from the appropriate annual pension limit ($11,830 - $7,592), resulting in an annual pension of $4,238, or $353 per month. Your monthly benefit may be increased if you're eligible for Aid and Attendance or housebound benefits.


Veterans' pension benefits are also available for surviving spouses and children.  For additional information, visit the United States Department of Veterans Affairs website at www.va.gov.

Life and Disability Insurance Workshop
Keller Public Library Free Financial Education SeminarsI am conducting a free workshop on the basics of life and disability insurance on Tuesday, June 28 at 6:30.  Workshops are generally the 3rd Tuesday of the month, but this month's is the 4th Tuesday because of vacation. 

This workshop is designed for individuals in their working years, and will cover: 

  • who needs to consider disability and life insurance
  • different types of insurance
  • how much you need and for how long
  • typical costs
  • ways to get it

Registration is encouraged for planning purposes to library@cityofkeller.com.


Topics for the rest of the year:

  • July: Maximizing social security benefits for baby boomers
  • August: Saving for college in Texas
  • September: Couples and Money
  • October: Maximizing social security benefits for baby boomers
  • November: The Long Term Care Insurance Decision: should you buy it, and if so when, what kind, how much?
  • December: Structuring your retirement income (designed for those in or very near retirement)

Workshops are usually on the 3rd Tuesday of the month at 6:30 pm.  Please mark your calendars and tell your friends about ones that interest you.  The Keller Public Library is located at 640 Johnson Road.

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 jean@keenerfinancial.com.
Jean Keener, CFP, CRPC, CFDS
Keener Financial Planning

Keener Financial Planning is an hourly, as-needed financial planning and investment advisory firm working with individuals at all financial levels.

All newsletter content Copyright 2011, Keener Financial Planning, LLC.