Jill on Money: Savings bonds, lump sum, target date funds
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Paul from Illinois started the show with a question about US savings bonds. The rules on these instruments are a bit thorny, so make sure that you check out this government web site for details about the taxation and transferability of savings bonds, as well as the ability to use proceeds of bonds for qualified education funding expenses.
Speaking of tax planning, Robert wants to know how to keep his $5,120,000 estate tax exemption before the Fiscal Cliff reduces it to $1,000,000 (hint: you can't!)
Jean, Marty, Ellen, Stu and Alex all had allocation questions, which opened up a great conversation about target date funds. Remember that not all of these funds are created equal, so be sure to check out how the manager invests and make sure that the allocation is consistent with your risk tolerance.
As a reminder, here is my portfolio for wimps. Listener Pat asked that I create a slimmed down version of the portfolio for wimps, which is as follows:
Jill's Wimpy Portfolio (slimmed down version):
-- 20% Cash
-- 35% Bond Fund (Vanguard's Intermediate Term Bond Index fund (VFICX), Vanguard Short-Term Investment Grade fund (VFSTX), Vanguard Total Bond Market Index Fund (VBMFX), Schwab Total Bond Market (SWLBX), Fidelity U.S. Bond Index (FBIDX)
-- 15% International Bond Fund T. Rowe Price International Bond Fund (RPIBX)
-- 20% Total Stock Market Index Fund (Fidelity Spartan Total Market Index, Schwab 1000 Index Fund Investor or Vanguard Total Stock Market Index)
-- 10% International Stock Index Fund (Fidelity Spartan International Index (FSIIX), Vanguard Total International Stock Index (VGTSX)
Jason from KY asked a lay-up question: should he use appreciated company stock to pay off high interest credit cards? YES!
Mark from Buffalo, Eileen and Dave are all weighing whether to take a lump sum from an old pension plan vs. an annuity or keeping the money with the old plan. The first step is to determine whether your plan is insured by the Pension Benefit Guaranty Corporation (PBGC.gov). The PBGC is a government agency that pays out benefits promised to private sector workers if their pension plans fail, up to annual limits. For 2012, the maximum guaranteed amount is $4,653.41 per month ($55,840.92 per year) for workers who begin receiving payments from PBGC at age 65. The maximum guarantee is lower if you begin receiving payments from PBGC before age 65 or if your pension includes benefits for a surviving spouse or other beneficiary. The maximum guarantee is higher if you are over age 65 when you begin receiving benefits from PBGC.
From there, you have to analyze and compare the monthly annuity payment offered to what you could generate yourself by investing the lump sum at a similar level of risk. Beyond simple math, you have to take into account your risk tolerance, income from other sources, and your health and the health of your spouse. It's also important to remember that a lump sum allows more flexibility over time and of course, annuities are very expensive.
Speaking of expensive annuities, Austin, who is 80 years old, should probably avoid purchasing an annuity, even if his monthly payment would be more than the current CD interest he is receiving and Jeff from Taiwan should encourage his parents to avoid rolling over old tax sheltered annuities into new annuity contracts and instead should move into a Rollover IRA at a no-load mutual fund company.
Here are web sites and resources mentioned in this week's show:
-- NAPFA: National Association of Personal Financial Advisors (fee-only advisors)
Thanks to everyone who participated and to Mark, the BEST producer in the world. If you have a financial question, there are lots of ways to contact us:
Call 855-411-JILL and we'll schedule time to get you on the show LIVE
Send an email: firstname.lastname@example.org
Tweet me: @jillonmoney
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