Money Lessons -- You Don't Want to Learn These the Hard Way (bankrate.com)

8 personal finance lessons you must master by age 40

By Jennie L. Phipps • Bankrate.com

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8 money lessons to learn by age 40

If you've hit 40 and managed to avert a midlife crisis -- congratulations. That sporty red convertible at the dealer showroom can wait if you want to be smart about money management.

Bankrate offers 8 personal finance lessons that everyone should know by age 40. Young precocious adults who adopt these lessons early will not be sorry, and late learners still have time to catch up. Read on to learn the important financial facts of life.

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Money is freedom

Figure out your net worth and, after you get over the shock, have a recovery plan. You don't have to be wealthy, but you do have to have enough that you aren't a slave to the shortfall.

"After getting on a budget, a lot of people feel like they've gotten a raise even though their income hasn't changed," says Dave Ramsey, a Tennessee-based financial adviser and media personality, who bases his approach on mistakes he personally made.

Ramsey offers no-brainer personal finance lessons that most people can follow: "Do a written budget every month before the month begins. Give every dollar of income a name so you know where it is going. Include a line for how much you want to save each month. Then, stick to the plan."

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No relationship is perfect

Working it out is usually cheaper than calling it quits. Even after the relationship is long over, getting along with your ex is cheaper than fighting over the kids or whether or not both spouses are paying their share.

"Divorce isn't good for your pocketbook. It is a long, messy and expensive process," says Jay Zagorsky, a research scientist at The Ohio State University who has studied the cost of divorce for nearly 20 years.

His research demonstrated that on average, divorce drops a person's wealth overall by 77%. "Wealth starts declining well before the final decree, and after divorce, people don't suddenly start with a clean slate," he says.

In other words, it's cheaper to keep her (or him).

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You can't buy security

Insurance can help, but it wasn't meant to pay routine costs. Its purpose is to cover devastating financial losses.

"Many people tend to purchase coverage with low deductibles, which can be costly. Because states have low liability limits, people think they should start there. But for most individuals, those limits are woefully inadequate, so they end up paying a lot for insurance that doesn't cover enough," says Robert Hoyt, who heads the Risk Management and Insurance Program at the University of Georgia.

Someone with lots to lose -- a home, a car and future income -- is better off picking a plan with high deductibles, he says, and planning only to claim when there is a devastating loss that the insured can't pay for otherwise. In other words, you collect when the house burns down or the car is totaled or the accident causes major injury.

"Assess what you can afford with high limits of loss and then add a personal umbrella, which can be cost-effective and provide protection if you are faced with tens of thousands (of dollars) in losses," Hoyt advises.

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Credit is a tool

Becoming an expert at using credit will improve your life.

At this stage, you're likely dealing with a mortgage, car loans and children entering college. "A healthy credit score is vitally important to you," says Bruce McClary, vice president of public relations and communications for the nonprofit National Foundation for Credit Counseling.

If you examine your credit score and you don't like what you see, chances are you haven't paid your bills on time. "Paying on time counts for about one-third of your score," McClary says.

Committing to paying everything on time is the obvious solution to this problem.

It also pays to check your credit report carefully for credit killers, such as identity theft or inaccurate reports. "There are a lot of those problems out there," McClary says.

Check your credit report for free at myBankrate.

Finally, at your age, you ought to be working to pay off debt and keep balances low, he says. "Focus on power-paying those balances and getting rid of them as fast as possible."

This will give you more credit flexibility if you really need to borrow because you have a health emergency, want to start a business or need to replace the roof. "A solid-gold credit score will make borrowing for any of these easier," McClary says.

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Keeping up with the Joneses is a no-win

As humorist Will Rogers is credited for saying: "Too many people spend money they haven't earned to buy things they don't want to impress people that they don't like."

Envy was one of the "7 deadly sins" and a route to hell, says Susan Matt, chair of the history department at Weber State University in Ogden, Utah, and the author of "Keeping Up With the Joneses: Envy in American Consumer Society, 1890-1930."

"Yesterday, envy was a sin; today, it is one of the fundamentals of our consumer-driven society," she says.

"People think the sky is the limit. When they get what they want, they want the next step up. People have never-ending desires, and they are never satisfied."

Is that bad? "It keeps our economy moving," she says. "But I don't think it makes people any happier."

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You can count on uncertainty

Trust us: Jobs don't last forever, and neither does excellent health.

The best hedge against poor health, job loss or other unforeseen setbacks is a financial plan that will help you navigate the shoals until you get back on your feet, says Chris Hogan, author of "Retire Inspired" and a popular speaker about personal finance issues.

"The definition of insanity is doing the same thing over and over and expecting a different result," Hogan says. "If you don't have a plan, you keep doing more of the same, and you never have anything to show for it."

To get around this conundrum, "you have to have an awareness of where you are now, an understanding of what it will take to get there and the determination to work your plan," Hogan says.

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Everybody needs an ace in the hole

You need a financial plan B that doesn't count on another person -- not even the love of your life. It's not disloyal to figure out an answer to the question, "How will I support myself if X happens?" whether X is divorce, death, disability or something else.

"'Everybody Loves Raymond' explained it best,'" says Cindy Hounsell, president of the Women's Institute for a Secure Retirement, or WISER.

Here's the exchange on the TV episode that she's referring to:

Debra: Ray and I were talking about wills, and he doesn't want to make one.

Robert: Oh, why not?

Debra: He thinks it's going to tempt fate.

Robert: No, no, silly. If you don't have a will, you're tempting fate. "I don't need a will. I'm gonna live forever." Manhole!

Ray: I don't know.

Robert: Raymond, listen to me. You need to have a will and eat a fibrous breakfast every morning and nothing can touch you.

Hounsell isn't so sure about the fibrous breakfast, but she thinks the will part is right, along with savings and insurance. "Anybody who is dependent on somebody else to make ends meet -- or even if you just depend on yourself -- you need a plan for what you're going to do when that goes away," she says.

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Working forever isn't a retirement plan

You just can't work forever.

Author Chris Hogan says, "I have a friend who was diagnosed at 48 with early onset Alzheimer's. He knows life has changed, but he can't do anything about it. When people say to me, 'I love what I do and I plan to work forever,' I tell them about my friend and ask them, 'What are you going to do if your mind or your body won't allow you to keep working?"'

Having a retirement savings plan is key. "The earlier you start, the longer your money works for you and the greater your chance of amassing a nice nest egg. It's a snowball effect. You start small and it builds," says Brian Hogan, director of small-business retirement products for Fidelity.

Or as Chris Hogan says, "It is never too early or too late to start saving."

Social Security Basic Facts (bankrate.com)

RETIREMENT

How Social Security works: Nuts and bolts of the benefits program

By Marilyn Bowden • Bankrate.com

How Social Security works

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How Social Security works

In 1935, in the midst of the Great Depression, President Franklin D. Roosevelt signed the Social Security Act, creating an insurance program to protect American workers from dire poverty in old age. It has since become a significant thread in the fabric of the national economy. In 2015, more than 59 million Americans -- or about 18.3% of the population -- received close to $870 billion in Social Security benefits.

Over time, amendments to that original act expanded Social Security to include benefits for disabled workers as well as dependents and survivors of the insured. Later, in 1965, Medicare health insurance for older Americans was added to the package.

In spite of these changes, however, the way Social Security works has remained fundamentally consistent throughout its history.

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Where does the money come from?

The funds tapped for Social Security benefits come from 3 sources. These are:

1. Payroll taxes;
2. Interest on 2 trust funds (one for Old-Age and Survivors Insurance, the other for Disability Insurance);
3. Income taxes from Social Security recipients whose incomes exceed a certain threshold.

The lion's share -- about 85% -- is drawn from payroll taxes.

In any given year, these taxes were originally calculated to cover prevailing needs, but in 1983, Congress raised them in anticipation of a considerable rise in expenditures once the baby boomer generation reached retirement.

Currently, 6.2% of earnings are deducted from an employee's paycheck for Old Age, Survivors and Disability Insurance, up to the maximum taxable income for this purpose of $118,500. Everyone, regardless of income, is assessed an additional 1.45% to cover Medicare insurance. Employers must match the amounts deducted.

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How does the government use these payroll taxes?

The money earmarked for Social Security cannot be used to cover other government expenses until all Social Security expenses have been met, according to the U.S. Government Accountability Office. However, whenever Social Security taxes exceed the amount needed to meet expenditures, the surplus goes into the U.S. Treasury's General Fund, where it is used to reduce the overall federal deficit.

The money is exchanged for special issue, non-tradable Treasury bonds, with the interest from the bonds accruing to the 2 trust funds. The bonds are redeemable whenever Social Security revenues fall short of expenditures.

This practice gives rise to the common perception that the government raids Social Security to fund other programs. But according to the U.S. Treasury, it's in line with the government's unified budget concept, which allows the flow of funds from one program to be applied to another as needed. Without that measure, it's argued that Congress would have to raise taxes, cut payout amounts or borrow from the public.

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Does everybody have to pay FICA taxes?

Nearly everyone working in the U.S. must pay Social Security and Medicare taxes, though there are a few exceptions.

These include federal employees hired before 1984, although since 1983 they have had to pay the Medicare portion and are therefore eligible for hospital insurance. Other groups exempted from payroll taxes are railroad employees with more than 10 years of service, employees of those state and local governments who choose not to participate in Social Security, and children under the age of 21 who are paid by a parent for doing household chores. Children over 18 years of age who work in a family business are not exempt from Social Security payroll taxes.

Some wage earners who are eligible for Social Security need to follow special rules in order to be compliant -- for example, the self-employed, military personnel, domestic workers, farm workers and people who work for a church or church-controlled organization that does not pay Social Security taxes.

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Is everyone who pays FICA taxes eligible for benefits?

In general, workers must accumulate a minimum of 40 work credits -- the equivalent of 10 years of paid labor -- to be able to collect retirement benefits. In 2016, you must earn at least $1,260 to get 1 credit, up to a maximum of 4 credits each year.

Qualifying for disability benefits also works on a credit system, but the rules are different depending on the age of a worker when he or she becomes disabled. For example, someone whose disability began before age 24 can qualify for benefits with 6 credits earned over the previous 3 years. Someone over 62, however, must earn 40 credits, at least 20 of them in the 10 years before becoming disabled.

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What is COLA and how is it calculated?

COLA is an acronym for the Social Security Administration's cost-of-living adjustment. For many years, the payments were static. Then in 1950, Congress approved an increase for the first time, and for the next 25 years, raises required an act of Congress. In 1975, annual adjustments became automatic. They're based on the percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers as computed by the federal Bureau of Labor Statistics.

In 2010, 2011 and again this year, there was no cost-of-living adjustment, since there was no increase in the consumer price index used to determine automatic annual hikes. Monthly Social Security benefits remained stagnant.

Proposals currently under consideration suggest tying Social Security's COLA to other measures of inflation. One idea is to use the Bureau of Labor Statistics' Chained CPI for All Urban Consumers. Proponents say it's a more accurate measure of consumer behavior when prices fluctuate. This would likely result in lower COLAs.

Some proposals advocate using other measures of inflation based on the purchasing patterns of the elderly. Since older people are more vulnerable to fluctuations in health care costs, which go up more rapidly than other consumer goods, this would tend to increase monthly Social Security benefits.

GET GOING! INVESTING FOR THE NEW YEAR (Bankrate.com)

10 top tips to beat investing inertia

Dr. Don Taylor, Ph.D., CFA, CFP, CASL

BANKRATE — 8:12 PM ET 12/24/14

This is my 16th year of writing a "Top 10" column to get you thinking about improving your finances in the upcoming year. May you benefit in 2015 from these investing tips.

1. Figure out what you're trying to reach

I encourage people to figure out what their goals are in life, and then work on a financial plan that will help them achieve those goals. However, goals that aren't well-defined -- like "I want a comfortable retirement" or "I want to save for my children's education" -- don't have numbers behind them, and that makes them harder to achieve.

I often see people financing goals they should have invested for, especially when it comes to their children's college education. With some exceptions, such as financing a mortgage, I'd rather see you earn a yield on your investments than pay a rate on a loan.

2. Insure, save, invest

Investing isn't the first step in providing for you and your family's future. Insurance is that first step. Between life insurance, health insurance, disability insurance, home, auto, liability insurance and long-term care insurance, evaluating and meeting your needs for insurance is an important first step before starting to save and invest for your future.

Financial professionals tend to differentiate between saving and investing. With saving, protecting principal is more important than increasing purchasing power. With investing, the emphasis is on building wealth and increasing purchasing power. An emergency fund, with its role of providing liquidity in times of financial need, is the place for savings. Retirement accounts, at least while you're still working, are the place to invest. Consumers with low risk tolerances tend to save money they would be better off investing.

3. Have an emergency fund

Too many people live paycheck to paycheck. They can't handle any financial setbacks in their lives. Some expect their credit cards to see them through the tough times, only to find themselves trying to dig out from under a mountain of credit card debt that may be growing at 23.99 percent interest.

As you start to build wealth in your investment portfolio, the portfolio can act as a financial backstop for at least part of the funds available in an emergency. Until then, it makes sense to have three to six months' worth of living expenses in a high-yield savings account or other liquid investment available to meet an unexpected financial need.

4. Know your income and outflow

Whether you want to do a forensic accounting of how you spent money in 2014 or decide to track spending with a financial app on your smartphone in 2015, the idea is to keep track of how you spend your income and figure out where the money goes.

While you're doing that, put together a spending plan and stick to it. I call it a spending plan instead of a budget, because like a diet, no one likes to be on a budget. Call it "planned spending" and it puts a positive spin on allocating your income to your need for current consumption, savings and investment. That's right; your spending plan should include line items for saving and investing.

I'm not a member of the "lose the latte" branch of financial planning. As long as you're not financing that latte by carrying credit card balances and you are meeting your savings and investment goals, enjoy your coffee. There's a lifestyle balance between current spending and saving for your future. All delayed gratification takes the fun out of today. Of course, if a cup of fancy coffee is the highlight of your day, you've got other things to work on besides your finances.

5. Invest in your health

What's health got to do with investing? Well, as my junior high school health teacher, Mr. Andrew Codispoti, always told his students, "health is wealth. All the money in the world can't buy health." OK, the poet Virgil said it first and better: "The greatest wealth is health." Invest in your health and the return on investment might amaze you.

6. Retirement income needs

Don't get confused into thinking that the 401(k) and IRA contribution limits, even with catch-up contributions for those 50 and older, were set by the government to ensure that you can retire comfortably. You're probably not saving enough.

Retirees wind up putting together a retirement income stream from retirement savings, Social Security and pension benefits. Pension benefits are getting rare in the private sector. Try to estimate your retirement income needs, and then work out a plan as to how you will meet those needs. Don't go ostrich on the topic; work with a financial professional if you need help coming up with a target for your retirement nest egg.

7. Maximize expected Social Security benefits

Too many seniors are in a rush to file for Social Security benefits. File before your full retirement age and there's a big reduction in benefits. For senior couples that can make it work, the higher wage earner can "file and suspend" at his or her full retirement age, earning delayed retirement credits up until age 70, while the lower wage earner files for a spousal benefit at his or her full retirement age.

When in doubt on the benefit claiming strategy that will maximize your Social Security benefits, hire a professional to review the different claiming strategies.

8. Maximize your employer's contributions to your retirement

If your employer matches any part of your contribution to their 401(k) or 403(b) plan, make sure you contribute up to the limits of the employer match. That's free money and you don't want to leave any free money on the table.

The typical plan will match 50 cents to every dollar you contribute up to 6 percent of salary. That has your employer contributing 3 percent of salary. You've made 50 percent on your money before even deciding how you're going to invest it.

9. Review and rebalance your portfolio

Over time, you'll see your asset allocations change as the investments you own go up and down in value. Reviewing your portfolio holdings lets you see if you've gotten overweight or underweight in your target asset allocation.

Portfolio rebalancing has you buying and selling investments to get your asset allocations back to your target levels or ranges. Buying and selling in tax-advantaged retirement accounts typically won't have a tax impact, while buying and selling in taxable accounts does have an impact on your taxes.

If you're working with an investment professional, you should know his or her approach to rebalancing. If you're doing it yourself, weigh your investment horizon against your risk tolerance and whether you're adding new money to the portfolio to decide on the frequency or timing of your portfolio rebalancing.

10. Track investment fees and expenses

Knowing what you're paying for in fees and expenses when investing is an important move. Managing those fees and expenses is just as important. Whether your investments are in a tax-advantaged retirement account or a taxable brokerage account, by knowing what you're paying, you can make better decisions about how you're invested, reducing the drag on your investment returns net of fees. The Department of Labor's "A look at 401(k) Plan Fees" Web page is a good place to learn about fees in that type of retirement account.

If you're working with a financial services professional, you should know how they're paid. There are several different compensation models including hourly fees, assets under management, commission-based models or a flat fee for a specific financial plan or service.

© Copyright 2014 Bankrate, Inc. All rights reserved

How to Get Started with Estate Planning (from New York Life)

Introduction to Estate Planning

There is a widespread misconception that "estate planning" is of importance only to the wealthy. This is due, in part, to the emphasis of the financial service industry on planning for estate taxes, which only concern larger estate owners. This tutorial, above all, should help you recognize a number of other significant issues that deserve everyone's attention. Other tutorials explore the legal concepts and procedures, as well as the tools and methods of estate planning, probate, wills, and trusts.

What Is Estate Planning?
Although one's "estate" is adequately defined as his or her property, there is no precise definition of estate planning. Your estate plan can be viewed as a series of steps to be taken so that, after you die, your property will be handled in a way that recognizes your values and wishes regarding your survivors and any charitable interests you may have. When people start thinking about these things, some important lifetime concerns often come to mind, too, such as preparing for possible physical or mental disability. So, those issues are frequently addressed as well when one plans his or her estate.

Where to start? The prospect of estate planning can be intimidating because there is usually no single clear answer to that question-there can be so many interrelated human and financial factors to consider. Perhaps your thinking should focus on these two questions:

First, if you died tomorrow, what would you want to happen?
Second, what, most likely, actually would happen?

A good estate plan is designed to bring reality in line with your desires to the greatest extent possible, given the practical problems and limitations you face. The steps in the plan may include candid family discussions, drafting a will and trust, changing the beneficiary designations on some accounts, buying life insurance, etc. As for "problems," experience shows that the most common ones are insufficient money to fund all of one's goals, and survivors who do not act as hoped or expected.

The most important element of an estate plan is giving it the thought it deserves. Taken step by step, the process is not nearly as daunting as many people fear.


Assessing the Need for an Estate Plan: What Would Happen if You Died Tomorrow?

The answer to that big question is a composite of your responses to a range of smaller questions. Mull over the following questions, and if the answers or implications are not clear, or if they trouble you, make a note of them-a real note, not just a mental one. You will then have a list of issues on which to focus, and the simple act of writing things down will be invaluable in clarifying the thought process. Many people who have been uneasy for years thinking about this find it improves their peace of mind just to make themselves spell out exactly what bothers them.

Look over this list. Of course, not all questions will be pertinent to everyone.

Would there be mistrust, uncertainty, and bickering among your survivors in deciding how to handle your property and wrap up your affairs? Is there anybody who, if not prevented, might actually take your property or funds without authority?
Do you have a will that reflects your current wishes? If so, is all your property actually subject to probate court and the terms of the will-or is it instead set up to pass another way at death, e.g., through a beneficiary designation form, as with a 401(k) account, or to a co-owner, as with a joint savings or checking account?
If you do have property subject to probate (e.g., furniture, a house, or an account in your name alone), but do not have a will, what does your state's law of intestacy say about who takes property after a person's death?
What are the needs, abilities, and weaknesses of your survivors, especially your spouse and children, if any?
Are your survivors responsible individuals, capable of managing and using an inheritance wisely if they receive it outright? Or will they need protection from their own youth, financial inexperience, or bad habits? What about the influence of others? Would your bequest to a child need protection from his or her spouse or creditors?
If your current spouse is not the parent of your children, how—and when—will your estate be divided among them?
What kinds of property do you own, e.g., real estate, mutual funds, a family business, etc.? Can your property get along without your active management, at least for a while? How much of it could be converted to cash easily and quickly, if necessary, at reasonably good prices?
Is the net worth of all your property—or of the combined property of you and your spouse—more than the amount at which the federal estate tax begins to bite and tax planning is called for ?
What are your responsibilities to your survivors? Would you be leaving young children and the surviving parent, for example, with sufficient assets to maintain the family's standard of living? Or, in contrast, do you have grown children with good jobs, and a spouse with his or her own adequate retirement plan account?
If your children are under age eighteen, have you found a suitable guardian for them in case their other parent also dies?
Do you have a disabled child or family member who must be provided for separately, for life?
If you have an IRA or retirement plan account, have you selected the appropriate beneficiary and distribution options?


When people get around to reflecting upon these kinds of questions, problematic scenarios and "what if"s often come to mind. It is then that the need for an estate plan typically becomes apparent. Recognizing that need is the all-important first planning step. Unless your situation is very simple, the second step may be to consult with a qualified estate planning attorney.

Assessing the Need for an Estate Plan: What Would You Want to Happen if You Died Tomorrow?

What would you want to happen if you died tomorrow?

The more immediate issue may be what you do NOT want to happen.

If you have made a troubling realization or two after considering the above question, the more immediate issue may be what you do not want to happen. The top priorities are probably the potential situation you have identified and how to correct it. Frequently, an easy solution will suggest itself simply by you thinking through the problem. (If not, be smart and see an attorney experienced in estate planning. He or she has most likely dealt with many situations much like yours.)

Some peoples' values, wishes, and survivors' needs, however, really are very simple. So, too, should be their estate plans—perhaps just a two-page will saying, for example, "Everything to my three children, in equal shares." Other people have various contingencies for which to plan. Some form of charitable contribution—during life or at death—may be part of their plans. There may be a need for life insurance. Many want to keep one or more "strings attached" to payments made to their chosen beneficiaries. These strings come in infinite varieties, but almost always, keeping strings attached requires a trust.

A trust document can be drafted to set forth a personalized combination of specific instructions, with or without discretionary judgments allowed to your trustee, so that money is given to whom you want, when, and for the purposes you specify. This cannot be done with a will alone. A practical example of this point is the use of a trust by parents, in case they both die prematurely, to avoid the immediate distribution of assets to their children upon turning eighteen.

The first step in designing it properly is a realistic assessment of where you currently stand.


What Would You Want To Happen, If You Died Tomorrow?

If you have made a troubling realization or two after considering the above questions, the more immediate issue might be what you do not want to happen. The top priority is probably the potential situation you have identified, and how to correct it. Frequently, an easy solution will suggest itself, simply as a result of thinking through the problem. (If not, be smart and see an attorney experienced in estate planning. He or she has most likely dealt with many situations much like yours.)

Some peoples' values, wishes and survivors' needs, however, really are very simple. So, too, should be their estate plans - perhaps just a two page will saying, for example, "Everything to my three children, in equal shares." Other people have various contingencies to plan for. Some form of charitable contribution - during life or at death - might be part of their plans. There might be a need for life insurance. Many want to keep one or more "strings attached" to payments made to their chosen beneficiaries. These "strings" come in infinite varieties, but almost always, keeping strings attached requires a trust. (Trusts are examined in detail in other tutorials.)

A trust document can be drafted to set forth a personalized combination of specific instructions, with or without discretionary judgments allowed to your trustee, so that money is given to whom you want, when, and for the purposes you specify. This cannot be done with a will alone. A practical example of this point is the use of a trust by parents, in case they both die prematurely, to avoid the immediate distribution of assets to their kids, upon turning eighteen.


The Anatomy of a Simple Will, and Why You May Need One

Everyone should have a will. Even people of modest means should at least have a simple will, for two reasons:

To name an executor (sometimes also referred to as a "personal representative") to wrap up their affairs, and

To specify "who gets what" from their property, to avoid family squabbles.
In the absence of a will, the state law of intestacy determines how the decedent's (the deceased person's) property is to be distributed. In many situations, the law dictates exactly what the decedent would have wanted anyway if he or she had taken time to write a will. But many times the law does just the opposite.

Too often, one mistakenly thinks that one's heirs know what they are "supposed" to do, know what they're to get, or will act appropriately. Family squabbles regularly occur because siblings cannot agree on how to distribute mom's candlesticks, ashtrays, or microwave oven. When big-ticket items are involved, things can get bitter and ugly. A will, therefore, should be used to either name a particular person to receive each item of property or to set out a procedure for making the distribution, e.g., alternating selections by the two children, beginning with a coin flip.

Although some states include a form for a simple will in their statute books, there is no particular format required. The design of the document is usually straightforward, even if the language used by lawyers is a bit stilted. The text generally runs 2–5 pages. Keeping in mind that such a "simple" will may not be what you need at all, look over this description of a typical simple will structure just for reference purposes:

A paragraph stating that the will-maker is of sound mind and intends this document to be his or her "last will and testament."
A paragraph naming the executor—there should be an alternate, too.
Nomination of guardians for any minor children in the event both parents die prematurely. A guardian should be named for the person and for the property of each child. (These roles can be filled by the same person.) Note that whoever is nominated still must be approved and appointed by the court.
A provision that the executor first pay all the decedent's debts and taxes.
Specific bequests—if any—to named individuals, e.g., "Daughter Sally gets my wedding ring; daughter Jane gets my gold necklace."
Disposition of the remainder (residue) of property, which consists of everything that remains after taxes, bills, and bequests.
Married people with children often write wills that are "mirror images" of each other: "If I die first, everything goes to my spouse. If my spouse has already died, I give everything to my children, in equal shares, per stripes." Wills of this type are sometimes referred to as "I love you" wills.

The will can set out an alternating selection process, to be supervised by the executor. If no procedure is specified, it is the executor's job to conduct the property distribution as he or she sees fit—as long as it is completely fair to all beneficiaries. Too often, the executor is an adult child who is also a beneficiary and who abuses the position by giving himself or herself preference in some way. This is strictly prohibited by law, but it is the basis of many probate horror stories.

The "pay all my debts and taxes" clause seems straightforward, but it frequently leads to an unsuspected problem: since many transfers of property at death take place completely outside the probate system (e.g., joint property, retirement accounts, life insurance, etc.), this clause sometimes results in one beneficiary being singled out for these expenses. The decedent's "debts and taxes" all must come out of the "hide" of the beneficiary (e.g., a child) who inherits probate property, while other property, which may pass outside of probate to another child, is free and clear. This is one of many scenarios that make it wise at least to consult an attorney about your will.

People find that preparing a will provides great peace of mind, but they often fear that preparing one is complex. A simple will, however, is often merely a structured list of straightforward tasks designed to wrap up their affairs.


Choosing the Right Personal Representative (Executor and Trustee) for Your Estate

Choosing a personal representative may be the most important estate planning decision of all if you want to maximize the likelihood that your wishes get followed.

Personal representative is a generic term, referring to the executor named in a will or a trustee who is named in a trust to carry out its terms.

In most cases, your personal representative is going to have—by necessity—extensive or total access to your property.

An administrator is also a personal representative and is court-appointed to perform the executor's duties when a decedent has no will. Unfortunately, the person appointed may be a family member whom the decedent would not have wanted. Alternatively, the court may find it appropriate to choose a neutral third party—usually a lawyer—to serve as administrator. In the latter case, the estate is responsible for paying the administrator an hourly fee for all services performed.

Any of these personal representative roles can be filled by an institution, such as a bank, as well as by an individual. Obviously, however, whoever serves should be capable of doing the job, and this is a matter that often deserves much more thought than it is given. In many cases, relations among the surviving family are harmonious, there is little to be done, and everything works smoothly—no matter who is running the show.

When disputes arise or there is bickering, however, family diplomacy may be called for. Remember that some of us are better at this than others. Occasionally, on the other hand, someone must be ready, willing, and authorized to lay down the law and get things done. The selection of this person (or institution) should not be left to chance; he or she should be named by the decedent in a will or trust.

In most cases, your personal representative is going to have—by necessity—extensive or total access to your property. Very bluntly, a trustee, executor, or administrator is in a position to rob you (or your heirs) blind or to ruin your plan through inaction if somebody else acts improperly. Indeed, misconduct is probably the most common factor in estate and probate horror stories.

Of course, objections or complaints can be filed in court. But these can be difficult moves, and they are made after the damage is at least partially done. There is no close court supervision to prevent the misconduct. Therefore, you should not move forward with any plan unless you feel comfortable with the person or institution you have chosen.

The role of personal representative is crucial. Be sure to give ample thought to your choice of executor and/or trustee.

Do You Need an Attorney to Help You with Estate Planning?

Many people engage attorneys to help articulate and implement your plans, including the drafting of appropriate documents. In almost all cases, it is a good idea at least to consult with a lawyer at some point, even if only to review the plan and documents you might have prepared for yourself to be sure they comply with the laws of the state in which you live.

Most people do not know exactly how to put into legal effect the general desires that seem so very clear and uncomplicated in their own minds. Often, when laymen draft legal documents, they employ language that might, indeed, be clear to them, but ambiguous to others. Unfortunately, people tend to ignore (or be unaware of) limitations in their knowledge, and make financial and estate planning decisions in spite of it. Experience shows that many bitter moments occur in the probate courtroom, between members of the same family, engaged in a battle that could have been avoided with a little help.

This is not to say that all "do-it-yourselfers" are doomed to failure, especially if their situations are truly uncomplicated. Often, however, they fail to consider better options, tax pitfalls, related issues, etc. This, as opposed to total disaster, is the more likely danger to the "do-it-yourselfer," and the consequences vary from barely significant to very much so.

Will and trust preparation software can, in many but by no means all situations, produce quite adequate results. This type of software, however, often does not fully deal with particular details, contingencies, and very specific issues that may be important to a given family. If your circumstances have any kind of "twist" to them—and most people's do—there is no good substitute for individualized, professional guidance. Some people use will or trust software just to learn what these documents look like and to "get something on paper" before consulting a lawyer. This is an excellent idea, and these products offer quite a few educational tips and help screens.

The person who makes the estate plan is never there to see how well it works. Everything that can be done needs to be done—correctly—before death. While an attorney is not absolutely required for a good result in every case, using one is the best way to ensure that your plan is the very best possible for your circumstances.


Summary of Estate Planning

Keep in mind that estate planning should not occur in a vacuum. It should be seen as but one step in a process of comprehensive financial planning. This should include risk management and insurance of several types, as well as investment and retirement planning. As with any lifetime planning, merely having an estate plan is not enough to ensure it will work. Indeed, it is likely to fail if your financial and other personal affairs are not properly arranged at the time of your death.

Copyright (c) 2009, Precision Information, LLC. All Rights Reserved


This material is for informational purposes only. Neither New York Life Insurance Company nor its agents render tax, legal or accounting advice. Please consult your professional advisors regarding your particular situation before determining any appropriate course of action.

EOE M/F/D/V
Last updated date Mar. 25, 2010

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What to Look for in A Disability Policy (Ken Dolan)

The Importance of a Disability Insurance Policy
by Ken Dolan October 6, 2009 10:34 AM
Posted in: Insurance


You bought life insurance to take care of your family should something happen to you. That's great. But is your family protected if you become disabled and can't work? Could you and your family still pay the bills if you didn't get a paycheck for a few weeks, months or even years? It's a question we all have to face, because between the ages of 35 and 65 we have a far greater chance of becoming disabled than dying.
Ask your employer's benefits officer if you have a disability plan at work. If you do have disability insurance through work, ask your employer how long your company will continue paying your regular paycheck if you become disabled, what percentage of your salary your disability plan pays while you're laid up, and how long you have to wait for the benefits to start. Using this information, you can decide if your employer's policy is adequate, or if you need to buy additional coverage.

First, add your sick pay and any other income (spouse's salary, investment income, etc.) to your emergency savings, then divide that total by the amount of your monthly expenses. This will tell you how long you can wait for your employer's disability benefits to kick in.

Our hope is that you have enough "rainy day" money tucked away that you can get through this waiting period on your own. If you don't have emergency savings and think it will take you some time to build up enough funds to get through a waiting period, consider buying a disability policy to bridge the gap.

If you already have disability insurance through work, the only other reason you may need additional coverage is to make up for an income shortfall. For example, if your employer's plan pays 60% of your current salary and you can't get by on that, you could make up some of that missing income with your own policy. Keep in mind, however, that the most income you'll be able to replace through all sources of disability income combined is 80% of your salary. So, if you have disability insurance through your employer that pays you 60% of your current salary, you could only cover another 20% of your salary through an individual policy.

If you don't have disability insurance through your employer, you should consider buying a policy of your own. You can buy an individual policy from any top insurance company. You should also check with any professional organizations you belong to - they may offer quite a savings on policies.

Top Features of a Good Disability Policy

Here are the key features of a top-notch disability policy that will protect you and your family without draining your wallet:

1. A waiting period that works for you. The waiting period is the amount of time you must be disabled before you can begin to collect benefits. Waiting periods range from 30 days to one year. The longer you can wait, the lower your premiums. For example, you can cut your premiums by about 20% if you can wait two months for your policy to kick in...90 days is even better!

2. A benefit period to age 65. The benefit period is the length of time that you'll receive benefits. You can save up to 75% with a policy with benefits to age 65 instead of lifetime coverage.

3. Re-insurability. The insurance company should not be able to cancel your policy for any reason except failure to pay the premium.

4. Waiver of premium. After a certain period of disability, say 90 days, you should be excused from paying the premium. This waiver is standard in most policies.

5. Coverage for a disability caused by accident OR illness.

6. Residual disability protection. This rider lets you receive partial benefits if you are partially disabled. Be sure your policy would pay you a percentage of your benefits based on the amount of income you have lost.

7. Coverage if you can't return to your chosen job. A good insurance policy will include this coverage at no extra cost. An "any occupation" policy means your insurance company can refuse to pay you any benefits if you're still capable of performing any job. For example, if you're a nurse, and then have an accident, your insurance company may refuse to pay you benefits because you could still get a job flipping burgers.

8. Recurrence: If the same disability recurs within a certain period of time, such as 6 months, you shouldn't have to go through a waiting period again before benefits start. As you grow older and your assets grow, your needs will change, so reassess your disability needs every few years.

Your Safety Net: Disability Insurance (from WSJ)

Just in Case: The Skinny on Buying Disability Insurance

By ANNA WILDE MATHEWS
Disability-insurance benefits from the workplace and the government are getting harder to come by—and that's putting more pressure on consumers to purchase their own coverage in case a medical condition keeps them from working.

But disability insurance can be confusing. Policies may include conditions that make it tough for people filing claims to actually qualify for the benefits. And some policies may limit payouts for certain diagnoses, particularly mental illness. To protect themselves, consumers considering buying disability coverage need to read the fine print.

The percentage of companies that paid all or part of the cost of workers' private long-term disability insurance fell to 48% last year, from 59% in 2002, according to LIMRA, an association of financial-services and insurance companies. Many employers are "taking a step back in terms of what they pay and putting the onus on employees" to purchase richer benefits if they choose, says Michael Bailey, a principal at Mercer, a consulting unit of Marsh & McLennan Cos.

Vetting a Policy
If you are thinking about purchasing disability coverage, here are some things to check:

Details of what it pays: If it's a percentage of your income, does that include just your base salary, or other things like commissions?Portability: If it's being purchased through your employer, can you keep it if you leave?What triggers the benefit: Do you have to be unable to do any job comparable to your own?Limits on payouts: For long-term policies, are benefits for certain conditions, like mental illness, capped?

Here are some online sources of information:

Social Security Administration: www.socialsecurity.gov/pubs/10029.html
Council for Disability Awareness: www.disabilitycanhappen.org
Consumer Federation of America: Go to www.consumerfed.org, click on Publications, then Brochures, and scroll down.

At the same time, disability claims are pouring in to the Social Security Administration, and that's resulting in bigger backlogs. The agency expects claims to jump to 3.3 million in the current fiscal year, ending Sept. 30, from 2.6 million two years earlier. That's led to a greater number of cases pending—about 794,000 this month, up from about 557,000 in late 2008.

"With the number of cases rising and the number of claims awaiting a decision," the waiting time for claims to be processed could tick upward, an agency spokesman said. He attributed the increase in claims largely to out-of-work people scrambling to make up for lost income.

What that means is that consumers should understand what benefits they might currently be able to access, and consider purchasing additional coverage to make up any shortfall.

Government Safety Net
Start by understanding what the government can provide. Social Security is only available to those with a condition that is either expected to leave them unable to work for at least a year, or is terminal. For those who do qualify—around 36% on average on the first application, though more win benefits after appealing—the payout averages just 40% of their predisability income. For high earners, the share will be smaller.

Tom Klett, a consultant with Towers Watson & Co., says qualified applicants should count on waiting three to five months or longer to get Social Security disability benefits. And with the number of applicants growing, "if you're depending on that [benefit], you've got problems," he says. Consumers should also check if theirs is one of the few states that provide some additional disability benefits.

Buy a Policy at Work
Figure out what your employer provides. If it pays all, or even a share, of the premiums for disability insurance, that's your best option. If this is the case, make sure you have both short-term coverage, which tends to last for a few months, and long-term, which often only starts paying after a set time period, often 90 to 180 days.
Watch for a possible gap between them, since some employers' short-term policies may not stretch to when the long-term ones kick in.

Even if your employer makes disability a voluntary benefit, with the premium coming out of your paycheck, it's likely to be a better deal than purchasing an individual policy on your own. Still, particularly if you are young and healthy, you might want to check with an insurance agent.

Keep in mind that if you are buying a policy through your employer, you might be able to pay the premiums from your paycheck on a pretax basis. But this will mean you will owe taxes on the payouts you receive after filing a claim. You should also check whether you will be able to keep the coverage if you leave that company.

Ilene Sturrock, 46 years old, of Los Angeles bought a short-term disability policy in 1998, through her job as an office manager. She kept paying the $56-a-month premiums, even though she left that employer years ago and is currently out of work. She's used the benefits several times, including an eight-week break for surgery four years ago, and a three-month gap in 2007 when she broke her foot. "It pays off in the long run," she says.

If you are buying an individual long-term disability policy, the initial premiums will be set based on factors including your age, health status and occupation, according to insurer Unum Group. You may have the option of a level premium, which won't change over the life of the policy, or premiums that could rise at a fixed rate. If you're joining your employer's group disability policy, the premiums will be adjusted based on the claims history of the entire group.

A growing number of employers offer basic disability coverage and let workers buy more. But you'll have to figure out how rich a benefit you need. Long-term disability insurance will generally pay a percentage of your predisability income—60% is common—and it may not include extras such as bonuses. Also, be aware that most private disability policies require you to apply for Social Security benefits, and then subtract the government payout from what the insurer pays, a move called an "offset."

Plan for Health-Care Costs
In figuring out your likely expenses during a period of disability, keep in mind that if you are out of work for an extended period, you may lose your job, and have to start paying for health coverage. Though disabled people who receive Social Security benefits can qualify for Medicare, there is a two-year lag before the federal health coverage kicks in.

Another key thing to check is under what circumstances the disability insurance benefit will pay out. It's better if the money is triggered when you can't do your current job, says Andrew Imparato, chief executive of the American Association of People with Disabilities. But some policies say that if you can do any comparable job, you aren't truly disabled.

Write to Anna Wilde Mathews at anna.mathews@wsj.com