Eccentric New York real estate mogul Leona Helmsley died leaving her little Maltese $12 million. Two of the hotel magnate’s grandkids, left with nothing but memories, took the matter to court. After months of legal wrangling, the grandkids were awarded $6 million combined, while the dog’s inheritance was reduced to $2 million.

More often, jilted heirs don’t hound the dog, but instead go after relatives who got the longer end of the stick. In the case of the estate of billionaire J. Howard Marshall, who died at age 89, only shortly after marrying Playboy model Anna Nicole Smith, it was a battle between widow Smith and her (much older) stepson. Family feuds also erupted over the estates of Hyatt hotel founder Jay Pritzker, socialite Brooke Astor, singers James Brown and Whitney Houston, and comedian Lucille Ball, to name just a few. And the Michael Jackson mess is just getting started. “Throw a dart at any list of deceased celebrities and chances are that you’ll hit upon someone whose family members fought over the inheritance,” says Adam Schucher, a Fort Lauderdale, Florida, attorney specializing in estate planning and administration.

Of course, it’s not just celebrities who die without making proper arrangements. Fewer than half of all adults have a will. And you can bet that those same people do not have an advance healthcare directive, either. Yet these are among several documents that you, as a responsible adult, need in place—for your own well-being and for the harmonious future of your family.

• A will. OK, you know what this is—the basic who-gets-what document. But, do you have one? Without a will, whatever you leave behind will be distributed per the laws of your state, which might mean that someday one of your least favorite relatives may be comfortably sleeping in your bed and eating off your fine china. If you have young children, the will names their guardians. The will also names an executor, who will handle the nitty-gritty details and usually gets compensated for the hassle, which can be considerable.

• An advance healthcare directive or living will. It lets you make end-of-life decisions in advance. If you were in a coma, for example, would you want to be kept alive by artificial means even if there was little hope of regaining consciousness? [For more on the horrors of failing to have a living will, see “How Doctors Die”]

• A healthcare surrogate designation. The living will can’t foresee every possibility. You also need a surrogate to make day-to-day medical decisions for you, should you no longer be able.

• A durable power of attorney. This gives power to another to handle essential matters beyond healthcare, such as managing your bank accounts, should you become unable to do so.

The bottom line: Every adult, and especially those with minor children, should have these documents completed, signed, and saved. Simple wills may be drawn up for as little as $150. Complete estate plans—which might include various trusts to allow for the smoother transition of assets and possible tax breaks—could run to $3,000 or more.

If you wish to save a few dollars, and don’t mind putting in some legwork, most state government websites offer some forms, including the advance healthcare directive form, for do-it-yourselfers. Need guidance? State bar associations often have an attorney referral service. You can also contact your county courthouse, and ask for a list of local pros who handle estate law. “The most important thing is that you don’t succumb to decision paralysis,” says Connie Fontaine, who teaches graduate-level estate planning at The American College in Bryn Mawr, Pennsylvania.

And finally, even if you have an estate plan, you need to update it regularly. “Refreshing is often a simple matter,” says Fontaine, who suggests casting an eyeball on your estate plan at least once every two years, or whenever you experience a major life change, such as a move or a death in the family. Had Leona Helmsley reviewed her plan in a calmer moment, who knows? She might have thought twice about her rather unusual pooch bequest and saved her heirs a major headache.

Are Your Vital Financial Documents in Order? The Saturday Evening Post

Indeed, in one recent study from Duke University, it was estimated that heavy portfolio-tweakers underperform light portfolio-tweakers by 1.25 percentage points a year. And that’s before taxes. But that doesn’t mean you should leave your portfolio forever on autopilot. Here are four occasions when tweaking is well warranted:

Your portfolio is out of whack
A year ago, you crafted a moderately aggressive portfolio of 60 percent stocks and 40 percent bonds. Now’s the time to check your allocations. If stocks have been good to you and your ratio has risen to 65/35, it’s time to rebalance. That means selling off some stocks and buying bonds. You do this to keep your risk in check. The other reason is to force yourself to continually sell high and buy low. Over the long run, experts say, regular annual rebalancing could juice your returns by more than half a percentage point a year.

You are close to retirement
A major exception to the buy-and-hold guideline is when your life circumstances change dramatically. As you get closer to retirement, the common wisdom is to lower your risk by moving more savings into bonds, less into stocks. The reason is that once you retire, you will be pulling money from the portfolio, rather than putting money in. Should markets crash, an older person has fewer years to recoup the loss. A very general rule of thumb is to invest your age in bonds. “As rough rules go, this isn’t a bad one,” says Brosious.

Your funds have become obsolete
There’s been a revolution in both stock and bond funds over the past decade or so, and management fees have come down considerably. But not all funds have followed suit. According to Morningstar Principia, dozens of index funds simply track the performance of Standard & Poor’s 500 index (500 of America’s largest company stocks), but with vastly different fees. You can spend 0.05 percent a year in management fees for the Vanguard S&P 500 ETF (ticker VOO), for example, or you can spend 10 times as much (0.50 percent a year in fees) for the virtually identical Dreyfus S&P 500 Index fund (PEOPX). There’s rarely a reason not to switch when the price difference is this dramatic.

Your investments are too popular
Investors have a bad habit of making trendy investments. Trouble is, by the time they’re trendy, they’ve very often peaked (think tech stocks in 1999 or real estate in 2006). Buying a stock when it’s hot often means needing to dump it when it’s cold. “Not a profitable strategy,” says Neil Stoloff of SweetSpot Investments in Bloomfield, Michigan. Instead of buying high and selling low, you want to do the opposite, he asserts. Rebalancing (see No. 1) will help you to buy low and sell high as a matter of routine. But if you wish, you can go a step further; be a contrarian and purposely buy what others have been fervently selling, says Stoloff. “That’s what we do—at the beginning of each year, we buy whatever kinds of investments saw the greatest outflow of investor dollars in the previous year.” You needn’t work through the complex number-crunching that Stoloff does to take advantage of a contrarian strategy. Simply look to see what’s hot and what’s cold in the world of investments. What is your brother-in-law selling? What have all the chattering heads on TV and radio been advising you to dump? Move opposite the crowd. For example, if European stocks are unloved by the masses (as they have been of late), you might put five to 10 percent more in European stocks than you otherwise would.

Portfolio tweaks, by definition, are done in moderation. “Tweak, yes,” says Brosious. “Overhaul? … Only with very good cause and … the blessing of your tax advisor.”

New Year, New Investments The Saturday Evening Post

Not since Hitler’s armies stormed into Paris have affairs in Europe received greater attention—or caused greater concern—than today’s debt crisis. But just how subject is the U.S. economy to contagion from across the Atlantic? And what actions—if any—might a wise investor take to protect against a potential financial blitzkrieg?

The first order of business is to put the dangers in perspective. Yes, the financial trouble is very real, but that trouble is mainly limited to five of the 27 countries in the European Union. These five—Portugal, Italy, Ireland, Greece, and Spain (often referred to as PIIGS)—are facing enormous financial problems, but the major European economies—Germany, France, and the U.K.—are not in such horrible shape. “Many EU nations are not only financially solvent, but are arguably in better financial health than the U.S.,” says F. John Mathis, professor of global economics and finance at the Thunderbird School of Global Management in Glendale, Arizona.

In fact, we do much more trade with Canada, Mexico, and China than we do with countries in the EU. And within the EU, the five most troubled nations (PIIGS) are minor trading partners with the United States. [See chart below.]

While a handful of EU nations face severe financial turmoil, those troubles alone cannot sink the U.S. economy, says Mathis. “The largest danger the debt crisis in Europe poses to the U.S. is psychological,” he asserts. The recent volatility in the U.S. stock market coupled with the collapse of housing have many of us fearful about investing in general. In this context, the potential of certain EU governments drowning in debt is creating more worry, not all of it justified, says Mathis.

How bad will the EU crisis get? Bugra Bakan, CEO of Shield Wealth Management, says many fears about the EU market have already been baked into stock prices. “The stock market tends be a great discounting mechanism that often anticipates the worst,” he says. In short, the recent decline of EU stock prices reflects the well-known possibility that one or more governments could go bust. “Given the current low prices of EU stock, whatever happens next, it is more likely that share prices will shoot up rather than fall further,” says Bakan.

With all the uncertainties ahead, you can assume that European stocks will be volatile. But so will U.S. stocks. And considering the huge size of their economy and the amount that the EU imports from the outside world, the rest of the world’s stock markets may be in for a wild ride, too.

You’ll have to decide if that ride is too wild for your taste, but Bakan favors keeping some EU holdings in a diversified portfolio. “In a moderately aggressive portfolio with 50 to 65 percent in stocks, I recommend that about 10 percent of the portfolio be allocated to EU stocks,” he says. Low-cost, well-managed funds that track the EU stock market are good options for most investors, says Bakan, including the Vanguard MSCI Europe ETF (symbol VGK), or the iShares MSCI EMU Index Fund (symbol EZU).

Paris, after all, was eventually liberated. And Europe, although severely damaged by World War II, came back strong. We may be in a down phase of an economic cycle, but “cycle” is the very word. This is not the end of times.

Europe and You The Saturday Evening Post

Every four years the air is ripe with speculation about what the presidential election—not to mention the new administration—will mean for the stock market. Will the Dow sink, swim, or soar?

While we can’t know the precise answer to this question, we do know one thing: For the average stockholder, attempting to game the market by radically reallocating your portfolio holdings is a bad idea at any time. But let’s look at some telling statistics about presidential elections. True enough, since the end of World War II, the market has risen in 12 of 16 election years. If that sounds like the market has a good chance of climbing this year, well, you’re right. But that would be no freak event. Standard & Poor’s 500 Index has historically gone up in about 12 of any 16 years. But does it matter which party wins? Studies reported in Bloomberg News prior to the 2012 election revealed that the annualized return of the S&P 500 throughout the past 23 years of Democratic administrations has been 11 percent. Compare that to the 2.7 percent annualized return during the 28 years of Republican administrations. You might want to think twice before rolling the dice on party control, because in 2008, a Democrat won, and the stock market sank in the months following the election; in 2004, a Republican won, and the stock market soared.

What drives these market trends? According to Ned Davis Research and T. Rowe Price, the markets seem to like consistency. In the post-World War II period, when the incumbent party won elections, the market gained an average of 9.2 percent for the election year versus only a meager 2.2 percent when the challenging party won. But what’s happened in the past may have limited bearing on stock market performance over the next couple of months, and beyond.

John C. Bogle, founder of the Vanguard Group and author of The Clash of the Cultures: Investment vs. Speculation, says presidents influence markets. But, he adds, making bets based on presidential cycles is akin to speculating on stocks using tea-leaf readings or whether the NFL or AFL won the last Super Bowl. All of these “strategies” are parlor tricks, says Bogle, “statistical noise.”

What it comes down to is common sense: “The key to profitable investing is buying and holding a well-balanced portfolio,” says Bogle. “Market timing rarely, rarely works.” Using figures from Morningstar, he points out that the average U.S. stock mutual fund—whose manager does considerable buying and selling—underperformed the S&P 500 Index by 1.3 percentage points per year, over the past 15 years. Even more telling, the average investor—who tends to swap out almost a third of his portfolio each year—underperformed the average mutual fund by another 2.2 percent a year.

How can you beat the average investor? Invest your money largely in low-cost, broad-market index funds, says Bogle. Make sure you have a well-rounded portfolio, with stocks—U.S. and foreign, large- and small-company —and bonds. When the going gets rough and holdings tumble, don’t be so quick to sell. Trust that the market will come back, as it always has done.

Yes, who is in the White House, the President, as well as Congress, can affect the market. “We need to encourage our leaders, whichever ones are in power, to think long-term about the strength of the economy, for ultimately, the markets move with the economy,” says Bogle. “Strengthening the economy means tackling the federal deficit, improving infrastructure, creating jobs, and revamping a healthcare system that is costing our nation way too much.”

Such policies take time. “Patience,” says Bogle, “rather than taking wild bets on elections, is how to profit from the markets.”

Election-Year Investing The Saturday Evening Post

Bill Dyszel, a communications executive in Manhattan, plunked his 401(k) savings into a single mutual fund. Hannah and Mike Resig of Falls Church, Virginia, did the same. Dyszel, 57, chose the Fidelity Freedom 2025 Fund, and the Resigs, both 25, opted for the American Funds Target Date Retirement 2050 Fund—both known as a “target-date” or “life-cycle” fund. (The years —2025, 2050—stand for retirement dates.)

According to Morningstar, contributions to this type of funds have soared in recent years to $420 billion—double what it was five years ago.

The basic strategy behind a target-date fund is to provide a well-diversified portfolio that starts off aggressively and then, as time rolls on, shifts to a more conservative strategy. Thus younger investors, like the Resigs, wind up with mostly stocks and few bonds. Older investors, like Dyszel, who are closer to retirement, carry more bonds and fewer stocks. The ratio of stocks to bonds shifts automatically each year. Estimate your retirement date and a formula does the rest. One reason for these funds’ popularity is that in 2007 the Department of Labor passed a regulation that led many employers to use life-cycle funds as the defaults in 401(k) plans. If workers fail to make another choice, contributions to 401(k) go directly into a life-cycle fund. But the rise in assets is attributable to more than this ruling.

Dyszel chose the life-cycle option for its simplicity. “I didn’t want to spend time figuring out what to invest in and when to invest it,” says Dyszel. For the Resigs, just starting to build wealth, the life-cycle option seemed too sensible to resist. “These funds take into account that when you’re younger, you can afford to take more risk,” says Hannah.

Jerome Clark, portfolio manager of T. Rowe Price’s line-up of retirement funds, says that 90 percent of his savings is in his employer’s life-cycle option. “These funds are a great core holding for almost everyone,” says Clark. “Many younger people invest too conservatively, while many older investors invest too aggressively. With life-cycle funds, the allocations for investors vastly improve.”

Interested in life-cycle funds? “These funds are the easiest investments you can make, but you still need to do research to make the best decision,” says Clark. Some key considerations:

1. Study the strategy.
While all life-cycle funds start off aggressively and then grow more conservative, the rate of progression varies widely. The Fidelity Freedom 2025 Fund is currently 60 percent in stocks, while American Funds Target Date Retirement 2025 Fund and T. Rowe Price Retirement 2025 Fund are both 75 percent in stocks. If you like a fund company but find their mix too aggressive, simply choose a target date closer to home—for example go with the 2015 fund, rather than the 2025 fund.

2. Look carefully at fees.
Life-cycle funds charge fees that can vary considerably. According to Morningstar, the average life-cycle fund charges 1.08 percent a year in management fees. Other options in your 401(k) plan may be much less expensive. If that’s the case, “ask yourself how much the simplicity is worth to you,” says Everette Orr, a fee-only financial planner in Virginia.

3. Consider the mix.
Look at the fund’s diversification (does the stock portfolio have U.S. and international exposure?), the strength of management (how long has it been around?), and historical performance.

Easy-As-Pie Investing The Saturday Evening Post

In hindsight that was a clever move because not only are bonds less volatile than stocks but their value has risen steadily with the decline in interest rates. But with interest rates at historic lows, those gains won’t—in fact, almost can’t—continue, says Dirk Hofschire, senior vice president of asset allocation research for Fidelity Investments. He predicts that the safest bonds—U.S. Treasuries—are likely to pay just enough in the next decade to keep up with inflation.

Time to get out of bonds? Not so fast, says Hofschire: “The situation argues for realistic expectations not for the abandonment of bonds, and perhaps a portfolio with a good mix of bonds still has much to offer.”

The key word here is “mix.” If Treasuries are paying a paltry two percent, the strategy calls for diversifying. Bonds come in all flavors, just like stocks do.

“Complementing high-quality bonds with a variety of other sectors can help you increase your yield and return potential while protecting against risks such as potentially higher inflation,” says Hofschire.

Treasury bonds are available in both conventional form (with steady coupon payments) and inflation-adjusted (lower, fixed coupon payments but regular adjustments for inflation). Include both in your portfolio. In addition, consider the following:

• High-quality, “investment-grade” corporate bonds. These typically yield about 1 percent a year more than Treasuries.

• Municipal bonds. Historically, bond issues by cities and state governments haven’t paid as much as Treasuries. But right now they are about on a par—and, of course, the difference is that interest on municipal bonds is generally tax-free, making their effective return greater than Treasuries.

• Corporate high-yield bonds. Issued by less-than-financial-powerhouse companies, these bonds are riskier than the others mentioned above but are now paying about 3 percentage points a year more than Treasuries.

• Emerging-market bonds. Issued by countries such as Brazil, Russia, and Turkey, the bonds are now yielding a rate similar to corporate high-yield. These, too, carry risks, but offer good diversification power.

Within each bond sector you can further diversify by choosing a mutual fund or exchange-traded fund that allows you instant ownership of hundreds or more of individual bond issues. The strategy is crucial when investing in options like high-yield (aka “junk”) bonds, where the default of any one bond is more than a remote possibility.

Finally, it may be time for even the most conservative investor to venture cautiously into other areas. Consider lowering your bond exposure by investigating vehicles that pay higher interest rates, says David Lambert, founding partner and wealth advisor with Artisan Wealth Management of Lebanon, New Jersey. “For many of our clients we have lowered the overall allocation of bonds and replaced them with other income-producing holdings such as real-estate investment trusts and dividend-paying stocks.”

But sound money management will always dictate holding some bonds. As Lambert points out, even the largest and most stable stocks tend to be more volatile than bonds.

Taking Stock of Bonds The Saturday Evening Post

Prior to the 1980s, credit cards were far less common, and personal loans were generally made by lenders who knew their customers. “Today, credit worthiness is determined almost entirely by computers based on credit scores,” says Platt. “Unless you use all cash, there’s no way around it … You need a credit score—the higher, the better.”

Your credit, or FICO, score determines not only whether you can obtain a credit card or borrow money to purchase a home, it also dictates what interest rate you’ll be charged. The higher your score, the lesser a risk you pose to creditors, so the lower your interest rate.

Want to boost your credit score? First you need to know what it is. To see just your credit report—what prospective creditors see when considering extending a loan—log on to annualcreditreport.com or call 877-322-8228. You can find out what each of the three major credit report companies—Equifax, Experian, and TransUnion—say about you. What you can’t get without paying extra is your numeric credit score, which runs from a low of 300 to a high of 850. You can get that number from creditkarma.com or creditsesame.com without paying a dime, though.

Scores are based on several factors, from your credit history to the amount of money you owe—essentially your track record of paying off past debts. For example, if there’s a delinquent payment on your record, it’ll certainly bring your number down. That’s why it’s essential to check your report every so often. If there’s a problem, you’ll see it and be able to contest it.

A score above 650 is widely considered good. If your score is 720 or greater, you are a candidate for the best credit deals. You don’t need to shoot higher than that; raising your score to 800 or above may give you pride, but is unlikely to lower your payments by much. Any score under 620 makes you a “subprime” borrower; as such, you may have a tough time getting credit and will certainly have a hard time getting the best rates. Want a higher score? The surest, quickest way is to clear away existing debt. “Pay off as much of your credit balance as you can, and your score will rise,” says Ken Lin, CEO of Credit Karma. “It isn’t the only factor, but it is the single biggest.”

Myths abound about getting a higher score. For example, the amount of money you earn doesn’t enter into the calculation. “Making six figures, winning the lottery, or inheriting a fortune will not give you a good credit score,” says Lin.

Also, it won’t necessarily raise your score to close old credit cards, as has been reported elsewhere. According to Lin, having a large amount of credit available to you may make some lenders nervous, but, on the other hand, having an account or two that’s been open for many years may actually work to your benefit.

What’s the best strategy for bringing up your numbers? Lin suggests that you shoot to apply for one new card each year, taking advantage of the juiciest perks you can find—free mileage, cash back, or zero-percent financing. “Do this until you have five or so cards,” says Lin. “Then start to cull your older cards with lesser perks, so that you’ll have three to five open credit cards in good standing with the oldest card giving you at least four years of history.”

Raising your credit score is something of a game, true. But it’s a game you can win.

Keeping Score The Saturday Evening Post

Before long, Sylvia was in well over her head. “I was up to a balance of nearly $7,000, and paying interest rates as high as 39.99 percent on seven different cards,” she says. “I realized that I was going to have a very hard time ever paying that off and I became very depressed.”

In today’s economy, Sylvia’s story is far from unusual. Americans hold an estimated 610 million credit cards, and the average household with credit card debt carries a balance of nearly $16,000.

With so many people owing so much, a large debt settlement industry has emerged. By way of unsolicited phone calls and advertisements on radio and television—usually late at night when the debt-ridden presumably are sleepless—these companies make promises of fast, painless relief. “We’ll cut your bills in half!” the ads promise. But, as the old adage states, if something sounds too good to be true, it usually is. According to a recent investigation by the Government Accountability Office (GAO), the debt relief industry is rife with fraudulent and deceptive practices that often leave people only more in debt, sometimes facing multiple lawsuits and bankruptcy.

Here’s what’s behind those promises of miraculous debt reduction. First, the firms tell you to stop paying your bills. After your creditors haven’t been paid for several months, the strategy is for the debt settlement attorneys to go to your creditors and offer them a lump sum payment for far less than the amount owed. It actually can work. The catch is that you’re stuck paying fees to the debt settlement company that may be close to—or even exceed—the amount you’ve saved. Plus your credit rating is shattered. In the worst case scenario, you might pay thousands to the debt relief company and still fail to reduce your debt in the slightest. These companies’ actions are “appalling beyond words,” said Senator John D. Rockefeller (D-WV), who ordered the GAO investigation. “These debt settlement companies are kicking people when they are down.”

There is a legitimate alternative to all this. It’s called “debt consolidation.” Such programs are usually managed by nonprofits following strict ethical guidelines that help you group your debts together into one payment (often using your home as collateral) so that your interest rates can be lowered.

In part due to the GAO investigation, new federal laws went into effect in October of 2010 that make it more difficult for unscrupulous debt relief firms to continue doing business as usual. But industry insiders warn that the new laws will not protect consumers from all fraud and deception. If you are in debt and can’t find your way out, consider the following tips to help you distinguish good help from bad.

1. Check under the hood. Look for a nonprofit credit counseling agency—not a for-profit “debt settlement” company. The nonprofit should belong to either the National Foundation for Credit Counseling (NFCC) or the Association of Independent Consumer Credit Counseling Agencies (AICCCA) or both.

These organizations set ethical standards that all member agencies must follow.

2. Beware extravagant claims. Legitimate companies aren’t going to cut your debt in half—or anything close.

3. Refuse up-front costs. Charging fees in advance is typical among the firms investigated by the GAO. Some of these companies demanded hundreds or even thousands of dollars on day one. A legitimate nonprofit agency will charge you no more than $50 a month, often less, and only after they’ve worked with you to lower your monthly credit payments by at least that amount, says Gail Cunningham, spokesperson for the NFCC.

4. Do a background check. Ask the Better Business Bureau and your state Attorney General’s Office if complaints have been lodged against any credit counseling enterprise you approach.

Sylvia Mitchell finally landed a fulltime position with the Transportation Security Administration. At the same time, she sought help from a nonprofit agency called InCharge Debt Solutions (a member of both the NFCC and AICCCA). With its help, she was able to consolidate her loans, lower her payments, get control over her budget, and, over two years, reduce her credit-card debt to zero. “I’ve learned my lesson,” Sylvia says. “No more credit. From now on, it’s just cash and carry for me!”

No Shortcuts to Debt Relief The Saturday Evening Post

National Foundation for Credit Counseling (NFCC). In addition to the main website, you might want to explore www.debtadvice.org, which offers a wealth of information on budgeting and the smart use of credit. The MyMoneyCheckUp tool will help you assess your debt, and to decide if you need help digging out.
Contact: 800-388-2227. www.nfcc.org

Association of Independent Consumer Credit Counseling Agencies (AICCCA). The AICCCA represents the common interests of member agencies to ensure that all who seek help with their debt problems receive the highest quality of assistance.
Contact: 866-703-8787. www.aiccca.org

Council of Better Business Bureaus. Check with the Better Business Bureau (BBB) and with your state Attorney General’s Office (below) to see if any complaints have been lodged against any credit counseling enterprise you approach.
Contact: 703-276.0100. www.bbb.org

National Association of Attorneys General. Visit the website (below) and click on the colorful map of the United States to find your home state’s office of the Attorney General.)
Contact: www.naag.org

Resources for Debt Reduction The Saturday Evening Post

That worry helps explain the popularity of annuities, financial products designed to generate a steady cash flow as long as you live. But today’s annuities are very different from yesterday’s pensions, says Christopher Jones, CFP, principal of Las Vegas-based Sparrow Wealth Management: “They certainly are not for everyone, and choosing the right one is crucial.”

You buy an annuity by forking over a lump sum, and, in return, the annuity company agrees to pay you a set amount of cash each month for the rest of your life. Why annuities? Bonds generate steady dividends too, but you’ll get more monthly cash from the annuity. That’s because of something called the “mortality premium,” which is a polite way of saying that annuity providers will pay you more today because when you die they, not your heirs, will grab your principal. The mortality premium gets larger for every candle on your birthday cake. The very best candidates for an annuity are older (65+) and have expectations of living a good long time.

You are probably a good candidate for an annuity if…

You’re not certain you have enough money coming from Social Security and your savings to cover your basic expenses in retirement. Say you’ve crunched the numbers (see “What’s Your Retirement Number”) and have calculated that you’ll need to tap $1,000 every month from personal savings, but that’s really more than your nest egg can handle. Buying an annuity that pays out $1,000 a month will allow you to sleep at night.

You are probably a bad candidate for an annuity if…

You have a good-sized nest egg, are in little danger of running out of money, and can stomach a bit of market risk. “The return you’ll get on a diversified portfolio will very likely be much greater than what you’ll get on an annuity,” says Jones. In addition, your heirs—not the annuity company—will get your money when you pass away.

The standard annuity is a fixed-income annuity. To receive a guaranteed $1,000 a month, a fixed annuity today would cost a 65-year-old man roughly $165,000 (about $175,000 for a woman because women usually live longer). You may choose to purchase add-ons such as a “joint-and-survivor” benefit, which allows your spouse to continue collecting if you die in exchange for reduced cash flow while you’re alive.

The other kind of annuity is called a variable annuity. Unlike the fixed annuity, this option ties your cash payments to underlying investments. The payout fluctuates, but you still get security. However, Jones warns that variable annuities, often pushed by aggressive salespeople, can be incredibly complex and expensive, and often don’t deliver as they promise.

Ready to start shopping? Kerry Pechter, publisher of the online newsletter Retirement Income Journal and author of Annuities for Dummies, offers the following tips and caveats:

• Buy only from a strong company. You may be around for several more decades; you want a company that will be around, too. Choose only companies with the very highest credit ratings. Ratings are listed on the websites of the providers.

• Compare offers. Prices change frequently, and during any given month the best deal might shift from one carrier to another. You can compare prices easily online. The following sites will give you competitive quotes from top-rated companies: Fidelity.com, ImmediateAnnuities.com, and IncomeSolutions.com (that last one is available only to customers of Vanguard and fee-only financial planners).

• If you are concerned about inflation (and you should be), don’t put all of your money into an annuity. Leave enough aside to invest in stocks or buy an annuity with inflation protection (which costs a bit more but adjusts annually to reflect cost-of-living increases).

• Because annuities pay you based on current interest rates, and interest rates are now very low, you might want to “ladder” your annuities by putting some money into an annuity today and buying another every year for several years.

• If you feel a bit lost, you might think about getting an unbiased expert to help. Consider a fee-only financial planner; find one at napfa.org.

Retiring with Annuities The Saturday Evening Post

If he can save enough by the time he’s 60, Stoloff can see himself quitting his day job at Chrysler. But will he be able to save enough? And just how much would “enough” be? Stoloff, despite his mechanical engineering skills, doesn’t know. “I should, but I haven’t really run the numbers,” he admits.

Stoloff is both unusual and usual—unusual in that few Americans have been “saving, saving, saving,” but usual in his admission that he has yet to run the retirement numbers. According to a recent survey done by the Employee Benefit Research Institute (EBRI), only about four in 10 workers have ever actually tried to calculate how much money they will need to have saved by the time they retire.

Why is that? For some, no doubt, retirement seems simply too far away—so why even bother thinking about it? For others, “They are probably too scared to do the math,” says Jim Otar, CFP, a financial advisor based in Ontario.

You’ve heard that ignorance is bliss, but you may not wind up so blissful if you get to the age at which you wish to retire and suddenly realize that the bills aren’t going to pay themselves. So please consider rolling up your sleeves and joining us for just a few moments of quick and simple arithmetic.

This exercise boils down to subtracting your estimated expenses from your estimated income. The math is easy. Doing the estimating is the tricky part.

No one can read the future, but to give yourself a clue, look at how much you’re living on today and figure you’ll probably be spending a bit less. After all, you’ll likely be putting fewer dollars into the gas tank, having fewer lunches out, your kids may have finished college and left the nest, and your house may be paid for. Your tax hit should also be less—partly because your income should be lower and partly because investment and pension income is typically taxed less heavily than earned income. Also, you’re no longer saving for retirement!

On the other hand, some costs may go up; you might find yourself spending more for travel and recreation, and—if health problems crop up—more on medical costs not covered by Medicare.

For a ballpark estimate, most people find that they need somewhere between 70 and 90 percent of their pre-retirement annual income. For a more precise number, tally up your costs below.

YOUR EXPENSES
My Estimated Monthly Costs at Retirement for:
_ Food
_ Clothing
_ Housing (rent/mortgage)
_ Utilities
_ Insurance (home, auto, life, medical, long-term care)
_ Transportation (car payment, bus, train)
_ Taxes
_ Gifts
_ Recreation
_ Leisure travel
_ Cable and phone service
_ Household maintenance
_ Debt payoffs (other than mortgage)
_ Miscellaneous
_ Total monthly expenses
_ Total annual expenses (monthly expenses x 12)

YOUR INCOME
Calculating money coming in is usually a lot simpler than estimating expenses. Let’s run those numbers.

My Estimated Monthly Income at Retirement is:
_ My Social Security (If you don’t know your S.S. payout, go here.)
_ Spouse’s Social Security
_ Part-time work
_ Pension or annuity income
_ Rents or other sources
_ Total monthly income
_ Total annual income (monthly income x 12)

Ready to do the math? Subtract your annual expenses from your annual income. The result for most people is a negative number or shortfall. This is the amount you’ll have to contribute from your own savings each year, as shown in the equation below:

INCOME – EXPENSES = SHORTFALL

For instance, if you think you will need $50,000 a year to live comfortably and you expect to receive $20,000 a year from Social Security and other income, you will have to pull $30,000 a year from your nest egg ($50,000 – $20,000 = $30,000).

Multiply your shortfall by 25 to get your minimum target retirement portfolio (assuming you wish to retire in your mid-60s). In the case above, you would multiply $30,000 by 25 and come up with $750,000. Why 25? Because that would allow you to pull 4 percent a year from your savings, and—provided you have a well-balanced portfolio—your savings, studies show, will have good chance of lasting as long as you do—at least 30 years.

CLICK HERE for our quick guide to retirement calculators.

What’s Your Retirement Number? The Saturday Evening Post

Quick and Easy

Employee Benefit Research Institute

AARP

Not So Quick and Easy (but Very Detailed)

Jim Otar’s Retirement Optimizer (Note: The free trial version includes all the features of the full version, except that you cannot change your current age, which is preset to 55. The full version costs $99.99.)

A Middle Ground

FIREcalc is not as quick as the AARP or ERBI calculators, but it’s also not as detailed or time-consuming as Otar’s calculator.

And the Robot Says… A Quick Guide to Retirement Calculators The Saturday Evening Post

Susan Ellis, 78, a retired U.S. Department of State worker residing in Washington, D.C., lives partly on a pension and partly from her savings. Those savings are half in stocks and half in bonds, with the lion’s share of those bonds being Treasuries. While Ellis’ stocks sagged in the recent recession, her Treasuries more than held their own. “Having part of my portfolio in U.S. government bonds provides me with great comfort,” says Ellis. “It helps me to sleep at night.”

Treasuries give many investors similar peace of mind. “When there is fear and turmoil in the markets, people seek safety; Treasuries fulfill that role admirably—and they always have,” says Christopher Philips, a senior analyst with the Investment Strategy Group at Vanguard Investments. Indeed, during this past recession, Treasury bonds were the only place to seek safety, adds Philips. “U.S. stocks were down, so were foreign stocks, real estate, and corporate bonds … every kind of major investment lost value, except for Treasuries.”

According to data from Morningstar, while U.S. stocks fell in value 46 percent between October 2007 and March 2009, long-term Treasuries rose by 25 percent. In the recession prior, between March 2000 and September 2002, U.S. stocks fell by 38 percent, while long-term Treasuries soared 40 percent. This zigzagging pattern of returns between stocks and government bonds has existed for decades, which is why smart investors, wanting to dampen volatility in their portfolios, own Treasuries.

The “catch” with Treasuries—in fact, all bonds, but especially Treasuries—is that they produce modest returns over time. Since 1926, per Morningstar data, stocks have returned 9.8 percent a year, while long-term Treasuries have generated 5.4 percent. If you mixed-and-matched, combining 60 percent stocks with 40 percent Treasuries, the average yearly gain of your portfolio would have been 8.6 percent.

To make Treasuries a part of a balanced portfolio, consider this:

• The first step in constructing a portfolio is to determine what portion you want in stocks and what portion bonds. The higher the return you desire, and the more volatility you can stomach, the more you want in stocks. Important note: Bonds in the past 20 years have done exceptionally well (see chart on page TK), but the relative return on bonds to stocks may revert to long-term norms, says Philips. “Treasuries have done very well in the past 20 years because bonds tend to shine when interest rates fall … but when rates rise, bonds tend to not fare as well.”
• Whatever your allocation to bonds, consider putting roughly 40 percent of that into conventional Treasury bonds, recommends Philips. The rest could be in corporate bonds (which tend to return slightly more than Treasuries), municipal (tax-free) bonds, foreign bonds, or inflation-protected Treasury bonds (discussed below).
• Treasuries, like all bonds, may be purchased with various maturities: short-term, intermediate-term, or long-term. In general, the longer the maturity, the higher the return, but the greater the price swings. Philips recommends that you shoot for the middle—“intermediate-term” bonds that mature in about seven years.
• You can buy individual U.S. Treasuries, free of trading costs, by going to Treasurydirect.gov. Or, you can buy a fund of Treasuries, which allows for instant diversification of maturities and ease of management. Choose a fund with low costs. Options include the SPDR Barclays Capital Intermediate-Term Treasury fund (ticker symbol ITE) or the Vanguard Intermediate-Term Treasury fund (VFITX).
• Add TIPS. Treasury Inflation-Protected Securities (TIPS) are a different breed of Treasury that offers little interest, but is adjusted for inflation twice a year. Consider allocating a part of your bond portfolio above and beyond conventional Treasuries to TIPS, suggests Philips. Like conventional bonds, TIPS can be purchased individually through Treasurydirect.gov or as a fund. Options include the Vanguard Inflation-Protected Securities fund (VIPSX) or the iShares Barclays TIPS fund (TIP).

Whichever way you decide to go to buy Treasuries, once you do, your sleep, like Ellis’, will likely improve, too.

Investing in America The Saturday Evening Post

Only the first question is easy. The traditional IRA allows you to sock money away and get an immediate 
tax deduction. But when you eventually withdraw the funds, you pay tax.

The Roth, in contrast, gives you no deduction stepping in, but you pay zero tax when taking the money out. In other words, the traditional IRA offers tax-deferred growth; the Roth offers tax-free growth.

The ability to convert from the traditional to the Roth is nothing new. That’s been allowed since 1998. As of January 1, 2010, however, there is no longer a $100,000 income cap on who can convert to a Roth. Now anyone can. All you have to do is pony up the taxes due. But just because you can convert does not mean that you should.

“For many people the conversion can make enormous sense. For others it can be a disaster,” says Robert Keebler, CPA, MST, a partner in the accounting firm of Baker Tilly Virchow Krause, LLP, in Appleton, Wisconsin.

Which group are you in? Here’s how to tell:

Will your future tax rate go up?

With the federal debt mounting and personal income tax rates lower than they’ve been in decades, taxes overall are likely to rise. But what about your personal tax bracket? That is perhaps the single biggest consideration in deciding whether to convert.

“If you are paying 30 percent in taxes today, or 30 percent tomorrow, you are, in a strict mathematical sense, going to be no better or worse off by converting,” says Keebler. If you expect your taxes to rise in future years, however, you are a good candidate for conversion. If you expect your taxes to fall, which might be the case for a highly paid professional looking to retire soon, the conversion will probably not make sense.

When will you need the IRA funds?

The longer you have before tapping the funds, the more the Roth can grow tax-free and the more the conversion will help secure your nest egg. If you plan to use the funds within the next three to seven years, converting to a Roth probably won’t work to your advantage, says Keebler. If, on the other hand, you plan to not touch the money for decades, or perhaps never touch the money—leaving it to your kids, for example—the Roth conversion may add substantially to family wealth, he says.

Do you have the cash to pay the taxes now?

If you convert, say, $20,000 of your traditional IRA to a Roth this year (you can choose to convert all or part of your traditional IRA), you will likely owe income taxes (both federal and state) on the $20,000. If you are in the 30 percent total tax bracket—assuming the $20,000 doesn’t push you up into a higher tax bracket—you’ll have to cough up an extra $6,000 ($20,000 x 30 percent) by tax time. Or, you can take advantage of a special law currently in effect that allows you to defer recognizing the conversion income until you file your 2011 and 2012 tax forms. “Either way, the conversion will be more advantageous if you have the cash outside of your IRA to pay the tax,” says Scott Jacobsmeyer, CFP, president of Argent Wealth Management in Round Rock, Texas. In addition, he warns, if you pay the tax due out of the IRA and you are not yet 59 1/2, you may be subject to a 10 percent penalty.

Fortunately, you don’t need to figure this all out today. To convert for tax year 2010, you need to make your move by the end of December. And there’s always next year … and the year after that. “In fact,” says Jacobsmeyer, “for many people, partial conversions over a number of years (so you’re not taking too big a tax hit in any one year) might be the best strategy of all.”

Should You Convert Your IRA? The Saturday Evening Post

A rash of media stories called for abandoning the diversified portfolio, rejecting buy-and-hold investment, or adopting new tactics, such as market timing (jumping in and out of the stock market in the hopes of buying low and selling high) and cherry-picking (banking on one or possibly a handful of investments that you think will do better than all the others out there). Other stories have advocated just keeping your money under the proverbial mattress.

Investors are listening. According to the investment resource Morningstar, $573 billion in cash flowed into low-yielding but secure money-market funds in 2008 when the stock and bond markets (other than Treasury bonds) were suffering the most. As soon as the stock and bond markets started to come back in 2009, so did the investment money.

We’re here to tell you that you might want to think twice before following the pack and abandoning the tried and true—the well-diversified, broad portfolio of stocks and bonds and cash that you pretty much buy and hold—and jumping onto any bandwagon that promises to do better. Here’s why:

1. Cash is costly. Keeping your money in cash (money-market funds, savings accounts) may spare you from market volatility, but in the long run, the return on a diversified portfolio of 60 percent stocks and 40 percent bonds still clobbered cash. According to Morningstar, the respective 30-year returns on the diversified portfolio, after accounting for inflation, were three to four times that of a portfolio held in cash.

2. Markets are unpredictable in the short run. If you’re thinking that you’re going to keep your money in cash and pop into the markets at just the right time, think again. Pro investors often can’t even time the markets, says Cathy Pareto, MBA, CFP, president of Cathy Pareto & Associates, a wealth management firm based in Coral Gables, Florida. “Studies show that investors who buy and hold a diversified portfolio, rather than try to rush in and out of investments, tend to do much better.”

3. Specific winners and losers are unpredictable, too. If, instead of diversifying your portfolio, you try to zero in on individual securities or small segments of the market, you may be adding to your risk, but not your return. “People are often overconfident in thinking they can pick one stock or perhaps one industry that is going to do well,” says Don Bennyhoff, CFA, a senior investment analyst at Vanguard Investments. “Professional investors often do a very poor job when they attempt such picks—the average investor won’t even do that well.”

4. Costs are bigger than you think. When you buy and sell (whether popping in and out of the market, or gambling on individual stocks or market sectors) there are substantial costs involved, says Bennyhoff. The “spread” (the middleman’s cut) on stocks can be as high as several percentage points. There is often a commission or markup to pay the broker on any trade of a stock or bond, and fees on fund swaps are not uncommon. You may also pay higher taxes on a shifting portfolio than on a buy-and-hold one.

5. Look at the bottom line. The downturn of 2008–2009 was unusual in the manner in which so many investments, and entire classes of investments, turned sour at the same time. Still, diversification paid off, assures Bennyhoff. Bonds overall didn’t do quite so bad; some bonds, namely Treasuries, did very well. Certain segments of the stock market even shot off like rockets in the second half of 2009. Overall, if you had a highly diversified portfolio of 40 percent bonds, 30 percent U.S. stock, 20 percent foreign stock, and 10 percent cash, your portfolio on September 30, 2009, would have earned you 4.25 percent annually, or 51.63 percent cumulatively, over the prior decade. “Despite what you may have read, diversification and patience hasn’t entirely let us down,” says Bennyhoff.

Russell Wild, MBA, is a NAPFA-registered financial advisor who has written nearly two dozen books, including Index Investing for Dummies and Bond Investing for Dummies.

Why It Pays to Diversify The Saturday Evening Post