In 2010, companies have a whole new retirement plan option.

www.youtube.com/watch?v=qdmDandRL84

What is a DB(k)? Basically, a DB(k) combines a pension plan with a matching 401(k) plan. As the name implies, it is a defined benefit retirement plan with some of the features of a 401(k).

DB(k)s could become great recruiting tools. These hybrid retirement plans will be very attractive to employees looking to restore pre-bear market retirement savings levels – not to mention workers who want to retire with a pension-style income like the one Mom and Dad had. In the coming years, firms in especially competitive industries may be prompted to offer DB(k)s as perks.

Won’t it cost a lot for a company to fund one? Not necessarily. It is likely that the companies that do create them will have sizable cash reserves and profit margins. However, it isn’t as if a business is funding two retirement plans at once. In fact, any businesses that offer both defined benefit plans and 401(k) plans may unite them in this new option.¹

A DB(k) could save a business paperwork & money. These plans are exempt from “top-heavy” rules, and a company can put one in place with just one Form 5500 and one plan document. Principal Financial Group vice-president Chris Mayer, whose firm helped to develop the DB(k), told the Washington Post that the cost of providing a DB(k) will probably work out to 6-8% percent of payroll for most companies. This is certainly beneath the administrative costs of having both a 401(k) and a pension plan. Companies with 2-500 employees are eligible to have DB(k)s.^2,3,4

What do employees get? An income stream, an employer match and a really neat tool to save for retirement. In brief, the DB(k) has four compelling attributes:

• An arrangement for lifelong monthly income. The income stream won’t replace an employee’s end salary, but it certainly will help. Loyalty is rewarded: the pension income equals either a) 1% of final average pay times the number of years of service, or b) 20% of that worker’s average salary during his or her five consecutive highest-earning years.⁵
• Employees are automatically enrolled in the 401(k) portion. (They can choose to opt out.)²
• The company automatically directs 4% of a worker’s salary into his or her 401(k) account. The company also has to match 50% of that amount, which is vested upon the match. (Employees do have the choice to alter the contribution level up or down from 4%.)³
• It only takes three years for an employee to become fully vested in a DB(k) pension plan. So even if they leave the company, the money is theirs.⁴

The best of both worlds? Maybe. The DB(k) is shaping up as an intriguing 401(k) alternative, a new IRS-sanctioned way to offer valued employees something more than the usual voluntary retirement savings program. If you are saving for retirement, ask your company about it. If you own a business in a very competitive field, it may help you recruit, impress and retain the caliber of employees you really want.

What do they do? And should you have one?

www.youtube.com/watch?v=-LqDlixUWSA

What does a financial planner do? Well, that depends. Many individuals refer to themselves as “financial planners”, but not all perform true multidisciplinary financial planning. Investment, insurance and tax professionals sometimes specialize in certain areas of financial planning (such as retirement planning, estate planning, tax planning, or investment management).

In general, individuals who call themselves “financial planners” aim to help you plan for your goals and needs and improve your unique financial situation.

What doesn’t a financial planner do? A financial planner cannot make you a thriftier shopper, a better saver, or help you earn more money. Ideally, he or she will look at your financial “big picture” and help you work to enhance it via money management. Depending on their credentials, they may recommend specific investments, long-run investing strategies, insurance options, retirement planning, risk management methods and more.

Who needs a financial planner? If you have some significant assets built up (a home, a retirement fund, savings, etc.) and are wondering about how to protect and/or grow those assets, you’re probably ready for a financial planner. If you currently live paycheck to paycheck or have less than $10,000 combined in your savings and/or any retirement accounts, then you’re probably not yet in need of a financial planner. What you should do is research savings strategies and take a good look at your spending habits so you can begin to build your wealth at a faster pace.

How much does it cost? That is a tricky question to answer. The cost of hiring a financial planner can vary depending on who you hire, where they are located and what type of “fee structure” they use. A fee-only financial planner earns a flat fee, hourly or otherwise, for their services. A fee-based planner generally prefers to charge advisory fees (often .50% to 2.00% annually of the assets under management) for his or her services, rather than commissions linked to investments or product sales.

In occasional instances, charging commissions may actually be more cost-effective for you, but may not be as beneficial. A commission-based planner typically receives the total percentage of his or her income in upfront commissions and therefore some may feel they have little incentive to service you on an ongoing basis.

In most cases, your initial meeting with one of these professionals will be free of charge (be sure to ask in advance about this), and you can discuss fee schedules and compensation arrangements at that time.

How do I choose a planner? In two words … ask questions. Ask trusted friends or colleagues for referrals. Sit down with any planner you’re considering and find out how long they’ve been in business, what their credentials are, how they operate, etc. Most importantly, make sure if and when you hire a planner that your personalities will mesh. This is someone you may well be working with for the rest of your life, so you should choose someone you feel comfortable with.

If you can’t afford a long term care policy, this may be a good alternative.

www.youtube.com/watch?v=pt6wDdc7qsU

Are you familiar with critical illness insurance? Some people aren’t. It doesn’t get as much attention as disability insurance or long term care coverage. But if you face a serious health threat, a critical illness policy can help to ease a financial burden.

A tax-free lump sum at a crucial time. That is what critical illness insurance provides. If you have a life-threatening illness severe enough to prevent you from working, the money from a critical illness policy can be used to pay medical bills and even some costs not covered by medical insurance. While the insurance premiums are not tax-deductible, the insurance proceeds come to you tax-free.¹

A few years ago, a Harvard University study determined that about half of all personal bankruptcies in the U.S. happened as a result of the debts incurred by a critical illness.² Imagine having $50,000, $100,000, even $500,000 in tax-free cash to help you out in the event of a heart attack, a stroke or cancer. That is the kind of coverage we’re talking about. In 2007, the average payout was $100,000 with the average recipient being just under 50 years old.³

What illnesses does a policy cover? Critical illness insurance can cover two dozen or more health circumstances. Nearly all policies cover most forms of cancer, heart attacks and strokes, renal failure, multiple sclerosis, and operations such as heart bypass surgery and major organ transplants. The tax-free lump sum comes to you within 30 days of a diagnosis of a life-threatening disease.⁴

Critical illness insurance doesn’t cover everything. For example, early-stage prostate cancer and less lethal forms of skin cancer aren’t usually covered. Some policies don’t provide coverage if you have lymphoma, or Kaposi’s sarcoma related to HIV. If you have already beat back a serious health threat or if cancer or heart disease runs in your family, then you are undoubtedly going to have to pay more for this coverage – and a disease you fought into remission may be excluded from the policy.

Who buys this coverage? Well, it is often sold in tandem with life insurance – but not always. There are a few different scenarios in which critical illness insurance can be a great help:

• You have a major medical problem and you don’t have health insurance.
• You have health insurance, but it won’t pick up the cost of the treatments you need.
• You face a major health scare, and you are unable to pay your bills and your mortgage because you can’t work.
• You worry about winding up in a nursing home or an assisted-living facility someday, but you can’t afford to pay high premiums for long term care insurance.

Sometimes you can guarantee the premiums on a critical illness policy so they won’t rise with time.

You don’t have to be employed to collect the benefits from a critical illness policy. You don’t have to be disabled to collect the benefits either. You don’t even have to spend the lump sum on medical expenses – you can spend it as you wish.⁵

Critical illness insurance has been around since 1983 – it was first offered in South Africa, became popular in Canada and Europe, and has become an option more people are exploring in the U.S. A 2010 study from the nonprofit American Association for Critical Illness Insurance found that 89% of those opting for the coverage were under age 45.⁶

If you’re self-employed, in a high-risk line of work, or just want to have little more protection in case a serious illness strikes, take a look at critical illness insurance. Ask your insurance agent to show you some options. You might be very thankful for it someday.

What it is and how it guides your portfolio when the markets change.

www.youtube.com/watch?v=wx8xO_8m0vI

What’s an IPS? An investment policy statement, or IPS, is the foundation of a good investment strategy. It gives you an overview of the whole investment plan: the asset allocation, the objectives, the asset management approach and the ground rules for communication between you and your advisor.

A good IPS defines your time horizon, your risk tolerance, your liquidity requirements and income needs, your return requirements, and your tax concerns. It also notes any special needs and circumstances. But most of all …

Your IPS states the parameters by which you invest. You might consider yourself a value investor, a growth investor, or a conservative investor. With that preference established, your IPS defines a long-term asset allocation for you: a way to assign your invested assets to diverse asset classes in a way that suits your preferred investment style.

Think of your IPS as long-term GPS for your portfolio. The goal is to set the asset allocation in a way that can potentially give you the highest possible rate of return corresponding to an acceptable level of risk.

Your IPS keeps you from getting “off track” when it comes to investing. Over time, your financial advisor keeps an eye on your portfolio, to see that the assets inside it stay within the allocation boundaries set by your IPS. (This is why quarterly reviews are so essential.)

Periodically, your portfolio may need to be rebalanced. Here’s why. As months go by, the ups and downs of the investment markets will throw your asset allocation slightly or dramatically out of whack. As an extremely simple example, let’s say you start out with 25% of your assets in U.S. large caps, 15% in U.S. mid caps, 15% in U.S. small caps, 20% in foreign shares and 25% in bonds. Suddenly, small cap stocks have a great quarter, and thanks to the great returns, you wind up with 21% of your assets invested in small caps and only 19% in bonds. Great, right?

No. What’s actually happened is that your risk has increased along with your return. A greater percentage of your assets are now held in the comparatively risky stock market, removed from the bond market. So while the short-term gains have been great, it’s time to rebalance according to the parameters set by your IPS so that you can help reduce your risk exposure.

For tax-deferred investment accounts, this is easily done: you simply transfer assets among accounts to restore the target allocations. Future contributions occur according the IPS parameters. When it comes to taxable investment accounts, it is usually best to ramp up future contributions to the underweighted funds rather than sell portions of a fund and trigger taxes.

Remember that you are a balanced investor. Your IPS is designed to help you invest in a consistent, appropriate way, a way that matches your preferred investment style. Without an IPS, you invite impulse, emotion and a short-term focus into the picture. If you’d like to learn more about the long-term value of an IPS, talk to your personal financial advisor today.

Good question. Congress has elected to keep us in suspense.

www.youtube.com/watch?v=o_6CnlAwiPM

0% estate taxes in 2010 … for now, anyway. On January 1, the federal estate tax went away – at least for the time being and perhaps for all of 2010 as envisioned back in 2001. President Obama and Congressional leaders wanted the estate tax to stick around in 2010 at 2009 levels (estate taxes up to 45% with a $3.5 million exemption), but lawmakers were preoccupied with other matters.^1,2

Will Washington really give families million-dollar tax breaks? If no estate tax is imposed in 2010, it could mean a savings of millions for wealthy families. There is talk of bringing the tax back retroactively – after all, the federal government could really use the money. Yet the further we get from January 1, the more difficult reinstating the estate tax for 2010 may become.

As American Institute of Certified Public Accountants vice-president for taxation Tom Ochsenschlager told MarketWatch, “They’re still talking (in Congress) about making something retroactive, but at some point they can’t do that … is it even constitutional? There’s a real question about that.”

The unconstitutional argument goes like this: if Congress moves to retroactively apply the estate tax for 2010, an estate could take the mater to court and point out that Congress had all year to reinstate it but failed to do so.

That argument aside, some estate planners think Congress will get around to a retroactive measure – one that would put the 2009 estate tax levels back into place for 2010.

So, what taxes are in place now? Some taxes still apply to estates in 2010 even if the estate tax doesn’t. People who give away more than $1 million during their life still face federal gift taxes – though in 2010, they max out at 35% instead of 45%.³

Also, all assets with capital gains are to be taxed at 15% above a $1.3 million federal exemption when sold by heirs in 2010. The big news here is that heirs don’t get to use a step-up this year. When they compute the value of an inherited asset, they have to use the basis (the original price paid for the asset) instead of how much that asset was worth when the original owner died. (In addition to the $1.3 million exemption per estate just mentioned, there is another $3 million exemption available for assets inherited from a spouse.)³

What precautions may be wise this year? As a potential heir, you’ll want to document the cost basis of any assets you might receive in 2010. Good recordkeeping is in order.

Additionally, you may want to search a trust or a will for so-called formula clauses anchored by words such as “that portion”, “that amount” or “that fraction”, especially if the will or trust was created some years ago with the presumption of a constantly increasing federal estate tax exemption.

These formula clauses are fundamental to bypass trusts created to defend estate tax exemptions for a couple. However, these clauses assume that there is an estate tax. With no estate tax in place, there is the possibility (depending on how the formula clause is worded) that a deceased spouse’s assets would not be inherited by the surviving spouse, but instead go directly into the family trust – not the most useful result for the surviving spouse.³

What will 2011 bring? Well – if there are no changes – the estate tax and the generation-skipping tax would come back in 2011. Only the first $1 million of an estate would be exempt from estate taxes. Assets above the exemption would be hit with a 55% federal penalty.³ However, the Obama administration had talked of keeping the 2009 estate tax levels in place for 2010 and beyond, which would be better than returning to the pre-EGGTRA levels in 2011.

A special category of securities worth exploring.

www.youtube.com/watch?v=_HiDnbajxSY

Before I explain preferred stocks, let me explain dividends. Dividends are a part of the earnings that a corporation has that are paid out to it’s shareholders – usually on a quarterly basis. Let me give an example. Let’s say you own 1 share of xyz company, and that company is paying out a $5 annual dividend. Every quarter you would receive $1.25 for every share that you owned.

Preferred stocks are stocks that tend to pay sizable dividends. Institutional and individual investors buy preferred stocks because they offer fixed dividends – in fact, dividend yields are typically greater than those of common stocks.¹

Preferred stocks are occasionally called hybrid securities, because they have characteristics of debt instruments (meaning bonds) as well as equities. Let’s review some of their features and pitfalls.

A big feature is the priority of dividend payouts. As the “preferred” adjective implies, these shares are a step above common stock. If you own preferred stock in a company, you will get your dividend first; all the common shareholders will get theirs second if there is money left over. You also have preference if a corporation declares bankruptcy or liquidates and sells assets. In that instance, debt holders are paid first, then the preferred shares, and finally the common shares.

Dividend determination. Dividends paid out on preferreds are akin to coupon payments on a bond. A preferred stock obviously doesn’t have a maturity date like a bond, but it does have a par value, which is used to figure out the payouts. (A good stock research website can help you find the par value and preferred dividend rate of return.) You determine the preferred dividend by multiplying the preferred dividend rate percentage by the par value.

Accumulating dividends. Sometimes a corporation can’t pay dividends to preferred shareholders. If that’s the case, the company will often let the preferred stock dividends accumulate until cash flow improves.

The five kinds of preferreds. Most preferred stocks are cumulative – that is, any missed dividend payments accumulate for an eventual payout. So if a company can’t afford to make the dividend payment for 2 years and then it has the money to do so, the preferred stocks must be paid retro for the missed 2 years while the common stock gets no such consideration. Most preferreds are also callable – that is, the stock issuer has a chance to call (redeem) the shares at par value. Yields on preferred shares sometimes include premiums in recognition of this risk.

Some preferred stocks are convertible, with embedded options allowing you the chance to exchange preferred shares for common ones. (Sometimes a provision is allowed that gives the issuer (or company) the chance to call for the conversion.)

Some preferreds are participating – when a company does well, the dividends from these shares may be greater than the published yield. Finally, when a corporation issues multiple rounds of preferred stock, there may be preference-preferred shares; if you own shares from the first issuance, your preferreds take priority over preferreds issued later.

Now let’s talk about some possible pitfalls. So what is the downside of owning a preferred stock? Well, they do present potential and actual disadvantages. When a market sector heats up and common shares take off, preferreds often lag behind. Also, interest rate hikes can reduce the value of preferred shares. Additionally, you have no voting rights as a preferred shareholder.

Let’s address ratings. There is no “official” rating system for preferred stocks; however, the big credit agencies that rate bonds rate preferreds as well. Standard & Poor’s and Moody’s do, and when they downgrade, it can hit a preferred stock hard. Preferred stocks rated beneath BBB- at Standard & Poor’s or beneath Baa3 by Moody’s are considered junk preferreds.² If you have to go outside of S&P or Moody’s to find a preferred stock’s rating, that’s a red flag – it might mean that it couldn’t get a decent rating from S&P or Moody’s.

A preferred stock investor would do well to research a company’s financial ratios and cash flow, and its interest coverage ratio (higher is usually better).

Before you decide, consider the variables. Preferred stocks have looked attractive to retirees and others who are just seeking consistent dividends and quite happy with that. Rather than explore them alone, you should see a financial consultant who can help you thoroughly understand your options in this area and compare them to other choices you may have.

Investment advice is offered through Pete Mitchell, Inc. a registered investment advisor.com

Citations.

¹ mercurynews.com/columns/ci_14249188 [1/23/10]

² kiplinger.com/magazine/archives/2003/10/preferred.html [10/03]

This material was prepared by Peter Montoya Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information should not be construed as investment, tax or legal advice.

What it is, how it works, and how to get started.

www.youtube.com/watch?v=6H_zzmqy3DA

If you are confused or unsure, you’re not alone. It’s amazing to me how many adults, many of them college grads, know practically nothing about the stock market. Many schools simply don’t offer or don’t require the classes that cover it. If you’ve been holding off on investing because you simply didn’t know enough about it … that’s probably wise. But rather than delay any longer, here’s some information to get you started:

The nuts and bolts. Basically, if you own a stock, you own a part of a company. You’ve invested in that company. If the company does well, the value of your stock tends to rises. If the company does poorly, the value of your stock tends to fall. The value of the stock, or the share price is determined by supply and demand. When more people want that stock, perhaps because it is doing well, the price goes up. When less people want that stock because they see less value in the company, the price goes down. That is the stock market in the simplest terms.

When you hear “The market.” Think of it like a flea market. Rather than travel all over town, a flea market offers you a central location where buyers and sellers can meet up. The stock market isn’t all that different. Stock markets are simply gathering places for stock owners to buy and sell stock securities.

Heard the term exchanging or trading? These are terms you hear frequently in regard to stocks, but they can be misleading … and perhaps this is one reason there is so much confusion. You’re not actually exchanging stocks, and you’re not really trading stocks. You are buying them or selling them.

How much does it cost to buy or sell a stock? Actually, there are two costs to consider … 1) The cost of the stock, and 2) the cost of the “trade”. The price of the stock varies hugely from company to company and can change from moment to moment, so that’s a question I can’t answer for you. But there’s also a fee to buy or sell a stock (or “share”). The amount of the fee depends on which stock brokerage you use. Generally these fees can range from under $10 to $20 or even up to $100 per “trade”. Keep in mind you will pay a fee when you buy your stock, and again when you sell it.

What is a brokerage? A brokerage is a conduit for the buying and selling of stocks. For example, let’s say you want to buy a stock that’s listed on the New York Stock Exchange (NYSE). Well, that stock is bought and sold on the floor of the NYSE. So, unless you are authorized to trade at the exchange and want to travel to New York, you instead enlist the services of a broker to take care of your buying and selling for you. Brokerages pay fees to become members of a stock exchange and access the “floor” of an exchange for trading. They then buy and sell stocks on behalf of their clients.

So, how do you get started? There are all kinds of ways to get started and a myriad of brokerage choices, including discretionary dealing (where the brokerage chooses stocks on your behalf), advisory dealing (where the brokerage gives you advice, but leaves the decisions up to you), and execution-only brokerages (where you will be entirely self-directed). Most brokerages have a minimum deposit you must make to get started, so you’ll want to look into that as well. If you’re serious about investing and want to do it frequently and avidly, read up on the markets and consider taking a class to educate yourself.

What is Pete Mitchell, Inc.? My company is what is called a Registered Investment Advisor, or an RIA for short, not a stock broker. Now me personally, Pete Mitchell, I am an Investment Advisor Representative of my company. Even though there are many, the principle difference between an RIA only firm and a brokerage firm (also called a Broker/Dealer) is that we do not earn a commission or charge a fee to make trades for you. We charge a fee for our investment advice.

That may not make any sense to you so let me explain.

Stock brokers typically earn a commission when they sell you a product. After you are in the product, little if any, additional commissions are paid to the broker.  This means that the stock broker does not have the same financial interest that you may have when it comes to investing.

My type of firm charges a fee based on the assets we manage.  This is a percentage of the account (typically 1-1.5%). We get paid 25% of this fee every quarter. So if your account goes down because of either what is going on in the market or some other reason, our paycheck goes down as well. So here is my question for you. Who is more likely to be concerned with what is happening with your account? The guy who got paid up front or the guy who loses when you lose and wins when you win?

It is a rhetorical question.  I think you know the answer to that.

In summary. Before you make any big decisions, though, think about enlisting the assistance of a qualified financial professional who can give you insight and perspective on the financial markets.

Investment advice is offered through Pete Mitchell, Inc. a registered investment advisor in the state of California.

This material was prepared by Peter Montoya Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information should not be construed as investment, tax or legal advice.