Tech Stocks Set to Soar in 2011

By: Kerri Shannon

Technology companies, and tech stocks, started a revival in 2010 and are heading toward an even more profitable 2011. That's because a new age of computing - one that prioritizes mobility and efficiency - has dawned in the computing world.

Indeed, we've entered what researching firm International Data Corporation (IDC) calls a "new era" of computer usage.

Roughly half of all regular Internet users in 2011 will use non-PC devices, according to IDC, which says a trend becomes mainstream when it constitutes more than 15% of the market.

Just as the smaller PCs of the 1980s supplanted the lumbering terminals of the 1960s, PCs are being replaced by a variety of hand-held devices - like Apple Inc.'s iPhone and iPad and Research in Motion Ltd.'s Blackberry.

"The PC-centric era is over," IDC said in its annual report, released in November.

The firm predicts 330 million smartphones will be sold worldwide next year along with 42 million media tablets.

"These devices will be increasingly embraced as complements if not substitutes for PCs where voice and light data consumption are desired," Raphael Vasquez, an analyst at tech research firm Gartner Inc., said in a statement.

A slowdown in global PC shipments is already hitting manufacturers. Gartner cut its 2011 prediction for PC shipments to a 15.9% rise from 2010, down from the 18.1% increase the firm originally expected.

By mid-2012, non-PC devices are expected to out-ship PCs, Gartner says.

http://seekingalpha.com/article/244003-tech-stocks-set-to-soar-in-2011-as-new-era-of-personal-computing-dawns?source=dashboard_stocks-sectors

Bush Era Tax Cut Extension: Best News Possible for Dividend Stocks

By: Carla Pasternak

You've no doubt heard the Bush-era tax cuts have been extended.

After much sound and fury, Congress voted to extend the tax breaks to all Americans, including those in the top income brackets. The tax cuts were set to expire at midnight on Dec. 31, but will be extended through the end of 2012.

Lost in the headlines was some of the best news we've heard in a while. The 15% tax cap on qualified dividends and long-term capital gains was extended as well. And a tax rate of 0% on qualified dividends and long-term capital gains will apply for investors in tax brackets below 25% (those making less than $34,000 this year).

The deal puts an end to a debate that, if unresolved, would have seen Americans facing big tax hikes in 2011. It's expected to give a major boost to the economy by providing consumers and businesses with more cash to spend.

Mark Zandi, the chief economist of Moody's, upped his economic growth forecast for 2011 to 4% from 2.7% after the deal was announced. And what's good for the economy can be good for dividend-paying stocks that use their higher profits to ratchet up payouts.

Standard & Poor's estimates investors with taxable accounts will pocket an additional $74.5 billion during the next two years under the extended 15% dividend tax treatment. Over the nearly 10 years that income investors will have enjoyed the reduced dividend tax rate, we'll have raked in an additional $348.4 billion, says Standard & Poor's.

http://seekingalpha.com/article/244070-bush-era-tax-cut-extension-best-news-possible-for-dividend-stocks?source=dashboard_investment-ideas

2011 Analysis: “Look for underappreciated stocks… and growth stories”

By: William Bower, Fidelity Investments, Manager Fidelity Diversified International Fund.

Looking at Europe and Japan, developed market economies have some very similar problems to those we are seeing in the United States: slow recovery and slow job growth. While the United States seems to be aggressively trying to restructure its banking system, Europe, in particular, has struggled to produce a concerted response. I think the outlook for developed markets at the moment is challenging.

Globally, the only place that seems to have had meaningful growth recently has been the emerging markets. Brazil, China, and India have shown their mettle despite the broad slowdown in developed market economies. Their domestic economies have grown large enough that they've been able to grow on their own rather than rely solely on exports. It used to be that when the United States slowed down, emerging markets got crushed. That's just not the case anymore.

But there is no free lunch here. You have to look at the valuations. If you want to own growth in emerging markets, you're going to have to pay for it. I wouldn’t say it’s a crowded trade, but the merits at this point are well known.

From a top-down view, I think the outlook for the United States is marginally better than for other developed nations, but they all face very similar problems. And the emerging markets are a place where you can get growth, but you have to consider the valuations very carefully.

Follow the growth

The valuations are cheapest in those parts of the world where you have the greatest problems-the developed countries. So, if Europe and the United States really improve, if job growth kicks in and the developed world recovers, that's probably a better place to be in terms of investments. On the other hand, if we limp along and have a pedestrian recovery, investors probably want to have some exposure to emerging markets.

I don't know how the recovery will unfold, so I have owned both. I think international investing is like casting a net; it's just a much bigger net.

Think energy, emerging market consumers, technology

There are a couple of long-term investment themes that I find appealing. One has to do with energy. Because oil is one of the few commodities in the world that tends to operate at high capacity utilization, there isn't a lot of excess in the supply chain. As emerging markets grow and develop, I think oil is going to get tighter.

China currently consumes about 13% of the world's oil. But when you look at other commodities, such as copper and iron ore, demand from China can be as high as 50% of the world’s total. I think oil may follow that trend. Over the next five to ten years, I believe oil consumption in China could double.

Emerging market demand doesn't just show up in commodities, however. Major consumer product companies have achieved 30% to 40% of their revenues from emerging markets, which is tempering slow growth in developed world markets. I am also interested in technology.

The bottom line

Relative to fixed income, stocks seem like a good position to me, especially if the global recovery is better than expected. When you look at the United States and Europe, I feel valuations are generally inexpensive, particularly when you think of other alternatives like bonds. But I think it’s possible to find attractive stocks in both the developed and the emerging markets. I look for underappreciated stocks and companies with compounding growth stories that will be really resilient in challenging economic environments.

2011 Analysis: "The market is running on twin turbos"

By: Jurrien Timmer, Fidelity Investments, Director of Global Macro

I'm bullish because I see a scenario unfolding over the next six months that echoes that of 2009. Recall that in March 2009, the markets were pricing in Armageddon, a severe depression. Instead, the Federal Reserve intervened on the order of $1.75 trillion in 2009, through its first quantitative easing (QE), and the recovery began. The S&P 500 shot up 80% from its March 2009 low.

Fast forward to 2010. In the spring of this year, fiscal stimulus was on the wane. The rebuilding of inventories, which had helped GDP, had run its course. So these drivers of recovery were ebbing just as the European debt crisis was threatening to spread contagion to the U.S. financial system. We had a mid-cycle slowdown, and the market started to fear a double-dip recession. It was a little like early 2009 though on a more modest scale.

But, as in 2009, the Fed stepped in with QE2 and injected $600 billion into the financial system. Once the Fed signaled this was going to happen, the stock market took off and had its best September since 1939.

A repeat of 2009

I'm looking for this process to continue in the first half of 2011. We're getting an organic economic recovery plus aggressive Fed monetary stimulus. So it's like the market is running on twin turbos.

I'm what I call "risk on" — bullish on traditionally riskier investments like stocks, corporate debt, commodities, gold and silver, non-U.S. dollar currencies and emerging market stocks. I am negative on the dollar and U.S. Treasury bonds.

Exodus from bonds?

Another reason I am bullish for 2011 is that investors might start to think about exiting bond funds. From October 2007 to October 2009 bond funds attracted $650 billion, which is a staggering amount. At the same time, $265 billion has been redeemed from stock funds since the October 2007 high, according to the Investment Company Institute.

With interest rates low, the bond market isn't providing much in terms of returns. Stocks, meanwhile, are up 20% from their July lows and up 10% year to date. If $200 billion to $300 billion leaves the bond market and goes running after stocks, it could send interest rates higher and push up stocks. I don't know if that will happen, but we should not underestimate the impact if it does.

Down on Treasuries, up on corporates, high yield

I divide the bond market into two separate camps. I'm bearish on Treasuries, because the risk is that interest rates will move higher. Still, I am more positive on corporate and high-yield bonds, because an economic recovery should help the corporate side.

Bullish on gold, silver, foreign stocks and currencies

At the same time, I believe the dollar will continue to weaken because of the loose monetary policy being pursued by the Fed, and also by Europe, the UK, and Japan. Many other countries—China, Australia, and Brazil—are actually starting to tighten rates because growth and inflation have picked up.

Since gold and silver are priced in dollars, they will rise as the dollar falls. I would expect non-U.S. securities and non-U.S. currencies may also appreciate, reflecting the dollar's decline. This is why I'm also bullish on those investments.

QE3?

With fiscal stimulus waning, the Fed has to do nearly all the heavy lifting to keep a still fragile organic recovery alive. This reliance on monetary stimulus is actually more pronounced in Europe, where fiscal austerity is causing the European Central Bank to apply all the stimulus. Governments can't do it, because they are cutting spending

This may even play out in the U.S. municipal market, because local governments are facing budget pressures and cutting spending. If I were the Fed, the muni market would seem like an obvious choice to do QE3. But this is entirely my conjecture—the Fed has not said anything about it.

The thing to remember is that so much is at stake for the Fed. It has thrown all its political capital into the fight against recession. So I don’t think the Fed is going to just sit there now and let it all its work be destroyed. I think the Fed is going to do whatever it takes to keep the recovery alive, even if it means very unconventional measures.

2011 Analysis: "I think 2011 will feel better than 2010"

By: Lisa Emsbo-Mattingly, Fidelity Investments, Global Asset Allocation Team.

Usually when you exit a recession, you have pent up demand for consumer durables—like cars and washing machines—and housing. This is typically one of the first big drivers of a recovery. Not this time. Housing and autos are both well below their 2007 levels. But I believe there may be a silver lining in this slow recovery: consumer demand, rather than coming back with a bang, may have a longer fuse. So, I think 2011 will feel better than 2010—and certainly better than 2009.

Because incomes drive spending, I believe improvements in the labor market are still critical for the economy. Despite a worse-than-expected November unemployment number, we are getting lots of signs of a continued recovery in the job market. Private sector jobs are growing at a rate not seen since 2007. Weekly initial unemployment claims have declined to early 2008 levels according to the Labor Department. Hours worked in nearly every industry are rising rapidly, according to the Bureau of Labor Statistics. In my view, that indicates a building need to hire more workers.

Finally, one of the biggest drags on the labor market, construction and manufacturing, may finally be stabilizing. Over the past three years, the U.S. economy lost more than 7 million jobs. More than half of those jobs were in construction and manufacturing. Over the past year, the job losses in these sectors have slowed or even stopped. Going forward, the recent rise in pending home sales and the continued strength of manufacturing surveys indicate that jobs losses in the worst hit sectors of the economy may be behind us, and we may even see gains in 2011. As these key sectors normalize, I believe we'll continue to turn the jobs and income picture around.

Rebound ahead in hiring, capital spending

I think companies are beginning to realize they're losing business because they've held off hiring for so long. Now, I believe they actually have to push the button and make those hires.

I think the out-performers in this market are going to be companies that can grow their profits through revenues, because the margin expansion that we saw over the last couple of years is behind us. You're not going to get profit growth from cost cutting anymore. I believe the only way for most companies to get profit growth will be to increase top-line revenue. And I believe to grow top-line revenue, companies will need to hire and invest.

Opportunities from more capital spending and hiring

I anticipate gains in sectors that benefit from this need to hire and invest. Among them: industrial and technology companies, which include everything from truck makers to machinery manufacturers to software developers. Companies that benefit from an improving jobs market – media and telecomm services – also should show good results. Typically at this part of the recovery, some of these sectors are starting to slow. But while we have seen them grow internationally, we're just beginning to see gains domestically.

A higher stock market?

I think that profit growth is going to track gross domestic product (GDP) growth, which is nothing to write home about. But corporate profits are already extremely high; both U.S. total profits and S&P earnings are at or above their 2007 levels. I believe this implies that the market should be trading higher than it is.

How to get financially fit in the new year

By Brett Arends, The Wall Street Journal — 12/19/10

It's time to think about getting in financial shape in 2011. Vague resolutions and good intentions won't do it. You have to have a plan. Stumped for ideas? Here's a 12-month agenda.

No, it's not comprehensive. But it's doable.

Each month, set one financial target and hit it. Easy, manageable -- and it means this time next year you'll be looking back on 2011 with some satisfaction.

January: Max those savings! Financial planners argue you should be saving 15% or more of your income each year. Set your 401(k) contributions to the highest level you can handle. At least contribute up to any company match, and ideally push the limits -- $16,500 if you're under 50, $22,000 if you're over. If you are self-employed, or have self-employment income, talk to a broker about special tax-savings vehicles open to you, including Solo 401(k) plans, SEP-IRAs and Keoghs.

February: Target your cash flow. Get out all your statements and check stubs for 2010 and work out where all your money went. Chances are you spent more than you planned, or maybe realized. Restaurants, shopping, premium cable, car payments -- it all adds up. If you want to get control of it, you have to understand it. Now set a budget, and talk to your family about ways to cut back and save more.

March: Live without plastic for a month. Lock up your credit and ATM/debit cards. Generations lived without the spending ease and convenience of plastic. It is no coincidence they found it much easier to live within their means. Try it. Set a weekly budget, cash a check for that amount at the bank each week, and live on it. Unless you are traveling -- where a card can be invaluable -- you may find it easier than you imagined. Once you get used to it, keep going.

April: Spring clean your investments. Decide on the asset allocation you should have. Then look at what you have right now. There's probably a ton of rubbish in there -- mediocre mutual funds, stocks bought on tips, money left sitting in a low-yielding account. Don't forget the unused car in the garage that's still worth $4,000. Time to stop procrastinating. Clear out the rubbish, and put the money to better use.

May: Zap the debt. Pretty much any debt other than a reasonable mortgage is a burden. Credit-card debt is a disaster -- you're basically going backward financially as long as you carry a balance from month to month. To pay the 15% interest rate, you have to earn maybe 20% before tax. Not gonna happen. Cut up the cards, and live like a pauper till you get out of credit-card jail.

June: Invest in yourself. Kudos to financial planner Dennis Stearns of Greenboro, N.C., for this suggestion: When someone asks him about investments, he writes, "I ask them how much they could improve their lot in life if they invested [some money instead] in a leadership workshop, better communication skills or anything to improve their productivity." After all, your knowledge and skills are your most important asset. This month, explore adult-education opportunities in your area.

July: Check your progress on the cash flow. Print out all your statements. Analyze spending by categories. See what you planned to spend, and what you actually spent. This is a constant battle. Still looking for savings ideas? Cancel cable for the next few months. It's summer time -- what are you doing indoors watching TV?

August: Convert your traditional individual retirement accounts to a Roth IRA. There will be a tax hit upfront, but thereafter money in a Roth grows tax free forever. Even better: There are no required minimum distributions after age 70. Before 2010, Roth conversions were typically limited to those earning below about $100,000, but that limit was abolished: Anyone can now convert to a Roth.

September: Negotiate a Christmas truce with all the adults you know. That means family, extended family and co-workers. Stop the holiday shopping waste before it starts. This may save you hundreds of dollars. The only thing you will lose will be a bunch of sweaters you won't wear and trinkets you don't want. They'll save the same thing, too.

October: Tackle your insurance. Dull? Chances are you are wasting hundreds of dollars a year on homeowners and car insurance. The insurance industry thrives on your laziness: Studies repeatedly find that identical coverage can sometimes cost half as much. Take this month to shop around aggressively to find cheaper coverage. And find out how much you can cut your premiums if you raise your deductibles. Sometimes that's a no-brainer.

November: Update your will. Do you have one? And if you do, how long ago did you check it? Circumstances change. Maybe you've had children or grandchildren. Or minors have graduated. Your assets have grown (or, alas, shrunk). Too many people avoid dealing with their wills because thinking about death makes them feel yucky. Too bad. You're going to die, like me, like everyone else. Deal with it. Dying with an out-of-date will can cost your family incredible amounts of pain and money and throw away decades of hard work.

December: Open 529 plans for your children and grandchildren. These are no-brainers. The money grows tax deferred (and tax free if it's spent on qualified education expenses). It will help discipline college savings. After two years, the money is also sheltered from creditors -- something to keep in mind as you contemplate the financial upheavals and increases in personal bankruptcies of the last few years. Oh, and you keep control of the money, so Missy can't take it and run off to join a cult. (Well, she can, but at least she can't take the college money with her.)

Good luck -- and best wishes for a happy, prosperous and financially fit 2011.

How the new tax law may affect you

After weeks of heated Congressional negotiations on Capitol Hill, a tax bill has finally been cleared for President Obama’s signature. The bill temporarily extends the 2001 and 2003 federal income tax rate cuts, extends unemployment insurance for 13 months, provides new payroll tax breaks, reinstates the estate tax, and more.

The good news: The new law will give taxpayers a bit of clarity—and an opportunity to plan with relative confidence knowing that the playing field won’t change dramatically, at least for two years. But beyond that, an increase in the Medicare tax for upper-income Americans is slated for 2013. And more changes are likely in the future, given the pressure to raise revenues to reduce the deficit, and talk of sweeping tax reform.

Passage of this tax bill ensures that individuals at all income levels won’t face an automatic tax increase in January. The bill provides taxpayers with some certainty, but Congress will be back at the table having the same debate in two years.

https://guidance.fidelity.com/viewpoints/new-tax-law

401(k) changes give savers a brighter future

BOSTON (MarketWatch) -- If you’re one of the 72 million workers with a 401(k), you should consider 2010 a very good year. And 2011 might even be better, according to experts who track what some consider the retirement plan of record for many Americans.

So, what were some of the best (and worst) changes that were made to 401(k) plans in 2010 for the benefit of workers and what sort of changes should be made in 2011? Here’s what experts had to say.

New 401(k) fee disclosure rules

In October, the Labor Department’s Employee Benefits Security Administration issued a new rule that requires plan fiduciaries to disclose more information about 401(k) fees and expenses — including quarterly statements of plan fees and expenses and information about the cost of their investments — to participants.

Roth in-plan conversion option

The Small Business Jobs and Credit Act, which was signed into law on Sept. 27, has a number of provisions that affect those saving for retirement, including one that allows participants in 401(k), 403(b) and governmental 457 plans — beginning Jan. 1, 2011 — to roll over pretax account balances into a Roth account instead of having to roll those assets into an outside Roth IRA. And that in effect helps those saving for retirement save more money on an after-tax basis.

Employers reinstate matches

In 2009, many employers stopped matching their worker’s contributions. In 2010, however, some employers reinstated their matching programs. Widespread reinstatement of matching contributions was probably the best initiative in 2010 by plan sponsors.

Automatic enrollment, automatic escalation, and the like

Stacy Schaus, senior vice president at Pimco and author of “Designing Successful Target-Date Strategies for Defined Contribution Plans: Putting Participants on the Optimal Glide Path,” said some of the best changes to 401(k) plans center on automatic enrollment, automatic escalation and automatic rebalancing.

Investment options

More than a few experts said plan sponsors also changed the number and type of investment options in 401(k) plans for the better.

The year ahead

While 2010 will go down as a mostly good year for workers with a 401(k), there’s much more to be done in 2011 to improve retirement security.

The voluntary employer-sponsored 401(k) has helped millions of Americans save trillions. We should use this successful platform to address two key challenges: a lack of access to retirement plans and inadequate savings rates.

http://www.marketwatch.com/story/401k-changes-give-savers-a-brighter-future-2010-12-16?pagenumber=1

Tax Bill Would Slow the Rush to Die

Here's what taxpayers are expected to get.

A $5 Million Exemption: For estates of individuals who die in 2011 or 2012, the proposed tax-cut extension package would establish a $5 million federal estate tax exemption. That's at the upper end of what we reasonably could have hoped for. Big estates would be taxed at "only" 35% above the $5 million threshold, and that's about as low as we reasonably could have hoped for.

Ability to Leave the Unused Exemption to the Surviving Spouse: For the first time, married individuals who don't use up their exemptions would be able to pass along unused amounts to their surviving spouses.

For example, say you die in 2011 with a $3 million estate. With the $5 million exemption, you could leave everything to your kids without any federal estate tax hit. Then, the executor of your estate could pass along your $2 million unused exemption to your surviving spouse. If she then dies in 2011 or 2012, she could leave up to $7 million more to the kids without any federal estate tax hit (by using her $5 million exemption, plus your unused $2 million exemption). Alternatively, you could generally leave your $3 million to your spouse without any federal estate-tax hit and without using any of your $5 million exemption. If your spouse then dies in 2011 or 2012, her estate would have a whopping $10 million exemption to play with (her $5 million plus your unused $5 million). So she could leave up to $10 million to your kids without any federal estate-tax hit.

Key Point : The ability to effortlessly pass along your unused exemption to your spouse would be a very favorable development. It would ensure that both your exemption and your spouse's exemption could be taken advantage of without having to set up trusts or jump through any other hoops to do so. Only truly well-off couples would get socked with the federal estate tax.

Unlimited Income Tax Basis Step-Up for Inherited Assets: The proposed legislation would also restore the familiar rule that allows the income-tax basis of inherited capital-gain assets (such as real estate and stock) to be stepped up to reflect the full fair market value on the date of death. This rule was suspended for 2010 and replaced by a complicated provision that limits income-tax basis step-ups to $1.3 million, plus another $3 million for assets inherited by a surviving spouse. Bottom line: if the unlimited basis step-up rule is restored as expected, heirs won't owe any federal capital gains taxes on appreciation that occurs through the date of death.

Equalized Estate and Gift Tax Exemptions: Last but not least, the proposed legislation would set the lifetime federal gift-tax exemption at $5 million – same as the estate tax exemption. So an unmarried person could give away up to $5 million while alive without paying any federal gift tax. A married couple could give away up to $10 million. This is a huge improvement over the current $1 million gift-tax exemption. (To the extent you dip into your gift-tax exemption, your estate tax exemption would be reduced dollar-for-dollar.)

Stay Tuned: This Is Not a Done Deal

The proposed estate-tax changes are beneficial, and the increased gift-tax exemption would be a nice bonus. However this stuff must get through both the House and Senate to become law. I think that will happen, but it's too soon to celebrate. Once the dust settles, I'll have some specific strategies to tell you about.

Read more: Tax Package Includes Favorable Estate Tax Changes - SmartMoney.com http://www.smartmoney.com/personal-finance/taxes/tax-package-includes-favorable-estate-tax-changes-1292368597065/#ixzz18II5ufRF

Clients Aren’t Pulling Trigger On Referrals, Survey Says

While most clients say they are ready and willing to provide a referral for their financial advisors, many of them are not actually following through on it, according to a recent report released by Advisor Impact, Charles Schwab Advisor Services, and researchers at Texas Tech University, who surveyed advisors’ clients. Some 91 percent of respondents to the survey said they are comfortable providing a referral, but only 29 percent of them had acted on it in the past 12 months. Clients identified as “engaged” were more likely to offer referrals, the survey found.

“This study underscores that there is a direct economic correlation between having ‘engaged’ clients and having a thriving practice,” said Nancy Allen, director of Business Consulting Services with Schwab Advisor Services, which sponsored the survey.

“Engaged” clients, who made up 24 percent of those surveyed, provided a satisfaction rating of eight out of 10 or higher, 10 being the highest, and a loyalty rating of four or five out of five. And a full 100 percent of these engaged clients had provided a referral in the last 12 months.

“These ‘engaged’ clients are a great source of referrals for advisors, they just need to know how to close the gap by working with the right clients, having the right conversations and asking the right questions,” Allen said.

When clients were asked about their motivation to refer, the top reason was reciprocity, with 58 percent saying they wanted to thank their advisors for the good job they were doing. But there seemed to be a disconnect between their good intentions and actual action. “Being motivated to help simply isn’t enough,” said Julie Littlechild, president and founder of Advisor Impact.

Clients seemed only to act on their willingness to provide a referral when there was a clearly stated need on the part of a friend or family member, said Littlechild. When asked about why they took action on the referral, 57 percent said a friend had described a financial challenge, while 48 percent said a friend asked for a recommendation. Only 2 percent made a referral because an advisor had asked for a name.

According to Littlechild, because most referrals happen when a client becomes aware that a friend needs advice, a better approach for advisors might be to help clients identify friends with advisory needs and help them understand what kinds of problems they can solve. In fact, when asked what advisors could do to encourage more referrals, 58 percent of respondents who had already offered three to four referrals said advisors could help them understand how to help their friends.

To have the most immediate and substantial impact on the business, Littlechild suggested focusing on those clients with whom the advisor has a deep relationship and those clients who already have a propensity to refer.

http://registeredrep.com/news/clients_arent_pulling_the_trigger_on_referrals/?cid=nl_wm

Retiring in 10 years? Uh-oh

Your nest egg is a lot skimpier than it should be. Here's what you can do now.

By Karen Damato, The Wall Street Journal — 12/06/10

Imagine this scenario: You're only five or 10 years from when you hope to retire—but your portfolio looks like it needs another lifetime to bulk up.

What do you do?

Many people, of course, don't need to imagine it. It's their reality—the result of watching their investments get clobbered in the two bear markets of the past decade. And many others will face this sad state in the years ahead.

If you're one of those people, the first step is to take a deep breath and remind yourself that you're far from alone. Misery does love company.

Next, consider two messages that financial pros say people need to hear before any more time elapses:

No. 1: If your nest egg is far smaller than you will need in order to comfortably leave the work force, investment returns alone are unlikely to bail you out. You need to get serious about trimming your spending to save more money, or resign yourself to working more years.

No. 2: When your nest egg is small and time is short, you can make things worse for yourself by being either too conservative or too aggressive.

Many pre-retirees hew to one extreme or the other. When Fidelity Investments recently studied participants in the 401(k) plans it oversees, it found that 28% of participants age 55 or older either had no money in stocks or 100% of their 401(k) balances in stocks. (The no-stock folks were slightly more numerous than the all-stock crowd, 15% to 13%.)

Here's a closer look at the challenges for pre-retirees and their options.

No time for compounding

One way to estimate the lump sum you'll need for retirement is to rough out how much money you'll need to pull from your portfolio annually when you retire—and multiply by the painfully large number of 25. That's based on the rule of thumb that you can probably withdraw 4% of your account value in year one and adjust that by inflation each year. (That assumes you're investing in a mix of stocks and bonds and want your money to last for 30 years.)

If you're nowhere near that target now, making changes to your asset mix—typically by adding stocks—isn't as powerful a tool as it was when you were younger. It's simple math: There aren't many years for compounding to do its magic before you start pulling money out.

Moreover, while stocks are typically the driving force in a long-term portfolio, due to their higher average returns over time, they are also a wild card. Pre-retirees face a catch-up conundrum: They could sure use the payoff from being heavily invested in stocks when the market is in a strong upswing. But they can't afford the risk of having their already skimpy nest eggs decimated shortly before or after they leave the work force.

Loading up on stocks "radically expands the range of outcomes you may experience," says Christopher Jones, chief investment officer at Financial Engines Inc., Palo Alto, Calif., which provides advice and investment management to retirement-plan participants. And in the worst cases, "what was an uncomfortable situation can go to really uncomfortable."

Finding a balance

What that means for how you invest is this: If you have very little in stocks—say, because you fled equities amid the financial crisis of 2008—you can boost your expected return by adding some stocks to the mix. And by doing so, advisers say you'll probably be able to increase the cash you can safely withdraw. Even 20% of assets in stocks may make a difference.

Just don't go so far that you are setting yourself up to bail out the next time the market plunges. While taking more investment risk might make sense mathematically, "you don't magically become more risk-tolerant just because you have to," says Rande Spiegelman, vice president of financial planning at Charles Schwab Corp.

But if you've already got a lot in stocks, increasing that bet further could backfire—making your returns so unpredictable that it actually reduces the amount of money you can safely withdraw from your portfolio.

Particularly risky are big bets on individual securities, including your own company's shares. But about a quarter of 401(k) participants age 60 and older have more than 20% of their 401(k) money in employer stock, according to Financial Engines. These workers "mistake familiarity for safety," says Mr. Jones, who warns that most individual stocks "have two to three times the risk of a more broadly diversified equity portfolio."

Modeling the future

Many financial firms use "Monte Carlo" simulations in which they look at thousands of possible patterns of market performance and evaluate the probabilities of different investment results.

Using that type of analysis, Mr. Spiegelman of Charles Schwab advises that people within three to five years of retirement should have no more than 60% of their assets in stocks and preferably closer to 40%. By Schwab's math, stock exposure at just 20% of the portfolio can work, too, if you're willing to start off withdrawals at 3.8%, not 4%, of your nest egg.

In all three cases, if you maintain that portfolio mix through retirement, Schwab has calculated that you've got a 90% probability of your money lasting 30 years.

But Mr. Spiegelman cautions that the guidelines about how much you can pull out in retirement are all ballpark figures "based on a best guess using reasonable assumptions." He says people in retirement should stay flexible about adjusting their withdrawals to actual market conditions.

Christine Fahlund, a senior financial planner at T. Rowe Price Group, concurs that "the sweet spot" for stock exposure is usually between 40% and 60% as people approach and enter retirement. At 10% or less in stocks, "you don't have the upside growth potential," she says. And if you have 80% or more in stocks, "you have so much volatility that to maintain [a high] likelihood of not running out of money, you can't withdraw as much."

Other answers

Some other financial firms and advisers come up with very different suggested portfolios for cash-strapped pre-retirees, by approaching the issues of portfolio risk from a different angle.

Some professional investors design portfolios so that raising and lowering stock exposure isn't the primary way to adjust risk and potential returns. For instance, in its target-date funds, Invesco Ltd. aims to spread the risk fairly evenly among three asset types—stocks, commodities and bonds—because they tend to perform differently in different economic environments. It uses derivatives contracts to add more volatility and potential return to the relatively sedate fixed-income class.

Another school of thought is that investors who are behind the eight ball would be foolhardy to do anything but invest very conservatively.

"Focusing on probability of success misleads people by ignoring the severity of failure," says Zvi Bodie, a finance professor at Boston University. He generally advises retirement savers to limit stock holdings and to rely heavily on Treasury inflation-protected securities, or TIPS, and Series I inflation-indexed savings bonds to lock in a minimum level of income that will keep up with rising consumer prices.

Advisor Software Inc., a Lafayette, Calif.-based seller of financial-planning software to financial advisers, also emphasizes a safety-first approach. For a pre-retiree who is coming up short, the company might suggest a portfolio of as much as 85% to 90% in bonds—with much of that in TIPS—and only 10% to 15% in stocks, says company President Neal Ringquist. If you can't afford to lose what you've got now, "then it simply doesn't make sense to put these assets at risk," he says.

Strategists Predict 11% S&P 500 Gain In 2011

(Bloomberg News) Rising profits and cash balances will push the Standard & Poor’s 500 Index to the biggest three-year advance since the 1990s, surpassing forecasts for below-average returns, strategists at Wall Street’s biggest banks say.

The benchmark gauge for American equities will rise 11% to 1,379 in 2011, bringing the increase since 2008 to 53%, the best return since 1997 to 2000, according to the average of 11 strategists in a Bloomberg News survey. Goldman Sachs Group Inc.’s David Kostin, the most accurate U.S. strategist this year, said sales growth will spur a 17% rally in the S&P 500 through the end of 2011.

Market analysts say earnings will hit record highs, keeping valuations below historical averages at the same time government spending aids the economy. Reaching their average forecast for 2011 would give the index annualized gains of 15% over three years, twice the rate anticipated by Pacific Investment Management Co.’s new normal theory that anticipates deficits and increased regulation will limit returns.

“Your new normal may not be quite so new,” said Barry Knapp, the New York-based head of equity strategy for Barclays Plc, who expects the S&P 500 will reach 1,420. “There’s nothing to worry about with earnings. We’ll get some margin expansion, and we’re still at a pretty good stage in the economic cycle. From my perspective, I’ve tried to think about all the risks. I just think the outlook is favorable, so favorable that I struggle to see how the equity market doesn’t perform well.”

Estate planning: DIY or pro?

In this economy, smart consumers are tackling projects they used to turn to pros to handle in an effort to scrimp and save. Can you do that with estate planning? Experts generally agree that there are a few aspects of estate planning you can take on yourself. But trying to handle others on your own would be supremely unwise.

What you can do

Many experts agree that you can handle a few basic forms yourself. "An advanced health care directive, also called a health care proxy, designates who your health care agent -- or who can affect your medical decisions -- will be if you become incapacitated," says Terri Hilliard Olson, an attorney at Terri Hilliard PC in Westlake Village and Burbank, Calif. "You can get that online, but it's essential to update it occasionally because it may expire."

Another document you can execute easily is a Health Insurance Portability and Accountability Act, or HIPAA, release. "It's really essential so that your family members can speak to your physician about your medical condition without liability to your physician," says Hilliard. "You can also do that through an online form."

Though a durable power of attorney -- which allows others to control your finances -- may seem like another simple form you can execute yourself, experts have reservations about executing one without legal assistance. Typically, a durable power of attorney "springs" into effect when a specified event triggers it. That event could be your incapacitation, or it could simply be your unavailability for a scheduled real estate closing.

"Clients can inadvertently grant unlimited access to their finances because if a durable power of attorney isn't filled out properly, it's not springing," says Hilliard. "Where people also need counsel is determining the proper person to act for them. What attributes does that person need to properly act on your behalf? Just because people are relatives doesn't mean they're the best people to do that."

What may be risky to handle yourself

Many companies sell form wills and trusts you can download and execute yourself. Creating a will on your own is appropriate only in limited circumstances, and doing the same for a trust is truly risky.

"Online estate planning documents probably work very well if you want to leave your assets outright to one or two people, and those people have virtually no legal or financial problems," says Gary Altman, an attorney and Certified Financial Planner at Altman & Associates in Rockville, Md. Before you do estate planning on your own, Altman suggests asking yourself these questions:

1. How big is my estate?
2. Who am I leaving it to, and are they minors, or do they have issues like angry creditors I need to plan around?
3. How am I leaving it to them, such as through a will or a trust?

There are some situations in which expert advice is truly necessary, says Jack T. Carney, an attorney at The Law Office of Jack Carney LLC in Birmingham, Ala. Get professional help in these situations:

• Anyone in your family has a disability.
• You're in a blended family.
• You have assets and insurance in excess of the current estate tax exemption of $3.5 million.
• You own real estate outside of your state of residence.

Also ask yourself whether you truly know the intricacies of will-drafting and are willing to take the risk of committing an easy-to-make mistake that will wholly invalidate your will. "Most states don't recognize holographic -- or handwritten -- wills," says Kristi Mathisen, a CPA and estate planning attorney at the Seattle wealth management firm of Laird Norton Tyee. "Most states also require one or two witnesses and some evidence that the person making the will is competent and not under duress. You also can't do a videotaped will."

The most important thing to remember about DIY estate planning is that if you make a mistake that invalidates your will, the entire document will be thrown out. "Many people think an invalid will still influence(s) where your assets go, but it doesn't," says Mathisen. "If you have an invalid will because of a failure in the execution of the document, your state's law of intestate succession steps in."

Also be brutally honest with yourself about whether you truly understand what will happen to the proceeds of all the contractual estate planning agreements you've entered into over your lifetime. "Contract law covers things like U.S. savings bonds and bank accounts, which are almost always held in joint tenancy with a right of survivorship," Mathisen says. "There are also pay-on-death accounts in which you open an account, check a box as payable on death and name somebody to receive those funds. Retirement plans, individual retirement accounts and life insurance policies also have beneficiary forms."

With each of those contractual documents, do you want the proceeds paid directly to the beneficiary? If your beneficiaries are minor children, would you prefer they get the funds over time or at a specific age? You need to be able to answer those types of questions -- and then create valid legal documents to fulfill your wishes -- if you choose to do estate planning without expert advice.

"I'm about to hand a check for $400,000 to an 18-year-old because instead of making sure her life insurance proceeds went into a trust for her daughter, the mom left the money to her daughter outright," Altman says.

Will you know when changes are necessary?

Finally, remember that an expert can help you identify when changes in the law make it necessary to update your estate planning documents. "Sometimes people think that when they've done estate planning, they never have to look at those documents again," says Altman. "I had clients who did estate planning with me in 1997. Since then, the estate tax laws changed, and an obscure regulation that affected a small fraction of the public -- including them -- changed."

Though Altman sent the clients many letters suggesting that they update their documents, they didn't respond. When the wife died earlier this year, the husband was hit with a large estate tax bill. "Due to the change in the estate tax laws and the fact that they didn't take advantage of this small modification in a regulation," says Altman, "it cost $200,000 more in estate taxes than it would have cost if they'd have just updated their estate planning documents. For not wanting to spend $1,000 to $3,000, it's cost them $200,000."

Altman has final words of caution. "There are a number of people who don't consult estate planning experts because they don't want to spend the money," he says. "But estate planning is something that if you make a mistake, there's no way to correct it because you're no longer around. If you don't pay to have estate planning documents done properly now, your heirs will probably pay more than you'll have ever paid a professional to do them. In many ways, the most selfless thing you'll ever do is to make sure your children or heirs will receive your assets in the best and least costly way possible."

https://news.fidelity.com/news/article.jhtml?guid=/FidelityNewsPage/pages/estate-planning-diy-or-pro&topic=estate-planning

Six financial blunders and their fixes

BOSTON (TheStreet) -- This year will likely be remembered for its broad, unpredictable market swings.

As one might expect in a time of volatility, making all the right moves with your investment portfolio and retirement plan was a challenge. What didn't help matters were the mistakes and overreactions many investors made, moves that could hurt them both immediately and for years to come.

But there are also some easy steps to take to recover from the mistakes of 2010 for a better 2011:

PROBLEM 1: Analysis paralysis

When confronted with questions about what direction to go in with their financial plan, many decided to go... nowhere.

Mark Byelich, president of M.J. Byelich & Associates, a Pennsylvania-based financial services firm, says the problem is not just lacking the confidence to stick with an investment strategy, but even having a well-considered plan to start with.

"I talk to so many folks who say they held back from making any contributions to their 401(k) because they were unsure what to do with the market," he says. "There is this stagnation. Everyone is just sort of stuck in the mud, uncertain of what to do."

"You can dissect it down to, 'Maybe I didn't get out of bonds a month ago' or, 'I sold my commodity allocation because I thought we were at the top,' or 'I didn't buy gold,'" he adds. "But I think it comes down to a more fundamental thing: 'I didn't really have a real asset allocation plan, I didn't have a real financial plan and therefore I don't have the confidence to stay in the game.'"

THE FIX: Don't be a baby. Analysts uniformly see inaction as the most common problem, but also the easiest to fix: Get professional advice, use it and get your assets working. Not doing anything isn't going to help.

PROBLEM 2: Losing the match game

An increasing number of employees are not taking full advantage of the matching contribution their employer will make to their 401(k) plan. A study by human resources consulting firm Hewitt Associates found that about 28% of participants don't contribute enough to their 401(k)s to get the maximum amount of matching funds from their employers.

"That's free money take advantage of it," Byelich says. "Some very, very smart people I've talked to have told me they stopped the contributions to their 401(k). It is amazing."

Mike Steranka, CEO of Retirement Planning Services, a Maryland-based financial planning firm, recalls a conversation in which an employee was passing up the opportunity to collect on a 100% match, up to 9% of pay, offered by his company.

"I told the guy, 'If we put in $9,000 and they give us $9,000, that's a 100% return," he says. "If I could offer a 100% return, there would be a line outside around my window."

THE FIX: Contribute as much as you can to take full advantage of an employer match. Keep in mind that the tax-advantaged status of retirement plans, and dollar cost averaging, means that what you contribute is less a hit on your bottom line than the total may indicate. A $1,000 contribution, for instance, may only cost you in the ballpark of $850.

PROBLEM 3: Taking on the full Roth tax hit

Even though a Roth IRA conversion entails paying taxes upfront, a one-time offer was put on the table to split that burden over next year and 2012.

But, fearing that the expiration of the so-called Bush tax cuts would lead to higher rates starting next year, many paid the balance in full this year. Now that it appears some, if not all, of the cuts will be extended, tackling the full bill may prove to have been unnecessary, more of an immediate hit and that much less to collect interest on your behalf.

THE FIX: It is never too late to consider a Roth IRA conversion. Even if the ability to spread the tax hit was a one-time offer, paying that charge upfront in a lump sum can still make good financial sense for many. Tax rates will likely rise, and younger investors will be positioned to earn more in the coming years and therefore be in a higher bracket. This likely means that what you take on in taxes now will be less than the hit you may face later. The relatively new introduction of Roth 401(k)s may be a good option to investigate, especially for younger workers.

PROBLEM 4: Losing interest

With interest rates lingering at phenomenal lows, refinancing long-term debt would seem a no-brainer. But people are still holding off.

"You are looking at 3.5% to 4.5% on a 30-year fixed," says Steranka, also an investment adviser rep for Investment Advisors and a registered rep with Broker Dealer Financial Services. "Those are such low rates that people should take advantage of them. Where are they going to go -- zero?"

"While I don't see rates increasing over the near-term horizon, there is probably not going to come a time where they are going to get much, if any, lower," says Morrison Creech, head of private banking and executive vice president for Wells Fargo Private bank. "As rates start moving up, they will do so pretty fast. There will be some signs of economic growth then, all of a sudden, monetary policy will change and they will start tightening and it will move pretty rapidly. There is no upside in waiting, but there is a lot of downside."

THE FIX: Don't be afraid of debt. By taking advantage of low interest rates on longer-term loans such as a 30-year mortgage, you have the opportunity to invest that money and, even after accounting for interest, may still make a profit on even relatively low-risk returns.

PROBLEM 5: Not assessing assets

Financial advisers recommend rebalancing your portfolio at least once a year, preferably every quarter.

Continuing a habit acquired during the recession, though, people still seem to toss their statements aside. If they are looking at their performance, many may not be making the adjustments they should.

"It is like the old Will Rogers quote, 'I'm not concerned about the return on my money, just the return of it,'" Steranka says. "Whenever we have corrections, people just don't want to open their statements. Some people, unfortunately, are not that sophisticated, or they just aren't concerned, or they just don't know what to do."

Part of the blame may go to the rise of target date funds, automatic enrollments and automatic deferrals. This year saw a big push in the "set it and forget it" approach to retirement plans and, as an unintended consequence, many are lulled into a false sense of security.

The poor performance of numerous target date funds during the recession bears out a bit of always good advice -- take ownership of your financial plan, adjust as needed and don't neglect seeking professional guidance when you need it.

THE FIX: Don't let your asset allocation sit idle. Try to evaluate your holdings, and rebalance, on a quarterly basis. Keep in mind that target date funds may be convenient, but they need to be monitored for performance just as any other holding would be.

PROBLEM 6: Dialing down risk

People are seemingly so afraid of losing money that they are, in fact, losing money.

Dialing down risk in times of volatility, especially when it comes to retirement savings, may seem to make sense. With many fleeing stocks and bonds for the perceived safety of cash investments, however, the loss of adequate returns may linger for years to come.

A recent study by MetLife found that a fear of unexpected expenses, and the related desire for greater liquidity, was leading even more-affluent Americans to rely heavily on low-yield savings accounts, CDs and money market funds as they save for retirement, despite their dissatisfaction with returns.

A Merrill Lynch survey earlier this year of those with $250,000 or more in investable assets found that a greater percentage of people age 18 to 34 describes their risk tolerance as low (52%) even though that demographic is in most need of the portfolio-building returns that can come with even moderate risk.

"When they are earning half a percent in a money market account, they may think of it as being safe, but they are negative," Steranka says. "They are negative compared to inflation. What I've found, to help drive people out of that mud, is to show them the effect of their investment five, 10, 15 and 20 years out. We can look at it a number of different ways and it just always makes sense to move forward."

"There are difficult markets, no doubt about it, and there is lots of uncertainty," Byelich says. "But isn't that how it is every year, really?"

THE FIX: Take some risk! It's the only way to boost returns. Sticking with a safe 1% or 2% return only increases the likelihood of running out of money -- for anyone. Older investors concerned about taking on too much risk should also consider an annuity, especially one with an "income benefit rider" that guarantees a set income. Just make sure to evaluate the product you are considering carefully and stick with a reputable provider, such as a major insurance company.

https://news.fidelity.com/news/article.jhtml?guid=/FidelityNewsPage/pages/overcome-financial-blunders&topic=financial-planning

The Growth in Mobile Devices

Is your charitable giving getting results?

BY LIZ RYAN, KIPLINGER'S PERSONAL FINANCE — 11/09/10

As many as half of all charitable contributions are made between Thanksgiving and the end of the year, according to Charity Navigator, a watchdog group. But just because you gave to a charity last year doesn't mean it deserves your largess this time around. While the spirit of giving is upon you, grab a cup of cocoa and review the philanthropic decisions you made a year ago.

Follow the money

Most tax-exempt organizations are required to file IRS Form 990, which gives details about the organization's finances and governance. The form, or a link to it, should appear on the charity's Web site. Line 12 shows total revenues, and line 18 shows total expenses. Compare those numbers with the same lines on the previous year's form, which should also be available. If the charity is thriving, both revenues and spending will have grown at least 3% to 5% over the past year, says Sandra Miniutti, of Charity Navigator. That level indicates that the charity has the ability to meet long-term goals.

Also, look at how the charity spends its money. Most charities spend 60% to 75% on their programs, with the remainder going to administrative and fund-raising costs. If the percentage for overhead is more than 30%, call the charity and ask for an explanation. For example, some charities, such as museums, have relatively high maintenance costs.

A charity should end its fiscal year with at least six months' worth of working capital (called the "working capital ratio" at Charity Navigator), the better to sustain operations if donations decrease or the demand for services spikes -- or simply to keep the place running. "Donors need to understand the need to reserve money for mundane things such as electric bills," says Miniutti. That said, nobody loves a hoarder. Be sure the charity is spending appropriately on programs and not just saving for saving's sake. The largest charities pay their chief executive an average of $150,000 annually, or about 3% of the organization's total spending, according to Charity Navigator. Compensation depends on variables including where the charity is located and the level of expertise the CEO brings to the organization. If he or she pulled in a salary that far exceeds the average, find out why.

Vet the feedback

Expect the charity to provide a clear description of its mission, a rundown of its board members and a summary of finances, says Bennett Weiner, chief operating officer of the BBB Wise Giving Alliance. A proactive charity will also periodically let you know about its day-to-day activities by posting blogs, Facebook albums or YouTube videos. If you are not satisfied with the level of communication, let the charity know -- and drop any that refuse to provide details. "Charities doing great work are eager to tell their story," says Miniutti.

Look for evidence that the board exercises oversight, including approving the budget, reviewing the performance of the CEO and signing off on fund-raising contracts, says Weiner. Showing up counts, too. If the board fails to meet face to face at least three times a year at evenly spaced intervals, it isn't doing its job.

Weigh the results

Expect the annual report to lay out how the charity met its mission, including the challenges it faced and the milestones it met. Be sure the goals and results were measurable -- say, number of meals served -- and not just general statements, such as "fed the hungry." For instance, SOME (So Others May Eat), in Washington, D.C., reports that it served 288,390 meals in its dining rooms in 2009, an increase of 17,000 meals over the previous year. Those numbers demonstrate impact, says Michael Nilsen, of the Association of Fundraising Professionals. "People want a sense of the concrete." If you can't get a handle on the reported results, talk to staff members to get the insiders' take.

Charities sometimes stray from their mission, in part because funds earmarked for specific purposes can shift an organization's priorities. Be sure your money went where you intended it to go, and also determine whether your goals have changed or become more focused since you last donated. For instance, rather than give to an organization that funds breast-cancer research, this year you may want to fund mammograms for women in your own community.

If the checkup leaves you with mixed feelings, it may be time to take your donation elsewhere. After all, you want to support a cause you are passionate about, not an organization that takes your money for granted. "Giving is a very personal decision," says Nilsen. "It's got to come from the heart."

https://news.fidelity.com/news/article.jhtml?guid=/FidelityFeeds/pages/assess-charitable-donations&topic=financial-planning

Tax Deal Could Be a Boon for Retirees

It might not make up for the freeze on Social Security this year, but retirees who are taking distributions from their retirement accounts may now have an opportunity to strike back. With the proposed extension of the Bush-era tax cuts, retirees could have an extra two years to game the lower tax rates and set up years of lower-tax income to come

Many financial planners assume tax rates – on income, at least, if not on capital gains – will increase after 2013. To take advantage of the current low rates before they rise, first make sure you’re withdrawing from the most tax-efficient accounts: in this case, your traditional IRA and 401(k). Because those withdrawals are taxed as income, you’re likely to pay less in taxes now than in the future, says Keith Weber, CFP, author of “Rethinking Retirement.” This is especially important for those who may be facing large required minimum distributions,” he says. “Even a 3% increase in future rates could cost a retiree an additional $300 on every $10,000 they’re required to take out.”

Then, to stretch that tax benefit further, consider withdrawing extra money from those tax-deferred accounts, and plowing it right back into the markets, in a Roth IRA (or simply partially converting a traditional IRA to a Roth). Because investments in a Roth grow tax-free, making that conversion now locks in lower income tax rates on the initial amount, and zero capital gains taxes on any additional growth, says David M. Hill, a CFP with Madison, New Jersey-based financial advisory firm Brinton Eaton. Other advantages: the tax burden for a Roth IRA conversion can be split over 2011 and 2012, and there’s no age limit for the Roth IRA, so anyone can do the conversion.

To illustrate the strategy, Hill gives this example: Let’s say you’re 59 1/2 or older (the age at which you are no longer penalized for withdrawing from your IRA), in the 35% federal tax bracket, and want to withdraw $50,000 from your IRA. You could save about $2,000 by taking the distributions now, rather than after a potential tax rate increase (let’s assume a 39% rate), he says. Once you’ve put that money into the Roth IRA, you won’t have to pay those taxes again. And as an added bonus, the more you take out of your IRA now, the less you will have to take as required distributions after age 70 1/2.

This strategy isn’t foolproof, planners say. Because withdrawals from traditional IRAs and 401(k)s are considered income by the IRS, taking higher distributions from these accounts could push you into a higher tax bracket or, in some situations, trigger the alternative minimum tax. And regardless of strategy, the important thing, planners agree, is that bigger withdrawals don’t lead to higher spending, if that could jeopardize your future financial security. ”Most people will be better off letting their investments continue to grow," says Nick Barnwell, the vice president of retirement planning for Weiser Capital Management.

Read more: Tax Deal Could Be a Boon for Retirees - Personal Finance - Taxes - SmartMoney.com http://www.smartmoney.com/personal-finance/taxes/tax-deal-could-be-boon-for-retirees/#ixzz17kupb7C1

How the Tax Deal Affects Taxpayers

President Barack Obama called the bipartisan tax agreement announced on Monday a "framework." As yet there is no legislative language or even a comprehensive outline of the proposals, and its passage by Congress isn't assured.

But its broad parameters do address a range of tax issues that have been in question for months or years. Here's how the various provisions could affect taxpayers.

Individual tax rates: The agreement would extend the Bush-era tax rates for two years for all taxpayers. Current rates would remain in place, with a top rate of 35%.

Capital gains: Current rates would be extended, and the top rate on long-term capital gains would remain at its historic low of 15% for two years. The rate applies to gains on assets held longer than a year.

Dividends: Current rates would be extended, and the top rate for qualified dividends—those on most stocks held longer than two months—would remain 15% for two years.

Payroll tax: The agreement calls for a two-percentage-point cut in the employee's portion of payroll (FICA) taxes, just for 2011. The change would make the tax 4.2% instead of 6.2% on the first $106,800 of wages per worker, according to the nonpartisan Tax Policy Center. No phase-in or phase-out or other limit was specified by the White House document, so the maximum a working couple could pocket is $4,272—$2,136 per individual wage-earner.

Alternative minimum tax: A two-year "patch," for 2010 and 2011, would keep the AMT exemption at or near current levels. Without the patch, 21 million additional taxpayers would owe AMT for 2010.

Estate and gift tax: No language on the estate or gift tax appeared in the document released by the White House, but a source familiar with the framework said it includes an estate-tax provision for 2011 and 2012 that has a top rate of 35% and an exemption of $5 million per individual.

This agreement appears to draw on the Lincoln-Kyl estate-tax proposal introduced earlier in the Senate, which also proposed a top 35% rate and $5 million exemption, but further details are unavailable. It is also unclear how or if the estates of those who died in 2010 would be affected by the agreement.

Extenders: The framework doesn't address several popular "extenders" that will expire this year, but White House officials said they were included in the agreement. Among them: transfers of IRA assets to charities by those over age 70½; a state and local sales-tax deduction for non-itemizers; a real-estate tax deduction for non-itemizers; and a deduction for teachers' expenses.

Unemployment insurance: Federal benefits would be extended at their current level for 13 months, through the end of 2011.

Provisions for lower-income taxpayers: The framework proposes to extend the $1,000 child credit and maintains its expanded refundabilty for working families for two years. It would also expand the Earned Income Tax Credit for larger families and married couples, and maintain both the higher-education tax credit and its partial refundabilty for the same period.

Read more: How the Tax Deal Affects Taxpayers - Personal Finance - Taxes - SmartMoney.com http://www.smartmoney.com/personal-finance/taxes/how-the-tax-deal-affects-taxpayers/#ixzz17d6Pd5ON

What to Do With a Payroll Tax Cut

Working taxpayers will get a little, temporary raise, if the payroll tax reduction in the tax agreement reached by Congress goes into effect. It’s not life-changing money – the benefit tops out at $2,100 per year for anyone making $106,800 or more – but it is enough to have a ripple effect if used wisely.

Legislators, of course, are hoping you’ll do what Americans usually do with extra cash: buy things, patriotically heating up the economy. In fact, studies show that structuring a tax cut in precisely this way – a little bit over a longer period of time, as opposed to a lump sum – stimulates spending, not saving. Will many people actually stash the extra cash? Probably not, says Ross Eisenbrey, vice president at the Economic Policy Institute, a think tank: “Most people are probably going to spend it.”

But perhaps you’d do better to set your own agenda. Experts say there are ways to use the cash that will turn that 2% raise into a much bigger windfall:

Juice retirement savings

Want an immediate 35% return? Contribute that extra 2% to a 401(k) or a traditional IRA, and someone in the 35% tax bracket would save $560 in taxes. Contributing the money to a Roth IRA would also be a small tax lottery because experts largely expect taxes to rise after 2012 – making today’s after-tax dollars (and therefore, that Roth contribution) “cheaper” than they will be in the future. More convincing: Roth IRA contributions also result in more money come retirement. A 55-year-old who contributes an extra $2,100 in 2011, assuming a conservative 5% return over 10 years will end up with $3,421 – 8.5% more than if he’d contributed to a traditional IRA and paid taxes later.

Create a health-care kitty

The cost of health care is going up next year – an expense most families haven’t yet felt, or budgeted for, but one the payroll tax cut could well cover. Employees are projected to pay about 15% more next year for health insurance deductibles and co-pays, with the average deductible about $675 for a single person and about $1,500 for a family with a preferred provider organization (PPO) health insurance plan. And getting reimbursed for over-the-counter medications like aspirin and cough syrup will be harder next year because they’ll require a doctor’s prescription. From the one-year paycheck increase, a married couple could set aside up to $3,500 of their take-home pay and have enough to cover the health-care-related cost increases, says David Peterson, a certified financial planner.

Read more: What to Do With a Payroll Tax Cut - Personal Finance - Taxes - SmartMoney.com http://www.smartmoney.com/personal-finance/taxes/what-to-do-with-a-payroll-tax-cut/#ixzz17ZEf14ad

The cost of staying home

Tips for managing the transition from two incomes to one.

It’s not uncommon for couples to struggle with the decision to either both work or have one partner stay home to raise children. Although there are pros and cons associated with both options, giving up an income can be tough. But it’s not impossible as long as you plan in advance and manage the financial adjustment in a prudent manner.

As with most big decisions in life, it’s important to recognize that making such an adjustment will impact your everyday life. For example, living on less income will likely have implications for your budget, health insurance, life insurance, retirement savings, and more. But, there may be some financial and non-financial benefits you can take advantage of as well, such as more time with your family and potential quality-of-life improvements.

If you are thinking about moving to a one-income household, here are a few strategies to consider before the transition.

Revise your budget. There’s no doubt about it, paying the bills on one salary can be tough. So you have to make some difficult choices. Go through your monthly expenses and categorize them based on needs (essential) and wants (discretionary). Once you’ve established your one-income budget, try living on it for a couple of months before giving up that second income.

“Think of it as a trial run and a chance to give you the real experience before making such a dramatic change in your finances,” says Chris McDermott, senior vice president of retirement and financial planning at Fidelity Investments. “You’ll get a chance to track your spending, see where you need to cut back, and even use the income you’re not spending to pay down debt or build your emergency fund, prior to the transition.”

Secure health benefits. Health insurance is a must these days, especially if you’ve got children. But it’s expensive and you need to compare the total costs you will be expected to pay. Consider that the average out-of-pocket costs (copayments, coinsurance, and deductibles) are expected to be $2,177 next year–a 12.5% increase from 2010 figures. And, even more daunting is the news that the average annual premium for employer-sponsored health insurance in 2010 is $13,770 for family coverage. So, if you have to switch health care plans when you transition to one income, compare the old health care plan and the new one very carefully to see if your out-of-pocket costs will be higher once you switch. If you find they will increase, be sure to work these additional costs into your budget.

Revisit your retirement savings. Though it may seem like the easiest thing to cut when you’re short on cash, cutting back on retirement savings is typically not a good idea.

“Don’t derail your retirement savings just because you’re down to one income,” McDermott says. “Look at what you can realistically afford–even if it’s less than what you were saving on two incomes.” If you stop saving, you’ll lose the advantages of possible tax-deferred growth over many years. The chart below shows the growth potential even one annual IRA contribution can have.

Or, you may even want to consider a Spousal IRA. “A Spousal IRA can help make up any savings opportunities you may lose through an employer-sponsored retirement plan when you leave work,” McDermott says. This type of IRA allows non-wage earning spouses to contribute up to $5,000 for 2010 to their own Roth IRA or traditional IRA, provided the other spouse is working and the couple files a joint federal income tax return. Tax-deductible IRA contributions and Roth IRA contributions are subject to IRS income limits. This IRA contribution is in addition to any IRA contributions the wage-earning spouse makes. This means eligible married couples can contribute up to $5,000 each for the 2010 and 2011 tax years to their respective IRAs. Spousal IRAs are also eligible for catch-up contributions.³

Count on less from Social Security. When you stop working, you reduce your Social Security benefits at retirement because you won’t have paid into the system for a certain number of years. If you’ve planned your retirement saving strategy based on a certain level of income from Social Security, you may need to adjust your numbers in light of these reduced benefits. Perhaps you could increase the working spouse’s contributions to qualified retirement savings plans such as a 401(k) or 403(b) plan to help make up the difference.

Remember though, you can claim benefits based either on your own earnings or on your spouse’s. Spousal benefits are equal to 50% of what your spouse gets if you begin drawing them at your full retirement age. You get less if you start taking them earlier. You’re automatically entitled to receive the higher monthly amount–one based on your own earnings or the spousal benefit. Prior to your full retirement age, Social Security makes this determination for you.

Match your mortgage to your income. If you’re planning to buy a home in the near future, you should strongly consider applying for a mortgage based on one income. This strategy may help you avoid buying more of a house than you can afford. For those with a mortgage, look carefully at the possible benefits of refinancing. Is there a mortgage product available that would improve your cash flow? For example, you might have gotten a great rate on a 15- or 20-year mortgage, hoping to pay your house off sooner. But if a 30-year fixed loan would cut your monthly housing costs, particularly given current low interest rates, it may be worth refinancing to help you make ends meet.

Finding the silver lining

Though it’s clearly a big financial sacrifice, dropping to one income may have some potential benefits for your bottom line and your quality of life.

Lower your income taxes. Since you’ll soon be paying taxes on just one income, you may want to consider adjusting your W-4 withholding to increase your take-home pay. This may mean you trade a refund at tax time for more cash in every paycheck. But, given the tighter cash flow on one income, you may prefer having more income each month rather than one lump sum during tax return season.

Boost your deductibles. Increasing your deductibles on your auto and/or homeowner’s insurance policies could save you money by lowering your insurance premiums. But, if you’re going to raise your deductibles, you have to plan for the potential of paying these higher costs. Because you may need to make a claim on your insurance policy someday, you should consider having the amount of your deductible set aside and easily accessible. Otherwise, raising your deductible may only cause financial problems. You may also save some money by consolidating your auto and homeowner’s insurance policies with one provider. Many insurance companies now offer discounts when supporting more than one insurance need.

Of course, quality of life isn’t just about money–especially when it comes to raising a family. Still, if you do find that one income creates too much of a cash pinch, there’s always the option of working part-time or going back to work full-time once the kids are older. But if you do decide to trade an income for more time with the family, be sure to plan ahead and sacrifice sensibly so you can reap and enjoy the benefits.

https://news.fidelity.com/news/article.jhtml?guid=/FidelityNewsPage/pages/fidelity-cost-of-staying-home&topic=financial-planning