Download Trusted Advisor - SchoolsFirst FCU

OCTFCU_july_aug_2006.qxd
5/22/06
10:50 AM
Page 1
Retirement Savings, One Percent at a Time
Many experts suggest setting aside
at least 15% of income toward
retirement using tax-deferred
retirement plans and other savings
tools. But this can be difficult for
several reasons, especially for
individuals who are not already
setting aside a significant
percentage of their income.
If this describes your situation,
consider gradually increasing your
contribution until it reaches 15%.
Making the increase coincide with an
annual pay raise might help soften
the effect on your take-home pay.
$2,000,000
$1,600,000
10% annual contribution
10% contribution in year 1,
11% in year 2, etc.,
until reaching 15%
after 5 years
$1,762,039
Trusted Advisor
July/August 2006
$1,200,000
$1,236,934
$800,000
Ready to Retire Your Mortgage?
$400,000
Living mortgage-free used to be the hallmark of a successful
retirement. But today’s retirees and pre-retirees are challenging
conventional wisdom and questioning whether paying down the
mortgage still makes sense.
$0
Year
5
10
15
20
25
30
The graph compares the difference between contributing 10% annually of a $75,000 salary (that grows 3% per year)
for 30 years and contributing 10% of the same salary initially and increasing annual contributions by 1% until they
reach 15% of salary. Both accounts earn a hypothetical 8% annual return. This hypothetical example is used for
illustrative purposes only and does not represent any specific investment. The effect of taxes and investment fees
was not considered. Rates of return will vary over time, particularly for long-term investments. Actual results will vary.
Unfortunately, there is no easy, one-size-fits-all answer. The
appropriate response depends on a number of variables, including
your income, current portfolio, risk tolerance, and mortgage balance.
Here’s a quick look at some of the factors to consider when
determining whether to pay off your mortgage, pay it down faster, or
change nothing at all.
Mortgage Debt
Among Older Americans
Percentage of families holding debt secured
by a primary residence (by age of head
of household).
2001
2004
51.0%
49.0%
■ Comfort level. If the thought of carrying a high mortgage
throughout retirement makes you nervous, paying it off faster or
completely may be a priority for you.
Where Credit Is Due
American household credit-card debt keeps rising year
after year. It’s approaching an average of $10,000 per
household.1
Smart
Planning
Starts Today
32.0% 32.1%
■ Retirement savings. One rule of thumb is that your savings, along
with Social Security, should be sufficient to replace 60% to 80% of
your pre-retirement income. If you’re comfortable with both your
savings level and your mortgage payment, paying down your
mortgage may be less important.
Rising Indebtedness
Average U.S. credit-card debt
per household
Credit cards are almost essential in American life. Just try
renting a car or a hotel room without one. But anyone who
has ever used a credit card to finance a large purchase
knows that the real cost of the purchase can greatly
exceed the original price because of finance charges.
■ Mortgage interest rate. If the interest rate you are paying on your
mortgage is low, you may be able to earn more from other types
of investments. Of course, investments offering the potential for
higher rates of return also involve more risk.
18.7%
9.5%
55–64
years
65–74
years
75 years
and older
Source: Federal Reserve, 2006
continued on page 3
There is yet another cost of debt that most people don’t
consider: the lost opportunity to invest. An individual
spending $400 per month to retire a $20,000 credit-card
balance charging 8% interest would have to make
payments for five years. If the $400 was instead invested
in an account earning a hypothetical 5% annual return, the
balance after five years could reach more than $52,000.
Looking at the situation in this way, a $20,000 credit-card
balance actually cost $52,000 in lost opportunity.
This hypothetical example is used for illustrative purposes
only and does not represent any specific investment.
Actual results will vary. The effect of taxes and investment
fees was not considered.
1) CardWeb.com, 2005
4
$8,940
$9,205
$9,312
To update your mailing address for Trusted Advisor, log in to Online
Banking>>Services>>Trusted Advisor. Update your address on the
form shown and click “submit.” You may also call us at 800/4OCTFCU.
$8,234
$7,842
Issue Highlights
Developing a Plan for Long-Term Care . . . . . . . . . . . . . . . . . . . . . . 2
Good News for Long-Term Investors . . . . . . . . . . . . . . . . . . . . . . . . 3
Retirement Savings, One Percent at a Time. . . . . . . . . . . . . . . . . . . 4
Where Credit Is Due . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2000
2001
2002
Source: CardWeb.com, 2005
2003
2004
Investment products and services offered through CUSO Financial Services, L.P. (CFS)
are not NCUA/NCUSIF insured, not Credit Union guaranteed, and may lose value.
Financial Advisors are employed by OCTFCU and registered through CFS. OCTFCU
is in partnership with CFS. (Member NASD/SIPC)
OCTFCU_july_aug_2006.qxd
5/22/06
10:50 AM
Page 2
Smart Planning Starts Today
Developing a Plan for Long-Term Care
Paying the Bill
Here’s how people responded when asked how
they would pay the bill if they (or a family member)
required nursing-home care.
Insurance
30%
Don’t know
30%
16%
Self/Savings
Medicare/
Medicaid/
Government
13%
Other
Family
Social
Security
6%
3%
2%
Source: Kaiser Family Foundation Health Poll Report Survey,
June 2005
Most people realize that nursing-home care is expensive, but
not everyone has taken steps to prepare for the risk of
needing such care.
It’s estimated that about half of all 65-year-olds will eventually
enter a nursing home.1 Put another way, you and/or your
spouse have up to a 50/50 chance of requiring nursing-home
care at some point in your life.
The good news is that you have a number of options when it
comes to paying for long-term care. There are benefits and
limitations with each.
Today, a glance at the stock market indexes shows why many investors have
been disappointed. From 2000 to 2005, the average annual return of the S&P
500 was –1.14%, and the cumulative return for the same period was –6.63%.1
It might help to
remember that in good
times or bad, market
fundamentals and the
overall economy can
have a direct effect on
stock prices.
Government Programs
You might be surprised to learn that the benefits provided by
government programs, such as Medicare and Medicaid, are
very limited. Medicare, for example, pays for only the first
20 days of skilled nursing care after a minimum three-day
hospital stay. Patients are responsible for a portion of the cost
from days 21 to 100 and all costs after 100 days.2
Setting aside money to cover the cost of long-term care — or
using assets you and your family have accumulated — is
always an option, but it could be cost-prohibitive. In fact, one
study found that you would have needed to set aside about
$192,838 in 2005 and earned a 5% rate of return to cover the
cost of four years of nursing-home care.3
Long-Term-Care Insurance
Long-term-care insurance may be a good option for people
with assets who cannot afford to self-insure. Most policies
cover skilled care and basic custodial care. You can choose
the daily benefit, the benefit period (typically, two to five
years, or lifetime), the maximum lifetime benefit, the waiting
period, and whether you want inflation protection. You may
also be able to decide the kind of facilities in which you
would like to receive care. Most policies offer nursing-home
care, home care, and assisted-living facility care.
Planning may be the best defense to prepare for the risk of
long-term-care expenses. Call so that we can review options
to help protect you and your family.
1–3) 2005 Field Guide, The National Underwriter Company
Undoubtedly, it has been a turbulent period
fraught with terrorism, war in the Middle
East, and episodes of corporate scandal.
Painfully, mutual fund investors have learned
not to count on the double-digit stock market
returns that they once took for granted.
It might help to remember that in good times
or bad, market fundamentals and the overall
economy can have a direct effect on stock
prices.
Gauging Growth
The economy has continued to grow,
despite a series of shocks that include
several devastating hurricanes in the Gulf of
Mexico and high oil prices. Gross domestic
product has grown between 2.7% and 4.5%
each year since 2003, and economists have
predicted that the economy will grow by
3.25% in 2006.2, 3
Medicare does not cover the cost of custodial care
(nonskilled care that includes assistance with activities of
daily living). Medicaid may provide some coverage, but only
for those with low incomes and limited assets.
Self-Insurance
2
Good News for
Long-Term Investors
Profits Stay Positive
More good news: The operating earnings per share for S&P 500 companies
have risen 90% during the last four years.4 Furthermore, if the consensus
forecast of 13% earnings growth in 2006 comes to fruition, it would mean an
unprecedented fourth consecutive year of double-digit earnings growth.5
Over the last three years, the S&P 500 has risen cautiously toward its peak in
2000. Could it be that several years of solid economic growth and impressive
corporate profits will ultimately bode well for stock market returns?
Even professionals can’t predict exactly how the financial markets will respond
to positive reports or external shocks. However, only those investors who have
realistic expectations and stick to a disciplined approach will be in a position to
benefit when the markets perform favorably.
Mutual funds are sold only by prospectus. Please consider the investment
objectives, risks, charges, and expenses carefully before investing. The
prospectus, which contains this and other information about the investment
company, can be obtained from your financial professional. Be sure to read the
prospectus carefully before deciding whether to invest.
1) Thomson Financial, 2006, for the period 12/31/1999 to 12/31/2005. Stocks are
represented by the S&P 500 Composite Index (total return), which is generally considered
representative of the U.S. stock market. The performance of an unmanaged index is not
indicative of the performance of any particular investment. Individuals cannot invest directly
in an index. Past performance is no guarantee of future results.
2) Bureau of Economic Analysis, January 2006
3–5) The Wall Street Journal, February 6, 2006
Ready to Retire
Your Mortgage?
(continued from page 1)
■ Appreciation rate. The amount of
money you owe on your home has
no effect on its market value. If your
home is in an area where values
are rising, then any appreciation
will occur whether your mortgage is
large or small.
■ Tax bracket. If you keep making
mortgage payments, you will be
able to continue deducting the
mortgage interest. This may be a
valuable tax savings if you are in a
high tax bracket in retirement.
■ Source of funds. What funds will
you use to pay down your
mortgage, and what is the cost of
using those funds? Will you be
subject to any fees or penalties?
What are the tax implications, if any,
of using those funds?
■ Security. Nothing can replace the
role your home will play in
retirement in terms of shelter,
comfort, and security. Because
your home is probably your biggest
financial asset, you may want to
exercise extra caution when making
financial decisions about it.
■ Reflect on your heirs. With today’s
high real estate prices, your home’s
value could cause your estate to be
subject to estate taxes. An analysis
of your financial situation may
reveal whether putting your money
somewhere other than in your home
could help reduce or eliminate your
exposure to estate taxes.
Your home will be an extremely
valuable aspect of your retirement, so
consider your options carefully before
taking any action. Call today for help
with this and other decisions that
could affect your financial future.
3
OCTFCU_july_aug_2006.qxd
5/22/06
10:50 AM
Page 2
Smart Planning Starts Today
Developing a Plan for Long-Term Care
Paying the Bill
Here’s how people responded when asked how
they would pay the bill if they (or a family member)
required nursing-home care.
Insurance
30%
Don’t know
30%
16%
Self/Savings
Medicare/
Medicaid/
Government
13%
Other
Family
Social
Security
6%
3%
2%
Source: Kaiser Family Foundation Health Poll Report Survey,
June 2005
Most people realize that nursing-home care is expensive, but
not everyone has taken steps to prepare for the risk of
needing such care.
It’s estimated that about half of all 65-year-olds will eventually
enter a nursing home.1 Put another way, you and/or your
spouse have up to a 50/50 chance of requiring nursing-home
care at some point in your life.
The good news is that you have a number of options when it
comes to paying for long-term care. There are benefits and
limitations with each.
Today, a glance at the stock market indexes shows why many investors have
been disappointed. From 2000 to 2005, the average annual return of the S&P
500 was –1.14%, and the cumulative return for the same period was –6.63%.1
It might help to
remember that in good
times or bad, market
fundamentals and the
overall economy can
have a direct effect on
stock prices.
Government Programs
You might be surprised to learn that the benefits provided by
government programs, such as Medicare and Medicaid, are
very limited. Medicare, for example, pays for only the first
20 days of skilled nursing care after a minimum three-day
hospital stay. Patients are responsible for a portion of the cost
from days 21 to 100 and all costs after 100 days.2
Setting aside money to cover the cost of long-term care — or
using assets you and your family have accumulated — is
always an option, but it could be cost-prohibitive. In fact, one
study found that you would have needed to set aside about
$192,838 in 2005 and earned a 5% rate of return to cover the
cost of four years of nursing-home care.3
Long-Term-Care Insurance
Long-term-care insurance may be a good option for people
with assets who cannot afford to self-insure. Most policies
cover skilled care and basic custodial care. You can choose
the daily benefit, the benefit period (typically, two to five
years, or lifetime), the maximum lifetime benefit, the waiting
period, and whether you want inflation protection. You may
also be able to decide the kind of facilities in which you
would like to receive care. Most policies offer nursing-home
care, home care, and assisted-living facility care.
Planning may be the best defense to prepare for the risk of
long-term-care expenses. Call so that we can review options
to help protect you and your family.
1–3) 2005 Field Guide, The National Underwriter Company
Undoubtedly, it has been a turbulent period
fraught with terrorism, war in the Middle
East, and episodes of corporate scandal.
Painfully, mutual fund investors have learned
not to count on the double-digit stock market
returns that they once took for granted.
It might help to remember that in good times
or bad, market fundamentals and the overall
economy can have a direct effect on stock
prices.
Gauging Growth
The economy has continued to grow,
despite a series of shocks that include
several devastating hurricanes in the Gulf of
Mexico and high oil prices. Gross domestic
product has grown between 2.7% and 4.5%
each year since 2003, and economists have
predicted that the economy will grow by
3.25% in 2006.2, 3
Medicare does not cover the cost of custodial care
(nonskilled care that includes assistance with activities of
daily living). Medicaid may provide some coverage, but only
for those with low incomes and limited assets.
Self-Insurance
2
Good News for
Long-Term Investors
Profits Stay Positive
More good news: The operating earnings per share for S&P 500 companies
have risen 90% during the last four years.4 Furthermore, if the consensus
forecast of 13% earnings growth in 2006 comes to fruition, it would mean an
unprecedented fourth consecutive year of double-digit earnings growth.5
Over the last three years, the S&P 500 has risen cautiously toward its peak in
2000. Could it be that several years of solid economic growth and impressive
corporate profits will ultimately bode well for stock market returns?
Even professionals can’t predict exactly how the financial markets will respond
to positive reports or external shocks. However, only those investors who have
realistic expectations and stick to a disciplined approach will be in a position to
benefit when the markets perform favorably.
Mutual funds are sold only by prospectus. Please consider the investment
objectives, risks, charges, and expenses carefully before investing. The
prospectus, which contains this and other information about the investment
company, can be obtained from your financial professional. Be sure to read the
prospectus carefully before deciding whether to invest.
1) Thomson Financial, 2006, for the period 12/31/1999 to 12/31/2005. Stocks are
represented by the S&P 500 Composite Index (total return), which is generally considered
representative of the U.S. stock market. The performance of an unmanaged index is not
indicative of the performance of any particular investment. Individuals cannot invest directly
in an index. Past performance is no guarantee of future results.
2) Bureau of Economic Analysis, January 2006
3–5) The Wall Street Journal, February 6, 2006
Ready to Retire
Your Mortgage?
(continued from page 1)
■ Appreciation rate. The amount of
money you owe on your home has
no effect on its market value. If your
home is in an area where values
are rising, then any appreciation
will occur whether your mortgage is
large or small.
■ Tax bracket. If you keep making
mortgage payments, you will be
able to continue deducting the
mortgage interest. This may be a
valuable tax savings if you are in a
high tax bracket in retirement.
■ Source of funds. What funds will
you use to pay down your
mortgage, and what is the cost of
using those funds? Will you be
subject to any fees or penalties?
What are the tax implications, if any,
of using those funds?
■ Security. Nothing can replace the
role your home will play in
retirement in terms of shelter,
comfort, and security. Because
your home is probably your biggest
financial asset, you may want to
exercise extra caution when making
financial decisions about it.
■ Reflect on your heirs. With today’s
high real estate prices, your home’s
value could cause your estate to be
subject to estate taxes. An analysis
of your financial situation may
reveal whether putting your money
somewhere other than in your home
could help reduce or eliminate your
exposure to estate taxes.
Your home will be an extremely
valuable aspect of your retirement, so
consider your options carefully before
taking any action. Call today for help
with this and other decisions that
could affect your financial future.
3
OCTFCU_july_aug_2006.qxd
5/22/06
10:50 AM
Page 1
Retirement Savings, One Percent at a Time
Many experts suggest setting aside
at least 15% of income toward
retirement using tax-deferred
retirement plans and other savings
tools. But this can be difficult for
several reasons, especially for
individuals who are not already
setting aside a significant
percentage of their income.
If this describes your situation,
consider gradually increasing your
contribution until it reaches 15%.
Making the increase coincide with an
annual pay raise might help soften
the effect on your take-home pay.
$2,000,000
$1,600,000
10% annual contribution
10% contribution in year 1,
11% in year 2, etc.,
until reaching 15%
after 5 years
$1,762,039
Trusted Advisor
July/August 2006
$1,200,000
$1,236,934
$800,000
Ready to Retire Your Mortgage?
$400,000
Living mortgage-free used to be the hallmark of a successful
retirement. But today’s retirees and pre-retirees are challenging
conventional wisdom and questioning whether paying down the
mortgage still makes sense.
$0
Year
5
10
15
20
25
30
The graph compares the difference between contributing 10% annually of a $75,000 salary (that grows 3% per year)
for 30 years and contributing 10% of the same salary initially and increasing annual contributions by 1% until they
reach 15% of salary. Both accounts earn a hypothetical 8% annual return. This hypothetical example is used for
illustrative purposes only and does not represent any specific investment. The effect of taxes and investment fees
was not considered. Rates of return will vary over time, particularly for long-term investments. Actual results will vary.
Unfortunately, there is no easy, one-size-fits-all answer. The
appropriate response depends on a number of variables, including
your income, current portfolio, risk tolerance, and mortgage balance.
Here’s a quick look at some of the factors to consider when
determining whether to pay off your mortgage, pay it down faster, or
change nothing at all.
Mortgage Debt
Among Older Americans
Percentage of families holding debt secured
by a primary residence (by age of head
of household).
2001
2004
51.0%
49.0%
■ Comfort level. If the thought of carrying a high mortgage
throughout retirement makes you nervous, paying it off faster or
completely may be a priority for you.
Where Credit Is Due
American household credit-card debt keeps rising year
after year. It’s approaching an average of $10,000 per
household.1
Smart
Planning
Starts Today
32.0% 32.1%
■ Retirement savings. One rule of thumb is that your savings, along
with Social Security, should be sufficient to replace 60% to 80% of
your pre-retirement income. If you’re comfortable with both your
savings level and your mortgage payment, paying down your
mortgage may be less important.
Rising Indebtedness
Average U.S. credit-card debt
per household
Credit cards are almost essential in American life. Just try
renting a car or a hotel room without one. But anyone who
has ever used a credit card to finance a large purchase
knows that the real cost of the purchase can greatly
exceed the original price because of finance charges.
■ Mortgage interest rate. If the interest rate you are paying on your
mortgage is low, you may be able to earn more from other types
of investments. Of course, investments offering the potential for
higher rates of return also involve more risk.
18.7%
9.5%
55–64
years
65–74
years
75 years
and older
Source: Federal Reserve, 2006
continued on page 3
There is yet another cost of debt that most people don’t
consider: the lost opportunity to invest. An individual
spending $400 per month to retire a $20,000 credit-card
balance charging 8% interest would have to make
payments for five years. If the $400 was instead invested
in an account earning a hypothetical 5% annual return, the
balance after five years could reach more than $52,000.
Looking at the situation in this way, a $20,000 credit-card
balance actually cost $52,000 in lost opportunity.
This hypothetical example is used for illustrative purposes
only and does not represent any specific investment.
Actual results will vary. The effect of taxes and investment
fees was not considered.
1) CardWeb.com, 2005
4
$8,940
$9,205
$9,312
To update your mailing address for Trusted Advisor, log in to Online
Banking>>Services>>Trusted Advisor. Update your address on the
form shown and click “submit.” You may also call us at 800/4OCTFCU.
$8,234
$7,842
Issue Highlights
Developing a Plan for Long-Term Care . . . . . . . . . . . . . . . . . . . . . . 2
Good News for Long-Term Investors . . . . . . . . . . . . . . . . . . . . . . . . 3
Retirement Savings, One Percent at a Time. . . . . . . . . . . . . . . . . . . 4
Where Credit Is Due . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2000
2001
2002
Source: CardWeb.com, 2005
2003
2004
Investment products and services offered through CUSO Financial Services, L.P. (CFS)
are not NCUA/NCUSIF insured, not Credit Union guaranteed, and may lose value.
Financial Advisors are employed by OCTFCU and registered through CFS. OCTFCU
is in partnership with CFS. (Member NASD/SIPC)