ARE YOUR OLD SAVINGS BONDS STILL EARNING INTEREST? - April 2005 Newsletter

Do you, your parents, or elderly relatives have old E bonds, H or HH bonds, or the rare Savings Notes, lying around? If so, it may be time to cash in some of these bonds because they are no longer earning interest, and in some cases could have tax problems.

According to the U.S. Treasury Department, $12 billion in outstanding U.S. savings bonds no longer earn interest. Are your bonds among them? To answer that question, you need to know a little about how the various savings bonds came into being, how they work, their different maturities, and how they’re taxed.

The federal government first began issuing savings bonds, called E bonds, back in the mid-1930s. The bonds were issued in a range of denominations and citizens bought them at a discount of 75 percent of face value. You paid $75 for a $100 bond, for example.

The government stopped issuing E bonds after June 1980 and replaced them with EE bonds, which calculate earned interest slightly differently than E bonds. Investors buy EE bonds at half of their face value.

Investors receive interest from E/EE bonds only when they redeem the bonds. The bonds earn interest up to their “original maturity”—that is, when the accumulated interest and the original price paid for a particular bond total the face value of the bond. But interest payments are automatically extended after that, usually for periods of ten years, until the bond reaches its “final maturity.” At that point, the bond quits earning interest.

This is where matters get confusing for investors, because the final maturity dates vary. E bonds issued from May 1941 through November 1965 had 40 years to final maturity. As of this writing, nearly all of them have stopped earning interest.

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E bonds issued from December 1965 through June 1980, however, have only 30 years to final maturity. As of this writing, all E bonds issued through April of 1975 have stopped earning interest.

The final maturity for all EE bonds is 30 years, and since none are older than July 1980, you have a few more years before they stop earning interest.

Do you still own any Savings Notes, also known as Freedom Shares, issued from May 1967 through October 1970 during the height of the Vietnam War? Like E/EE bonds, these bonds were issued at a discount with the interest deferred until redemption. Savings Notes had 30 years to final maturity and no longer earn interest.

H and HH bonds differ from other savings bonds in that investors buy them at face value and the bonds pay out interest in cash semiannually. The government first issued H bonds in June 1952. Those issued through January 1957 had final maturities of 29 years, 8 months. All H bonds issued after January 1957, until HH bonds replaced them in January 1980, have final maturities of 30 years. Again, as of this writing, H bonds issued up to April 1975 have stopped earning interest.

But HH bonds, which the government quit issuing after August 2004, have final maturities of only 20 years. Consequently, any HH bonds you have that are older than 20 years should be cashed in to get back the original investment (the face value).

Taxes on savings bonds are free of state and local taxes, but you pay federal taxes at your ordinary income tax rate. Because H/HH bondholders pay taxes on the interest as they receive it each year, they don’t owe any taxes when they redeem them—the final payment is simply a return of the original principal.

But with E/EE bonds and Savings Notes, you will owe taxes on the accumulated interest, assuming you elected to defer reporting the interest over the years, when you redeem them—or when they reach final maturity, even if you haven’t redeemed them. This interest income is taxable for the year of redemption or final maturity. If you missed that year—say you now realize some old E bonds you’ve got lying around the house matured years ago—you may need to file an amended tax return and possibly be subject to a late penalty and interest. Confer with your tax specialist.

For current information on whether any bonds you hold have reached final maturity, go to http://www.publicdebt.treas.gov/ and to “Are Your Savings Bonds Still Earning Interest?”

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April 2005— This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Bold Financial Planning, LLC , a local member of the FPA.

TIPS FOR FINANCIALLY HELPING YOUR CHILDREN.EVEN WHEN THEY'RE ADULTS - April 2005 Newsletter

You can help your children financially in many ways, even after they are well into their adult years—and most of those ways don’t involve giving them money.

Here are a handful of tips from CERTIFIED FINANCIAL PLANNER™ practitioners about how to make your children’s financial lives a little easier, often in ways you might not expect.

Teach them good money management skills and money values. Sure, you can donate cash to their savings account, EE bonds in their name, or shares of stock or mutual funds. But the gift that really keeps on giving their entire lifetime is a sound financial education backed by the demonstration of your sound money values.

If you’re unsure of how well you can do this yourself, have them work with your CFP^® financial planner. Also give them money management material designed for children of different ages and have them take classes geared toward their ages. They need to learn such financial skills as budgeting, investing, retirement planning, insurance, taxes, charitable giving, how to read a pay stub and balance a checkbook, and what role money should play in their lives.

They may never thank you for this gift, but these skills and values will likely earn them far more money, and make better use of that money, than all the monetary gifts you ever make to them.

Set a good example. You can teach them the best money management skills in the world, but if you don’t exemplify good money management judgment yourself, they probably won’t either.

Open an IRA. Okay, okay, this involves giving them cold cash. But think of it as seed money, pump-priming money, a chance to reinforce the message that they will likely have to fund most or all of their retirement, as employer pensions are disappearing and Social Security may only provide minimal help.

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When they first start earning taxable income from outside jobs or even from household chores such as mowing the lawn, have them open an individual retirement account. Most experts recommend a Roth IRA, which is funded with after-tax money, because the tax-savings benefits of a traditional IRA are minimal for children earning little income. With the Roth, they can later withdraw the contributions and the earnings tax free.

Explain why they need an IRA (for that retirement they’ve got to fund, remember). Then match dollar for dollar whatever amount they can realistically invest in it (your combined contributions can’t exceed their earned income for the year or the 2005 maximum of $4,000, whichever is smaller).

Take care of your own retirement. Fund your retirement even if it means your children have to pay their own way through college. They can get loans or go to a less expensive school. There’s no financial aid for retirement if you fail to save enough, and you want to avoid asking them for handouts in your old age.

Don’t be a financial burden on them. This means not only making sure your retirement is properly funded, but that you can pay for medical care and possibly long-term care—two huge expenses during retirement many people overlook. Review your medical coverage, including possible retiree health benefits, Medigap insurance once you start Medicare, and long-term care insurance. Spare your children the financial burden of having to financially assist you at a time they’re probably trying to save for their own retirement and put your grandchildren through college.

Have an estate plan in place. Basics include a will, a financial power of attorney, a living will, and a health care power of attorney (also known as a health care proxy). You may or may not need additional planning, such as trusts or a family limited partnership, but those four basic documents will go a long way in giving your children flexibility and guidance should you become incapacitated (when powers of attorney become invaluable) or when you die. An updated estate plan also will ensure that your children inherit what you wish them to inherit.

Keep your financial records in order. Give your children a general idea of the value of your estate and your plans for it, and let them know where they can find financial documents upon your incapacity or death. This is sensitive stuff, but it beats leaving them with a financial mess at a stressful, emotional time.

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April 2005— This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Bold Financial Planning, LLC , a local member of the FPA.

PROS AND CONS OF COMBINATION LONG-TERM CARE POLICIES - April 2005 Newsletter

Despite persistent and strong advice to the contrary, many consumers in their mid-fifties and older have remained stubbornly reluctant to buy long-term care insurance. An alternative for the reluctant may be policies that piggyback LTC coverage with life or annuity policies—though many financial planners believe stand-alone LTC coverage is usually better.

Consumers have been reluctant to buy stand-alone LTC insurance for several reasons: they don’t want to think about long-term care, they figure they can self-insure, they hate the idea of paying premiums when they may never need the coverage, and they worry about possible future increases in their LTC premiums that they couldn’t afford.

Enter the combination or linked policy. Here the consumer starts with an underlying life insurance or annuity policy—typically a large single-premium policy—and attach a long-term care insurance rider. Insurance policies might be universal life, variable universal life, or whole life, while the annuity might be deferred or immediate. If long-term care benefits need to be paid out under the rider, you in essence receive an acceleration of benefits before you would normally have received them from the underlying policy. And if you never need LTC benefits, the life insurance or annuity remains in effect for eventual use by you or your beneficiaries.

Say you buy a life insurance policy with an LTC rider and later enter a nursing home for long-term care. The insurer would pay out a fixed percentage of the policy’s death benefits each month. Typically, this is around 2 percent, but might be as high as 5 percent. Thus, on a policy with a $100,000 death benefit, you might receive $2,000 to as much as $5,000 a month.

With an annuity, you can tap into the accumulated value of the policy to pay for LTC needs without paying a surrender charge that’s typically imposed on accelerated withdrawals. In either case, review the language of the rider carefully to be certain no surrender charges apply, or in the case of the life insurance, the policy won’t lapse and create a potential tax problem.

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While combination policies may sound like the best of both worlds without paying too much extra for long-term care coverage, many financial planners believe trying to serve two different needs with a single policy often serves neither need well. Consumers should review the options and ask some careful questions before buying a combination policy.

First, are you buying the underlying insurance or annuity policy out of genuine need? For example, do you really need the life insurance death benefits, such as to provide income for a survivor or to pay future estate taxes?

Second, if you genuinely need the underlying coverage, but drain some of its benefits to pay for long-term care, you’ve undermined its original purpose, perhaps leaving you with inadequate retirement resources or smaller life benefits for beneficiaries.

Will the LTC coverage be adequate? For example, many life policies cap the amount that can go to long-term care benefits to 50 percent of the face value of the policy. Yet the average annual cost of a private room in a nursing home is $70,000, according to the 2004 MetLife Market Survey. A combination policy could leave you seriously short of funds if you face a long stay in an LTC facility. That’s why many planners recommend stand-alone LTC policies with coverage of five years or longer.

You may be able to buy an independent rider on the policy that provides extended LTC coverage so that you don’t come up short. But now you’re spending additional premium dollars that might be more effectively spent on a stand-alone LTC policy. Another strategy is to buy a short-term (thus less expensive) stand-alone LTC policy and use a combination policy as backup in case the LTC coverage runs out—or vice versa.

Inflation is another concern. Good stand-alone LTC policies carry inflation protection so that 20 years down the road the policy will still adequately cover the rising costs of long-term care. But combination policies may not provide inflation protection.

Compare features. Stand-alone LTC policies typically offer more and better benefit options than a combination policy, including new features designed to reduce consumer worries about premium increases or “wasted” premiums. LTC policy premiums also may be partially tax deductible, unlike combination policy riders.

A combination policy may be right for you—but investigate carefully before deciding.

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April 2005— This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Bold Financial Planning, LLC , a local member of the FPA.