Estate Planning

Sustainable Civilization: From the Grass Roots Up

Estate and Financial Planning - Providing Assets for the Future

Many of the financial paradigms we live under amount to smoke and mirrors. The predominant political, corporate, and personal perceptions are a short-lived child of extreme abuse of finite resources. You can indeed make millions on Wall Street, or any other speculative market. But compare the long-term general rise in securities with the long term general real cost of living increases. (NOT necessarily the figures in the official federal COLA basket.)

INTRODUCTION

In physical terms the key to relegating a major disaster to the status of a (hopefully) mild inconvenience is preparation. Assume and estimate the worst, plan and act ahead of the disaster. Preparations for a short-term situation generally focus on gathering a stockpile of essential items while the weather is good, so you’re not stuck racing to the store for bottles of water, food, and batteries at the same moment every one else is making the same panic run. Long term mitigation efforts eliminate some effect of a disaster, such as raising you home above expected flood water levels.

Whether preparation or mitigation steps, you must first be aware early of what is coming, and pay attention to key indicators. The conditions for a hurricane build over a long period of time, and with modern information systems we can easily see the warning signs. There are those who heed the warnings and secure their home, or if it is going to become life threatening then “get out of Dodge.” There are always those who ignore every sign, and want someone else to “bail them out” after the fact. Consider though that the larger the disaster, the less likely there will be help.

In the coming decades the mix of physical and financial crisis may be a socio-economic hurricane. Our fossil fuel dependent infrastructure and the population dependent on it has taken a long time to build up, but once it crosses some critical point and becomes a storm it is likely to rise to violent destruction quickly. Most nations have public debt, on and off the books, that significantly exceeds the ability of the economy to pay in any real terms, and the finances of most citizens tends to not be better.

The peak oil, essentially the overpopulation hurricane, is going to include not only physical problems, but financial, and it will be a transitional not temporary situation.

Why do costs rise? Some claim cost increases are part of a normal, healthy and growing economy; as the demand for materials, employees, and goods & services rises. Large deficits (public and private) breed inflation. Public bailout of bad private debt, such as the 2007 proposed sub-prime mortgage bailout, drag down anyone making personal effort, and make the bigger picture worse.

Consider essentially two aspects to increasing prices. Government debasing the currency is a stealth tax and a source of overall price increases. Increased demand (per person, or in the number of people expressing demand) or a falling supply (fruit shortages) may cause isolated or overall price increases. At this writing (2007) oil is the largest single component of supply side inflation trends, with the enhancing challenges of continuing global population increase and expanding industrialization on the demand side.

PROBLEMS VISIBILE AND NOT

David M. Walker, appointed by President Clinton as the Comptroller General of the United States, has repeatedly documented evidence that we face a dangerous financial future. Reports at the Comptroller website estimate the “off the books” debt to be around $40 trillion. In SEP 07 Congress acted jointly to raise the "debt limit" (RECOGNIZED DEBT) by around $850 billion (9.5% - from $8.965 to $9.815 trillion), apparently in recognition that they would make no effort to stop increasing the debt, interest on which consumes perhaps 1/3 of every tax dollar.

In the same month a headline indicated 2007 Medicare spending is expected to reach $330 billion. The U.S. official population is around 300 million. Therefore BEFORE the baby boomer generation becomes Medicare eligible, the cost BEFORE the baby-boomer generation retires therefore represents a cost per-person of $1,100 per year.

The "real" situation is of course worse. In 2008 the leading edge of the post WWII "baby boom" generation is eligible for retirement under Social Security, potentially removing some of the highest paid (and highest tax paying) workers from the market, at the same time as SS expenditures rise sharply. This same wavefront becomes eligible for Medicare in 2011. Debt such as Social Security, government pensions, etc. are NOT included in the on the books debt.

As taxpayers leave the rolls, the per taxpayer portion rises. One would therefore think that the LAST THING anyone in Congress or the President would be planning would be another new federal expense, or expanding any current expense. We need to be cutting federal spending like crazy, unless of course, there is no intent to ever actually pay the debt.

In an interview with the Financial Times, Mr. Walker said he that “…THE FEDERAL GOVERNMENT’S FINANCIAL CONDITION AND FISCAL OUTLOOK ARE WORSE THAN MANY MAY UNDERSTAND.”

If you are a taxpayer, expect Uncle Sam to reach deeper into your pocket. If Uncle can't get enough money, expect NEW and creative taxes, potentially developing into forfeitures (direct theft of property). If you are dependent on the government, for your own health and safety find some other means of support. In another interview, drawing parallels with the end of the Roman Empire, Mr. Walker warned there were “striking similarities” between America’s current situation and “the factors that brought down Rome,” including “declining moral values and political civility at home, an over-confident and over-extended military in foreign lands, and fiscal irresponsibility by the central government.” Perhaps the best we can hope for is the printing press, where all of the debt is "paid", but the currency is worthless. IN THAT SCENARIO, communities that have in place, or rapidly develop a localized "life support" infrastructure and economy, may avoid the worst of the collapse…

A pro-active, or quickly self-rescuing community is likely to face though increased attention from the government, demanding expansion of "share the wealth" programs.

Look at your estate, what you earn, what you do with what you earn, what you teach your children, what legacy you are going to leave to your children. Just as the right physical steps can avoid physical disaster, the right estate and financial planning efforts can avoid disaster in this realm.

GETTING STARTED ON YOUR ESTATE AND FINANCIAL PLAN

Once you are aware of essential micro and macro economic factors, and decide to take definitive steps, note it's never too soon, and (almost) never too late to develop your personal estate and financial plan.

Professional Assistance - There are times when you just need professional assistance. But be aware of who you hire. Depending upon their primary business, and personal paradigms, your advisor or assistant may have concepts that differ greatly from yours. Ensure you are understood, and that the assistance you receive is in line with YOUR paradigms.

Estate Planning - If you expect to have more than some token estate, you do not want to allow your estate to pass by intestacy. In the United States, if you do not write a will, each state will have a law which determines who gets what.

Once you are in a coma, mentally incompetent, or physically incapable of handling your affairs or communicating your intentions, it's too late to act. If all of your affairs are truly simple, you may get by with completing a set of standardized forms. But if you make an error, once the document is needed, it's too late to fix it.

Please be aware, even in the area of estate planning when dealing with licensed legal counsel, in general you get what you pay for. There are for example frequently free seminars on estate planning, that in the final analysis can be seen as "commercials" for living trusts. Trusts are discussed elsewhere in this legal assistance information series. While these can be valuable tools for your estate, not everyone needs such. If you attend a "free" seminar, be aware and expect a sales pitch.

Financial Planning - If your finances are such that you are ready to move beyond the basics, you may want to contact a professional financial planner.

Ideally, your financial planner is someone who is familiar with a wide range of financial products, and will be able to translate your goals into a recommended plan of action. In selecting someone to help guide your investments, it's important for you to understand the "business" that the person is actually in. If your "planner" is an insurance agent, or mutual fund salesperson, you should not be surprised if the proposed plan has a focus in the area of the product they sell on commission.

While the government does regulate individuals in certain professions, such as attorneys, insurance agents, and those engaged in the recommendation or sale of securities, I do not find that Arizona licenses or regulates financial planners, so check the qualifications of your planner.

There appear to be three nationwide certifications for planners.

Certified Financial Planner - see

http://www.cfp.net/learn/

Chartered Financial Consultant (ChFC) - see

http://www.theamericancollege.edu/

Certified Public Accountant - Personal Financial Specialist - see

http://pfp.aicpa.org/

Outside of certification from one of these organizations, the title financial planner is used by many in the finance industry. Whether or not certified, you may find planners working in a variety of manners.

Fee Based Plan - In general, for a fee this type of planner will review with you your present status, what you goals are, and provide advice as to a timeline and types of investments to achieve your goals. They usually do not work for or have a commission arrangement with the insurance or investment firms they may recommend. In many cases, you may find such a planner will make broad suggestions, and decline to make specific recommendations for purchases. (see Investment Advisors)

Commission Based - There are frequently advertisements for free estate or financial planning sessions, and you may obtain valuable information from these sessions. Please keep in mind though, that if the free training and planning session is being presented by an insurance agent, or agent for an investment sales firm, they have an obvious incentive to sell the product of their firm.

Investment Advisors - Investment advisors can also generally be divided into fee only, and commission based. Investment advisors appear to be required to either be state or federally registered. Registration does not mean they are recommended, it simply means they are regulated.

Fee for Advice Services - There are investment advisory books, newsletter, email, live phone notice, etc., that approach investment from probably any aspect you might consider, such as if you're into ecology, there are "green" specialists. Some may be able to show you they have a good track record, some may not. But of course, the fact that they did well in the past does not guarantee they will make the right decisions for the future. Many of these services will allow you the opportunity to "test drive" their program, with some time period during which you can cancel and receive a refund of the cost.

Commission Based - This includes the stockbroker who calls with the hot tip, the agent for a mutual fund based investment entity, insurance agents, etc. While no such business should automatically be suspect, you must nevertheless keep in mind the conflict of interest the employee has in their natural bias toward the products of their own firm. Virtually every security that may be on the market via any particular specialty firm, is also available on the market for purchase by use of an account with a discount broker.

Getting Started - But before you schedule a session with your selected planning professional, you need to take stock of your situation, so that you can properly inform your respective advisors.

The U. S. Department of Labor has a guidebook available free online at:

http://www.dol.gov/ebsa/pdf/nearretirement.pdf

There is always the possibility that once the mystery is removed from estate and financial planning terms and concepts that you will feel empowered to draft your own personal plan.

Where Are You Now - Organize information on where you stand at the moment. Gather information relevant to your benefits, such as from Social Security, and your employment benefits while working and in retirement.

Where Do You Go From Here - Where is it you want your plan to take you? If you are planning to leave a legacy for your children, you will probably find you plan will differ significantly from one where you plan to retire and spend your remaining healthy years driving the country in a motor home.

Timeline - Regularly advertised are home mortgages for 360 months, and finance for a new car for 72 months. How many months do you have to invest for college for your child, or to prepare for your retirement? Not to be morbid, but what do you believe is your prospective lifespan? If you have term life insurance, when does the coverage cost increase, or when does coverage end? How do the time periods relate to each other?

If you start college savings when your child is born, you have 216 months to prepare for a large expense that is typically going to be paid out over a 48 months period. Do you have enough being set aside each month to meet your goal of providing this assistance?

The timeline part of your planning notes can be a simple series of important anticipated events and ages of your family members, or it can be a detailed spreadsheet including present and/or future value formulas that provide insight as to prospective rates of return and monthly amounts needed to reach your goals. Planning Factors - Ongoing events "in the news" make it clear that you cannot make long term personal financial planning decisions "in a vacuum". You must keep up with news events, and be prepared to make changes in your investment allocations, and other plans.

Lifespan - Information I find in financial planning websites indicates that someone who is 65 today has a 50% probability of living to age 85 or longer, therefore most couples should incorporate in their plan at least one spouse living to around age 90. Obviously, your individual estimate must include your health, your lifestyle, your family history, etc., but a great deal can happen in 25 years of retirement.

Inflation and Price Increases - Look at inflation as an overall decrease in the value of currency, and price increases as changes in the price of some good or service that make is consume a greater percentage of your spending. Inflation can be somewhat neutralized by investing in a commodity that holds value. Price changes must be addressed by reduction in your demand or relative reduction in some other spending.

Taxation -	Tax law keeps evolving, as does macro and micro economic news. You must keep abreast of the news and determine how changes will affect your plans. For example, if Congress were to pass a bill making ROTH distributions taxable, you would probably want to withdraw your money before the effective date of such a new law.

Medicare Drug Option - 	The prescription drug benefit took effect in 2006. See the introductory information online at:

http://www.medicare.gov/MPDPF/Shared/Static/Resources.asp

Under the plan, you must select an insurance provider. If you don’t have an income that exceeds $9,000, you get a break on insurance premiums and deductibles. If your income exceeds this, you start to pay.

For discussion purposes say the plan you select costs $40 a month. Add in the $250.00 deductible, and before the plan pays for anything, it costs you $730.00 You then pay 25% of the annual cost for drugs over $250, and up to a limit of $2,250 in drug costs. YOU then must pay all drug costs over this amount, until you have paid out of your pocket each year $3,600, after which the plan would come back into play and pay for you up to 95% of the additional drug costs. This cycle repeats each year.

If you have a federal health benefit that you can continue into retirement, compare its costs and benefits closely to this Medicare option.

Employment Based Benefits - For military and civilian federal employees, there is a great deal of information available that describes your benefits during employment and into your retirement. You should make it a priority to obtain and carefully review that which applies to your particular situation, as early as possible. For example, for civilian employees, it appears that to carry your federal benefit health and life insurances into retirement, you must have had coverage in place for 5 years preceding your retirement date.

Social Security - As discussed in more detail in a five page document on the topic, Social Security has the potential to become a significant issue in the coming decade. For planning purposes, please be aware that Social Security payments are neither a right, nor even a contracted for entitlement. They are simply a voluntary benefit provided to you by the government, which can be changed, means tested, or eliminated.

ESTATE PLANNING BASIC CONCEPTS.

Be realistic; when a person dies, disappears, or becomes incapable of handling their own affairs, certain matters have to be taken care of by somebody - lawyer or not - whether there's a Will, Trust, Power of Attorney or none. If you have been proactive and made decisions about how you what you affairs to be conducted, who will act, and most importantly, actually prepared and signed the documents, your wishes should essentially be followed. Why do you need an estate plan? Death. First, in death there is the funeral. Then, bills have to be paid; personal business and insurance matters must be concluded. Final personal income tax and inheritance tax returns must be filed, as well as a federal estate tax return, if necessary. The dwelling might have to be vacated. All sorts of property must be accounted for, secured, divided appropriately and formally transferred as required. None of these chores can be avoided. A certain amount of time -free or paid - is inevitably involved. Obviously, leaving all these details to an attorney can be expensive. Significant money can be saved if the Executor and heirs help. Incapacity. Even if you're not in a terminal condition, you may be so ill or injured that you may no longer physically, or mentally, be able to interact with those around you, or even be aware of your surroundings. In that situation, a Judge would need to appoint a "guardian" or "conservator", who would be someone selected by the Judge. The person appointed by the court may NOT be someone you would have wanted. It may be someone completely unaware of your wishes, who acts completely contrary to what you would want. Elements of the Estate Plan Will. Your will is the foundation of your estate plan. It is your final opportunity to tell the world what you want to have happen once you're gone. In it, you can indicate, "... everything else that I've not made specific arrangements for, should be taken care of by..." Durable Power of Attorney (POA). Short of your death, if you become incapable of handling your own affairs, you can designate in advance who should handle things for you by a Durable Power of Attorney (POA). In this document you, the "principal" give authority to your agent, your "attorney in fact" (who need not be a lawyer) to act on your behalf. The scope of the power can be specific - e.g., the purchase of a single real estate investment - or almost unlimited. You may want to split your designations, i.e. Child Care Power. If you are temporarily incapacitated, the person whom you want to take care of your children on a temporary basis may not necessarily be the one who they would live with if you were to die. Health Care Power. If you're not capable of making your own medical decisions, you can select someone to make them for your. Living Wills and Advance Medical Directives (AMDs). These provide general guidance to medical professionals, and are typically used where you have been diagnosed with a terminal condition, and you wish to avoid a protracted death. Whether you have signed an AMD or not - as long as you retain the capacity to make and express decisions for yourself, your consent must be obtained for your medical treatment. You remain solely and totally in control. If you have an AMD, it can be revoked or modified at any time, if you are still capable of doing so. Insurance. In the case of automobile (liability) insurance, it is required by law in most states. Otherwise insurance, which is essentially a complex gambling contract between you and the insurance company, has as a primary purpose financial protection. For those without extensive physical assets, life insurance is a way to purchase an immediate estate of substance. Health insurance can provide for coverage of delineated medical costs. Liability insurance provides coverage of damages you cause up to the agreed limits. Personal property insurance can pay for repair or replacement of your property if damaged or stolen. You need to examine your risks, determine the type and amount of coverage you need, and comparison shop for the best blend of rate, coverage details, and provider. Trusts. A trust is a means to separate and define ownership, control, and receipt of benefits from an asset. It can allow you or another to manage an asset, yet not have ownership such that it is part of your estate. Determine your present status. Manner of Title. The manner in which property is owned effects how title is transferred on death. Sole ownership. If you own something, in your name only, with no one else who has a "community property" interest, lien against it, etc., you can dispose of such property by a lifetime gift, transfer to a trust, or by your will. Joint tenancies with right of survivorship (JTWROS). If you die, "owning" property held in this legal format, you CANNOT leave your property to anyone by will. In JTWROS, when you die, your interest in the property "dies" with you, and it automatically becomes the sole property of the survivor. This type of ownership PRECLUDES estate tax planning with regard to that asset. (You can't fool the IRS...)  You CAN sell you interest, or transfer it into a trust, which effectively changes it to Tenant in Common. Tenants in Common. Each person "owns" an equal share in the property, which can be sold, transferred in trust, or left in a will. This is a "default" position, which sneaks up on some people. For example, if you got divorced, even a long time ago, and an item of property was not covered by the divorce, then the law typically considers you to still be a tenant in common with your "ex". Community Property. In practice, this works a lot like "tenants in common", but it DOES NOT necessarily require that both names of a couple be on the title. Things can BE community property, jointly owned by both spouses, REGARDLESS of whose name it on the title. You CAN give or will away, or transfer in trust, your community property interest. Defined Beneficiaries. If you have a qualified retirement plan, Individual Retirement Account, Thrift Savings Plan, life insurance, etc. type of investment, where you are required to designate in writing a "beneficiary", this money goes directly to the beneficiary you specify. Direction to the contrary in a will, trust, etc. will be ignored. Gather Information. You will have a better grasp of your assets, obligations, etc. if you gather information on all of your property, accounts, etc. into one location, and prepare a summary. This could be an invaluable tool for someone seeking to keep up your bills while you were hospitalized, or in probating your estate. Estimate Estate Needs. If no one is or is likely to become dependent on you, if you're convinced you won't become incapacitated (or don't care if you do), and don't care what happens when you die, you don't need estate planning. Otherwise you should determine your obligations, likely risks, and the plan aspects touched on above that you would like in place. Summary. Planning your estate is an ongoing evolving process, requiring changes as you life changes. In separate articles we will provide further details on the aspects touched on above. Please though do not make any tax or estate planning decisions based solely on the brief outlines presented. Estate planning is but one step in the overall process of "financial planning." This should include risk management and insurance, as well as tax, investment, and retirement planning. You should visit your legal assistance office, or other attorney, accountant, and other trusted professionals. ESTATE PLANNING - WILLS. Your "Estate" is all you own or control. A will is one tool in the larger process of "estate planning." There are specific requirements for preparing and signing wills, established by state law. Basic terms. Will. - In simple terms, this is the written document which provides direction as to how you want the property you own at death to be managed. Most states have statutes which will be used to "fill in the gaps" in an area where the will is not clear. Testator / Testatrix. The person (male/female) who is signing the will expressing their property distribution and other desires. Executor / Executrix. The person (male/female) who is designated in the will as the one responsible for taking the steps necessary to implement the terms of the will, also often referred to as the "personal representative" of the estate. Please note, if you are designated as the executor of an estate, you may decline to serve. Guardian. If you are responsible for a minor (child) or an incompetent person, the guardian is the person you select to take over your care duties. Trustee. If you are creating a trust by your will, or have already created one, you may designate in your will a change of manager for your trust. Probate. Refers to the court proceeding for an estate, debts are settled, and legal title to property is formally passed from the decedent to his/her heirs. The "probate estate" simply refers to any property subject to the authority of the probate court. Assets disposed of outside the probate process are part of the "non-probate estate." Who needs a will? If you die without a will, or other arrangements for your property, care of your children, etc., a Judge will make all such decisions for you, based on applicable local law. For example, if you die without a Will while you are: 1. Married with children: Most states award one-third to one-half of the decedent's property to the surviving spouse, and the remainder to the children, regardless of age. 2. Married with no children: Most states one-third to one-half of the estate to the surviving spouse. The remainder generally goes to the decedent's parent(s), if alive. If both parents are dead, many states split the remainder among the decedent's brothers and sisters. 3. Single person with children: When a single person with children dies without a Will, state laws uniformly provide that the entire estate goes to the children. 4. Single person with no children: In this situation, again, most state laws favor the decedent's parent(s) in the distribution of his/her property. If both parents are deceased, many states divide the property among the brothers and sisters. What cannot a will control? Your will CANNOT control every aspect of your property. Community Property. The term "community property" often comes up in discussions about estate planning (and divorce). It is recognized in Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. The general concept is that everything earned and purchased with earnings during a marriage is jointly owned by the spouses. While it is possible to will-away your share of community property, if the surviving spouse objects it may be that a transfer is effectively stopped. Consider: During a long-term marriage where both spouses worked and there are joint investments and investments in just separate names. That fact that only the name of one spouse is on title to property DOES NOT necessarily mean that it is separate property of that spouse, such that it can be given freely in a will. If the husband bought a tract of remote land with marital earnings, titled in just his name, and wanted to leave it in his will to a nephew, could he? Even though the wife's name is not on the property, due to community property she is still legally the owner of a 1/2 interest in the land. If she does not receive a large enough share of other community property, she could object, and potentially become a joint owner with the nephew, or be awarded the husbands share of other community property. Joint Tenants with Rights of Survivorship. (JTWROS)  If property is held with the title in this legal format, it is not possible to pass the property by a will. Legally, if you die owning property in a JTWROS title with someone else, at the moment of your death your interest in the property also dies. Predesignated Beneficiaries. Your accounts at financial institutions, life insurance, etc. have probably required you to fill out and sign a form designating a beneficiary for purposes of your account with that institution. If your life insurance policy still shows your parents as beneficiary, and you try to change it by a clause in your will, it will not work. How long is a will valid. In general, if a will was properly prepared and executed for the law of the time and place where executed, it remains valid indefinitely unless revoked. Altered by law. In many jurisdictions, including Arizona, the birth of a child, marriage, or divorce, serves to revoke that Will, at least as regards that person. Codicil. This is a separate document that modifies one or more terms of an earlier executed will, without the necessity of completely rewriting the will. Destruction or Alternation. If the testator destroys the original will, or otherwise marks the will such that it is clear to a Judge that it has been revoked. New will. A standard phrase in a new will is that it revokes all preceding wills. Will Advantages vs. a Trust. For the testator, preparing a will that provides for all property owned, guardianship, etc. can be a short simple process. A general phrase in a will can serve as legal justification for the transfer of any property, anywhere. New wills can be written at the discretion of the testator. A will does not generally pose any barrier to the testator's handling of property after execution of the will, including that the testator may freely dispose of property. The burden of actually changing legal title to property falls on the executor, not the testator. If the estate is under certain limits, the probate process can be a few simple documents. Will Disadvantages vs. a Trust. If real estate is owned in more than one state, it may be necessary to probate the will in every jurisdiction where there is real property. Depending on the size of the estate and the probate rules, probate can take significant time, and impose a trying burden on the executor at what may already be a stressful period. The probate process creates public court documents of the property and its disposition, and even if done without paid legal counsel, involves at the least court fees. Summary. A will is the foundation of the estate planning process, with the capability of legally transferring every aspect of an estate that is not handled in some other manner. But it is just one of many such legal tools. Please do not make any tax or estate planning decisions based solely on the brief outlines presented. Keep in mind, too, that estate planning itself must be seen as but one step in the overall process of "financial planning." This should include risk management and insurance, as well as tax, investment, and retirement planning. You should visit your legal assistance office, or other attorney, accountant, and other trusted professionals. ESTATE PLANNING POWERS OF ATTORNEY.

Your estate is all you own and control. While you are alive and healthy you should expect to handle your affairs yourself. But short of death, you may still reach a point from accident, illness or unavoidable absence where you are physically or mentally incapable of acting for yourself. In these instances, a durable power of attorney can give someone else authority to make decisions and sign documents on your behalf. Basic Terms. Power of Attorney. This is a document, which you sign, granting to someone else the authority to make decisions for you, and to sign your name, fully binding you to the contract signed just as though you signed it personally. Principal. The person who signs a document granting the power and authority to someone else to act in their place. Attorney in Fact. The person (Ignore the word attorney, you DON'T need to be a lawyer) who receives authority to act and sign on behalf of another. Incapacity. The event which causes you to no longer be capable of taking care of your own affairs. In general statutes would set this as a physical or mental state in which you are not capable of communicating. (i.e. unconscious or in such a diminished mental state that you clearly appear to those around you to not be aware and responding to normal communications) In your document though, you can refine the definition. Durable. By law in most states, a power of attorney is valid for only so long as you, the person who granted it, remain mentally capable. In those jurisdictions if you want the power to continue in force during incapacity, you must clearly indicate this. Springing. This refers to setting out terms or preconditions in your power of attorney such that it is NOT valid until your attorney in fact can prove to third parties that the conditions have been met. What can a Power of Attorney Do? Special and Limited. If you can't be present when household goods are being picked up or delivered, can't take weekday time off to go to motor vehicles, a closing on a house, etc., you can have a power of attorney drafted that authorizes someone else to go in your place and to sign all documents required for just that one transaction. The power would not be valid for any other purpose. Health Care. You can select in advance someone to make medical decisions for you. In the absence of you making this designation, it may be necessary to have a Court Order before someone could act for you. The Court may put restrictions on your agent (or grant powers) that you would not want, and of course, the Court may PICK someone you would not want. When you are proactive, you select who makes decisions for you, and you can be as detailed in your instructions as you like, or as broad in granting power as you like. Child Care. If you have children, and you become incapable of taking them to school, the doctor, or caring for them at home, who fills in for you? In an extreme example, if you're suddenly hospitalized and unconscious, your children may be subjected to being picked up by the state "child protective" office, and placed in a "foster home", even over their objection and the objections of your family and best friends. You should work out in advance with family or friends who will take care of your children if you are suddenly and temporarily "out of the picture", and most importantly, PUT IT IN WRITING. General. At the far opposite from special or limited, you can grant a power of attorney that lets someone else do (almost) anything you could. This is a very dangerous document if you do not clearly trust your "attorney in fact", as they COULD give your property away, put you significantly in debt, etc., and all of the documents WOULD be binding on you. If you grant someone a general power, the limits by state law imposed on what they do that is binding on you would be minimal, typically they could not change your will, change or take out life insurance. In most states, if you can prove your attorney in fact acted contrary to your best interests, you would be able to sue them for breach of their fiduciary duty. In Arizona, an attorney in fact who acts against your best financial interests would be committing a criminal offense. (Which still doesn't help YOUR situation, if they robbed you and spent the money, which you must repay.) Revoking (canceling) a Power of Attorney. Cancellation Date. First, you can put an automatic cancellation date into your power. This "safety" simply makes the document invalid after the set date. It means you will have to keep signing a new document, and reconsidering your designation on a regular basis. Formal Revocation. If a power of attorney is in effect, and in the possession of your attorney in fact, to revoke it you need to put the revocation in writing, clearing telling you attorney in fact that the power has been revoked. If that person refuses to surrender the document, and uses it after you've revoked it, YOU'RE STILL "ON THE HOOK" for what they do, but if you can prove you told the attorney in fact of the revocation, you've got a clear-cut lawsuit against them, as well as good evidence for a criminal prosecution. Pocket Revocation. If you're PREPARED the documents, told you attorney in fact where you're keeping them, but NOT actually given the documents out, you can simply destroy the originals. Summary. A power of attorney is a very useful estate tool, which you can make as broad and all-encompassing as you desire, or extremely narrow in scope and effective time. It allow you to select in advance someone you trust to act in an emergency if you cannot, and make your wishes clear for those times when you cannot speak for yourself. Estate planning is but one step in the overall process of "financial planning." This should include risk management and insurance, as well as tax, investment, and retirement planning. You should visit your legal assistance office, or other attorney, accountant, and other trusted professionals. ESTATE PLANNING - TRUSTS Your "Estate" is all you own or control. A trust is one tool in the larger process of "estate planning." There are several widespread misconceptions regarding trusts. Use of a trust is NOT a subject of interest only to the wealthy. In fact there are many situations where a trust is appropriate. Despite the "infomercials" presented on TV, and in live seminars, trusts are not a cure-all for estate planning, and they are not necessarily appropriate for everyone. Basic terms. Trust - In simple terms, this is the written document which provides direction to the trustee as to how the property held by the trust is to be managed. Most states have statutes which will be used to "fill in the gaps" in an area where the trust is not clear. Trustee - The person selected to manage the trust. Grantor - The person who creates the trust. Beneficiary - The person for whose benefit trust assets may be used. General types of trusts. Within these types, there are many more options in the management of assets. Living Trust - Created by your voluntary action during your lifetime. (Revocable or Irrevocable) Testamentary Trust - Created by a requirement set out in your will. (Revocable or Irrevocable) Revocable Trust - One where you can change your mind, and withdraw property which you had transferred to the trust. Irrevocable Trust - One where you CANNOT change your mind. Once property is owned by an irrevocable trust, you and the beneficiary are in most cases firmly bound by the terms set out. Why use a trust? Provide for your children. Anyone with young children should consider a testamentary trust. This can require that your property (which can include your life insurance, if paid to your estate or your trust) be held for your children's future needs, rather than being immediately available to the children, or to whomever receives guardianship of your minor children. Absent an age restriction set by you, Arizona law would require distribution of each child's share to them at age 18. You can though select essentially any age you want, and set reasonable conditions. For example, you could require everything be held in trust until your child reaches the age of 65, unless they complete a college education, after which they may receive the remainder immediately, thus prompting the child to at least get an education before they embark on a party with their inheritance. Families today may be second, third, etc. marriages for at least one of the spouses. There may be children from prior marriages on both sides, who may be living in the home, or elsewhere with the other parent. In the typical "first thought" will, spouses leave everything to each other. But if the surviving spouse re-marries, or in their will the surviving spouse simply ignores the children of the deceased spouse, the children receive nothing. The children can be protected by leaving property to a spouse in trust, with the property eventually passing to the children. Long Term Care. If you believe you might need nursing home care, and don't have adequate insurance, under current law the government will not pay for your care while you own certain combinations of assets and values. Further, even if a government program does pay, there may be a lien imposed against your property. Trust planning for this possibility is often referred to as a Medicaid Trust. Disability planning. Whether by illness or accident, or just plain old age, any of us may find we are no longer physically or mentally capable of managing our own affairs. If you do not prepare for this in advance, the Court may find you incompetent. In that event, the Judge will appoint a guardian to handle your affairs for you. This person may not necessarily be the individual you would have selected, had you acted earlier. Your guardian will have access and control of your assets, and may use them in a manner contrary to what would otherwise have been your intentions. If however, you had placed your assets into a trust, the guardian would be bound by the terms of the trust. When disability planning is appropriate, the Trust can be a useful tool. Assets in a living Trust are already under the control of a Trustee, who can make financial decisions. If you initially serve as your own trustee, it is imperative that a back-up Trustee be named. Asset Protection in a Lawsuit. People will sue, at times over what may appear to be insignificant issues. Juries will at times make decisions and grant damage awards that are difficult to comprehend. If you are on the losing side of a lawsuit, you may see your lifetime savings and investment disappear to satisfy a judgment against you. Enter the "Living Irrevocable Trust". If, prior to the event upon which a lawsuit is based, you have transferred ownership of your assets to an irrevocable trust, you will probably be found to not be the owner, and the assets held in trust will be exempt from consideration. Depending on the facts, merely having your assets held in the name of the trust may discourage a lawsuit against you. Estate Tax Planning. Whatever you own or control on your death may be subject to federal and/or state "death taxes". As currently written, the law on federal estate taxes provides that amounts exempt from the tax increases each year until 2010. The general discussion in the news is that the federal estate tax "disappears" in 2010. However, despite the news, as worded what disappears in 2010 is any EXEMPTION to the tax. BEWARE OF INFOMERCIALS! If a "living Trust" ad or proposal claims to save death taxes - as opposed to probate "costs" - either it is NOT so "simple," or it is a scam. The assets of any Trust you control are subject to estate taxes, as if no trust existed. Period. Unfunded Trusts. Although an empty Trust can exist, in order to function at all, a Trust must have assets formally transferred to the Trustee. If you want your car, home, bank account, etc., to be held, managed, and passed on by a trust, you must first transfer all titles and ownership to the trust. Trust advantages vs. a Will. If you own real estate in multiple states, a Trust would allow for immediate distribution of the property after death, and avoid the potential need to probate your Will in each state in which property is owned. Probate of a Will takes time - at least several months. Probate records are open, but a Trust document is private unless challenged in court. Trust DISADVANTAGES vs. a Will. You can make arrangements to transfer your property by will with a statement as simple as, "I leave all my property to my favorite niece, Jane Doe". To transfer property by a trust, you must actually transfer title of the property to the name of the trust. If you fail to transfer title to an asset, you STILL need a will to cover the "forgotten" property. The burden is on YOU to keep your transfer's up to date. If you are paying for your legal services, you will probably find that the cost is higher for a trust than for a will. The trust is a separate legal "person". If the trust earns income, you may need to file an income tax return for the trust. Examples of Specialized Trusts. Marital Deduction and Bypass Trust (the "A/B Trust"). This is the tax-planning cornerstone for many combined marital estates (i.e., all property owned by the husband, the wife, and jointly) worth over the federal estate tax exemption amount. It allows the surviving spouse to use the entire estate while they live, yet preserves the maximum amount of exemptions. If you own a home, have some investments, and life insurance, you might be surprised to find you ARE approaching the level where the estate tax would apply. (Although life insurance payouts are not taxed as INCOME tax, unless properly set up, they ARE part of your estate.) Medicaid Trust. This is an IRREVOCABLE trust, which removes the assets you place in it from your direct ownership and control. These assets are therefore unavailable for lien by the government, nursing home, other creditors, etc. This type of trust must meet certain other requirements set out in Medicaid regulations, such as a waiting period. This waiting period requires that 60 months pass (five years) from the date that assets are transferred into the trust, before the government will agree that they are truly beyond your control. If you must enter nursing home care during the 60-month period, the government may refuse to pay until the waiting period has passed. The Life Insurance Trust. Why use a Trust to own insurance policies? First, remember that proceeds from policies you own will be included in your estate, even though paid to a third party. If an irrevocable Trust owns the policy, however, death proceeds can be received by the family income tax-free (as usual), yet not be included in your taxable estate. But a Trust is not necessary to get this result. For example, if a child owns, pays for and is beneficiary of a policy on the life of a parent, he/she can receive the policy proceeds with no tax consequences to anyone. The real value of using a Trust to hold insurance is to provide for the use and management of the policy proceeds according to your wishes. (For example, held to pay for college for your child, or for the old age of your spouse.) The Crummey Trust. (Please no jokes about the name) This Trust takes its name from the court decision in the case of Mr. Crummey versus the IRS. The purpose is to create an estate through annual gifts, made in a way that discourages the beneficiaries from spending the gifts immediately. The simple way to do that is to make outright gifts, and just tell the recipients of your wish that the money be saved for college, for example. If however, you don't think you teenager will spend the money wisely, the trust adds a layer of control. This Trust was "invented" by Crummey's attorney so that his client could make gifts in Trust, but still take advantage of the annual gift tax exclusion from federal gift and estate tax. That is the important feature of the Crummey Trust because gifts to many other kinds of Trusts do not qualify for the $10,000 annual exclusion. Annual gifts are a great way to slowly reduce the taxable estate, while passing along wealth to the next generation. As long as the gifts are made in amounts under the annual limit none of the estate owner's overall estate tax shelter is used by the gifts. Yes, the federal government imposes a pile of paperwork if you give any one individual "too much" in any given year. One faces special problems when making gifts in Trust, however. The annual tax exclusion pertains only to gifts of a present interest in property (e. g., cash, free and clear) - not a future interest. It means that a gift to many Trusts would NOT qualify for the tax exclusion: Since the terms of many Trusts would not allow the beneficiaries to have unrestricted, immediate access to that gift, it would be a non-qualifying gift of a future interest. The Crummey Trust is intended to get around this problem. Gifts are made to the Trust, which is irrevocable. The Crummey Trust beneficiaries are given only a short period of time each year (e.g., 30 days) in which they are permitted by the Trust document to withdraw the gift money from the Trust, free and clear, for completely unrestricted use. The Grantor hopes they will not do that - and is free to say so - but there can be no formal agreement that the gift money will not be withdrawn. The Charitable Remainder Trust (CRT). Here, the Grantor has a charitable motive and wants a big current income tax deduction, too. Often, however, the Grantor does not want to give up all benefit of the property to be donated. If the Grantor needs lifetime income, a CRT, which is irrevocable, can be an extremely useful tool. This is a very complex topic, with many variations on a common theme. Great flexibility is possible, but very competent advice is required. Tax laws and rulings pertaining to CRTs will always be subject to changes that could drastically affect what was a well-conceived arrangement when drafted. The Qualified Terminable Interest in Property (QTIP) Trust. This is often used for those entering second marriages with substantial estates already. It provides lifetime income for the surviving current spouse, while leaving the remainder of Trust property to the children of a previous marriage (or others). A bequest to a QTIP Trust, by law, "qualifies" for the unlimited marital deduction for estate tax purposes, even though the surviving spouse's rights to Trust assets are less than total. Note that all Trust assets are included in valuing the survivor's estate for tax purposes, just as they would be if left outright to the survivor. The Grantor Retained Annuity Trust (GRAT). This is an irrevocable Trust, good for shifting some of the value of an asset out of the estate. The Grantor places assets in Trust for the ultimate benefit of the children (i.e., they have a remainder interest), but retains the right to an annual pay out for a period of years. Example: Grantor creates a GRAT and transfers $300,000 in mutual fund shares into it. The Trust provides that the Grantor will get a $6,000 annual pay out for 15 years, after which the Trustee will make a complete and final distribution of the shares to the Grantor's children. At this point, there has been a taxable gift - but not of the full $300,000, because there are "strings" attached. After all, the money is not available to the children for 15 years. This is how tax savings are possible. At the end of 15 years - IF the Grantor is still alive - the value of the mutual fund shares, including any price increase, will have been removed from Grantor's estate and will not be subject to tax upon his death. The GRAT is also a good way for the owner of a growing, closely held business to retain an income for himself, while passing the business along to his heirs before any more (taxable) growth occurs. The Qualified Personal Residence Trust (QPRT). This is an irrevocable Trust, similar in concept to a GRAT, with a confusing name. It is a good method of shifting the value of the family home out of your estate, for the purpose of lowering the ultimate estate tax. The house is placed into Trust for the future benefit of the children. The value today of this remainder interest is a taxable gift. As with a GRAT, the Grantor accepts some federal gift tax liability now, to save more on federal estate tax later. What the Grantor retains here is not income, but the right to live in the house for a term of years. If the Grantor outlives that term, the value of the house - plus any property appreciation since it was transferred to the Trust - passes to the children with no additional federal estate tax. As with a GRAT, if the Grantor does not survive the term of the Trust, it has no tax effect. Two significant drawbacks: First, the children will have received the house by lifetime gift, not inheritance, so there is no step-up in the tax basis of the property. Secondly, if the Grantor does survive, he/she must start paying the children fair market rent, or the IRS might look at this as a sham transaction. Summary. Many complex issues are involved in estate planning. As mentioned above, a trust may be an appropriate tool to use in your estate, but it is just one of many such legal tools. Please do not make any tax or estate planning decisions based solely on the brief outlines presented. Keep in mind, too, that estate planning itself must be seen as but one step in the overall process of "financial planning." This should include risk management and insurance, as well as tax, investment, and retirement planning. You should visit your legal assistance office, or other attorney, accountant, and other trusted professionals. FINANCIAL PLANNING GETTING STARTED

Do you have questions or concerns about your financial future? Have you planned for your continued education? Have you considered the responsibilities and costs of marriage (or divorce), raising children, college education for your children, and your retirement years? Or, perhaps, are you too far in debt?

Step One - Gather information. Perhaps a first logical step is to gather together into one document all of your basic information (names, accounts, contact points, etc.). For those interested, we have posted at the YPG intranet site an organizing outline document (18 pages PDF format - entitled PEACE OF MIND PLAN), prepared by the JAG school. Step Two - Set up a budget. It is obvious that to invest for your future, you can't spend your entire income on consumer goods and services. If you need help setting up a family budget, the ACS office here at YPG offers this service, or if your situation is more complicated, call for legal assistance review. It is important to arrange you budget such that you can begin some type of investment program as early as possible. Due to the effects that compounded interest will have on the final value of your investments, a delay of even a few years in STARTING your investment program, and have LARGE effects on the total amount you have in the future.

Step Three - Envision your future. Where do you want to go? What do you want in your retirement years? Are you prepared for the burdens of caring for a family member (or they for you) during a period of long term disability? Do you plan on providing a college education for your children? Can you family continue to live with the same lifestyle in the event of your death? Do you have your debts under control?

In general, the higher your formal education, the higher your lifetime income. Active duty members have a variety of tuition assistance options. Regardless of your status though, you still have many options to pursue an education. In additional to traditional classroom attendance, there are legitimate correspondence programs, "online" programs, and it is even possible to completely earn a Bachelor's Degree by simply taking tests. Whether active duty, civil service, or employed in the civilian sector, take a pro-active interest in advancement: examine your position, your capabilities, and the requirements for advancement. If there's a different job you think would be perfect for you, work toward getting yourself qualified for it.

Step Four - Protect your present assets, and your future goals. Do you have the right types of insurance coverage? Do you ENOUGH insurance coverage? Are you getting a "good deal" on your insurance? (i.e. for life insurance, there are websites when you can make your initial inquiries about policy costs, which when contracted for directly with the insurance company, SAVES you the fees which would otherwise go to the local insurance agent.)

Liability insurance, not only on your vehicle, but some type of "umbrella" policy that covers your personal liability for events other than a car accident. (i.e. what if you trip someone while you're at the mall, and they sue you?) These policies are often a rider to homeowners or renters insurance.

Homeowners / Renters insurance. Provides for replacement of your personal property for covered events (i.e. theft, fire, or other destruction), as well as liability protection for accidents that take place on your property. For example, if you live in quarters, and your child accidentally starts a fire that destroys all of your personal items, as well as the government owned home, could you afford to pay "out of pocket" for all of the damage?

Life insurance. SGLI is offered for military members in up to $250,000 coverage. SGLI terminates though 120 days after you retire or leave the service. In addition, have you considered, is this sufficient to truly provide for your family in the absence of your income? Many couples with children, where for example the non military spouse does not work outside the home, ignore coverage on the non military or non working spouse, thinking there is no income to be replaced. There is however a significant impact on the surviving family when they must pay someone else for services such as child care, that were otherwise being provided "free".

While there are variations, the two basic forms of life insurance. First, is "whole life", where the policy accumulates over time some manner of "cash value" which can be "borrowed" or considered as a form of investment. AS the name implies, it is generally a type of life insurance where the coverage can be maintained for your entire lifetime. The documents presented to you as part of the "sales pitch" often includes projections of significant profits within the policy. Read the details carefully, and look for the amounts that the company guarantees, rather than mere estimates. (The fact that any particular class of investment advanced significantly in the PAST, does not necessarily mean it will do so in the future.)

Second, is "term insurance", which is what the SGLI program is. Term insurance provides a much higher amount of coverage, for much less cost, because it has no "investment" aspect. When the policy ends, nothing remains. The "term" aspect generally refers to the period of time during which the company has agreed to provide insurance coverage and the costs for that period. More often than with whole life policies, you will find that term policies have costs that increase as you age. If your first priority is to provide a "safety net" for your family, your first priority is sufficient term insurance to meet those needs. After the safety net is met, whole life can then be considered as one of they many means (including also the world of "TSP", "Individual Retirement Accounts", mutual funds, money market accounts, real estate, etc.) available for investing for your future.

Long term care. If the need for nursing home care has "run in your family", or some aspect of your personal life indicates to you a likelihood that you may need nursing home care, you should note that the earlier you take out such a policy, the lower the payments, often even when the payments are aggregated over time.

Step Five - Savings. This refers to short-term financial goals, such as saving for a vacation, for that Christmas shopping spree, a car, etc. These funds are typically kept in bank or credit union deposits, money market funds, etc. An approach to savings is payroll deductions for federal "Savings Bonds", which have the advantage that the interest on the bonds builds up "tax-deferred", meaning you do not pay tax on the interest until you turn the bond in for cash. They can be redeemed at any bank, at any time later than six months after purchase. These bonds carry the additional benefit that at the maturity date of the bond you can exchange it for a class H bond. A class H bond pays you interest you can put in your pocket and spend. While the interest actually paid out to you from an H bond is taxable, there was no tax on the E bond interest while it accrued, and there was no tax when you exchanged the E for the H. This combination give the E - H combination advantages over commercial savings accounts.

Step Six - Investments. These are purchases you make with the intent and hope that the item purchased increases in value significantly faster than the general inflation rate, or bank interest.

Real estate. For most people, a home is the largest purchase they make. If you are not living in your home, it can be rented, which may have significant income tax advantages for you. While unimproved land (without a building) can be an investment, it typically does not have the tax advantages of "depreciation".

TSP. Federal military and civilian employees have the option to defer a portion of their income into a "Thrift Savings Plan". The money sent there from you salary is not considered taxable income during your current tax year, and should not be subject to withholding for taxes. In addition "Uncle Sam" makes some type of matching contribution. All of the money in your TSP accumulates profits, yet is not subject to income tax so long as it remains in the account. These factors combine to make the TSP account far more attractive than making similar investments with after-tax money.

IRA. Depending on your income tax bracket, you may also be able to make tax deferred investments in an "Individual Retirement Account". A comparison of tax deductible IRA/TSP and the same investment after taxes (using a 25% tax bracket as an example, and 5% annual interest) is below. Both columns below indicate an investment that amounts to $1500 "out of pocket". The first advantage of a pre-tax investment here is that to have $2000 each year deposited, it only "costs" you $1500 of the money that would otherwise be in your pocket. The other $500.00 going into your investment is money that you would have otherwise paid as income tax. As you can see, just over a five year period, the difference is substantial.

IRA/TSP		 Brokerage

Open account $2000.00		$1500.00

Interest during year 1 $100.00	                 $75.00			   -$18.75(income tax) Deposit year 2 $2000.00		$1500.00

subtotal $4100.00		$3056.25

Interest during year 2 $205.00		 $152.81		               -$38.20 (income tax) Deposit year 3 $2000.00		$1500.00

subtotal $6305.00		$4670.86

Interest during year 3 $315.25	               $233.54			-$58.39 (income tax)

Deposit year 4		$2000.00				$1500.00

Subtotal $8620.25		$6346.01

Interest during year 4 $431.01	              $317.30			 -$79.33 (income tax)

Deposit year 5 $2000.00		$1500.00

subtotal $11051.26		$8083.98

Interest during year 5 $552.56		$404.20		            -$101.05 (income tax)

Total at end of year 5 $11573.82	            $8387.13

ROTH IRA. Even if your tax bracket means you cannot deduct the deposits to a "traditional" IRA, you should consider the ROTH IRA. While you cannot deduct the deposits from this year's income tax, all of the profits still accumulate tax deferred, and if you comply with the other applicable rules, the money is also NOT taxed when you withdraw it. A significant additional aspect of a ROTH IRA is the ability (as of 2006 law) to withdraw at any time your contributions WITHOUT any tax or penalty. This allows a ROTH to function as an "Emergency" savings account to hold your "cash". While you must in general leave all interest/profits in the account, there are exemptions for the profits also.

- The account must have been in existence 5 years. - If you are not 59 1/2 or older, then the withdrawal of profits must: - Be used to buy or rebuild a "first home" as defined in PUB 590; or   - You must be disabled as defined in PUB 590 In either type of IRA, you have a wide selection of custodians (places where you make your deposit) and investments. Your IRA can be invested in stocks, bonds, mutual funds, bond funds, some option contracts, gold coins, and even real estate.

Purchasing a Pension. Yet you may not realize it, but even if you are not making cash deposits, in some manner you are “buying” your retirement plan.

Active duty must invest at least 20 years of service, and then become eligible for a lifetime pension. Your pension is determined by the rank you achieve, therefore it is in your best interest during your career to progress as high as possible in the ranks. Although you do not actually make any cash deposit to purchase your pension, I'd like to put it's value in perspective.

Assume an 18 year old enters the military, does a 20 year career, and retires at 38 at an E-7. Your pension will be around $1600 per month for life. Assume living at least 40 more years until age 78.

If interest rates when you retire are around 5%, at age 38 the economic value to you of the upcoming 40 years of checks is as if you had around $330,000 in the bank.

Assuming the same 5% interest rate, over the 20 years you served, if you had wanted to invest and have $330,000 in the bank you would have had to start saving $815 per month in a tax deferred account, and put $815 in every month you served, to simulate the value of your active duty pension. Whole Life Insurance. Although discussed above in insurance, it is really at this level in your financial plan that "whole life" type policies become a practical investment. They are a tool to use "after tax" earnings to invest further in tax-deferred, or potentially tax free investment programs. There are many insurance companies, among which you may find essentially identical investment options, but with widely differing costs to you. Be sure to check out the safety rating of the company. Remember, the company is in business to make money, as is the company agent. Read your contracts carefully.

Educational IRA's. While often improperly referred to as IRA's, there are available investment accounts, which if properly set up, the investment can grow tax deferred, and withdrawn tax free if used to pay for the education of your child.

Step Seven - Specific Goals. Achieving a goal starts with a dream, and determining the clear steps required to reach it. Along with achieving goals, "life happens". Besides daily living expenses, you may need to buy a car, pay off debts, save for your children’s education, take a vacation, or buy a home. You may have aging parents to support. You may be going through a major event in your life such as starting a new job, getting married or divorced, raising children, or experiencing a death in the family. The point is to not lose sight of your long term goals. Start by writing down each of your goals so you can organize them easily. This is your “wish list.” Sort it by the date to be accomplished, because you save for short-term and long-term goals differently.

Make retirement a priority! Even if you're going to have a secure lifetime income check coming to you, how well you can live on that income is greatly effected by the other preparations you make. If you don't believe your pension will be enough to pay your day to day expenses, as well as a mortgage or rent, you should either invest to purchase a home later, or buy one while you are working. It doesn't have to be your retirement home, but it's a resource that can be "exchanged" when you reach retirement. Remember that in retirement (in particular if you've not taken up another job) you will find it more difficult to borrow money.

Think ahead, yet be flexible. If you single, you may dream of buying a sailboat and traveling the world when you retire. If you've been saving for that dream, get married and have a child, it's not difficult to adjust your focus and now dedicate the sailboat account to your child's education.

There’s one simple trick for saving for any goal:

Spend less than you earn.

Step Eight - Other considerations.

Your health. What's the point of working hard, and investing for the future, if you die prematurely from an avoidable illness, or spend your retirement years in misery. In general, to reach your maximum life expectancy with the greatest health, medical science recommends a diet containing proper nutrients, including vital minerals that may only be necessary in "trace" amounts, limited calorie intake, moderate exercise, avoiding toxins, etc. See your physician for individual advice, and most importantly, FOLLOW the advice.

Your activities. As touched on in insurance above, a lawsuit can destroy the best financial plan, resulting in your investments being ordered delivered to someone you injure. The best recommendation is to avoid activities which are likely to lead to problems. If you're prone to violent conduct and fighting, seek anger management training. If you speed, slow down. If you tend to "drink and drive", STOP.

Social Security. You probably notice the deduction every pay on your LES for social security, also referred to as the "payroll" tax, FICA, or OASDI. Regardless of the name, it's a tax imposed on all income earned from labor, up to a federally determined limit. (The tax is NOT applied to income from investments, such as interest, rental property income, capital gains, etc.) The Social Security program is a topic which you may have noticed causes "heated" coverage in the media when discussed in Washington. There are a few simple facts however about the system. From the beginning, and as of the date this is written, the Social Security tax has taken in more money annually than has been paid out. The advertised theory is that the difference has been saved in a "trust account", and that should the time come when Social Security taxes not be sufficient to make Social Security payments, that money will be withdrawn from the "trust account" to make the payments. This theory fails to mention though that every cent which was "deposited" into the "trust account", was then exchanged for an "IOU" from the treasury department, and the money spent. Given this financial fact, for every additional dollar paid out by the Social Security Administration, there MUST be: a reduction in some other federal spending, an increase in a federal tax (Social Security, income tax, etc.), or an increase in the federal debt.

In the past, whenever the government saw a Social Security "shortfall", the general cure was to increase the Social Security tax rate, or to increase the amount of salary which would be taxed, either way increasing the amount of tax collected. However, in that the (current) means of calculating how much each retiree is to be paid is based, at least in part, on how much tax they paid, every time a shortfall was cured by this method, it meant that a larger future shortfall was created.

In the aftermath of World War II, there was a significant surge in births in this country, often referred to as the "baby boom". It is generally recognized that this baby boom generation comprises a significant percentage of the population, that they have among the highest earnings in the country, and pay a significant portion of the Social Security tax, and therefore under the current system are estimated to be "entitled" to significant payments.

The baby boom generation begins to be eligible for Social Security in 2008. At this time there are no clear plans as to how the government will deal with the shortfall between decreased tax revenue and greatly increased payments.

The Supreme Court has already determined that Social Security payments are not a "right", or even a contracted for entitlement. These payments are in essence simply a welfare payment, subject to change by the government at any time. Until it is clear how the government intends to deal with the shortfall, you should plan your personal retirement as though you will not be eligible for Social Security.

"Big picture" factors. In making long-term investments, and plans for your future, the recent news as emphasized that world political stability cannot be ignored. The suicide attacks of 9/11/01 not only resulted in the tragic loss of many innocent lives, and significantly impacted the airline and travel industries, but sent repercussions throughout our economy. In the current global infrastructure, distant events can have great local impact. Food for thought includes:

International tensions. Not merely the big issues, such as nuclear, chemical, and biological weapons, but a growing number of nations face the simple inability to feed populations which have grown beyond the local resource capabilities.

Fresh water. In recent news was southern California cities being ordered to cut back on how much water they took from the Colorado River. Large areas of Arizona have had so much underground water pumped out that the surface land is subsiding as much as twenty feet. The Oglala Aquifer in the central portion of the USA, which waters millions of acres of crops, is being pumped down far faster than rainfall can refill it.

Energy. California continues to experience energy concerns, after long refusal to allow new generators to be built, is now building in earnest. The greatest energy source used in the world is oil. The greatest concentration of remaining, readily accessible oil is in the middle east. Estimates of the remaining useable supply worldwide (with present technology) is between 800 and 1200 billion barrels of oil (BBL). The global usage in 2001 was 27.5 billion barrels (BBL). Absent new discoveries of supplies, or improved technology, and if pumping continues at the present rate, remaining supplies can be expected to be exhausted in no later than 29 to 43 years.

Global warming / Global cooling. There still seems to be two "camps" about the overall temperature change of the world, each with their own resulting disasters. In warming, the oceans rise, and the "temperate" zone moves further north. In cooling, the ice caps build to such a point that they throw the rotation of the Earth off. Who's right? Who knows. If EITHER is right, it's hard to say what your plans should be...

UFO's? Who knows, maybe we'll actually make contact with an alien race... it may be peaceful, it may be beneficial, or it may not....

Key aspects are: recognizing what you have, what you need to plan for, determining which aspects must take priority, and taking action. FINANCIAL PLANNING COMPOUND INTEREST Albert Einstein once referred to compound interest as "the greatest mathematical discovery of all time". Well, it's not really a scientific discovery, in fact it is a quite simple concept. When you deposit money (capital) in an interest paying account you earn interest on your capital. The next year you earn interest on both your original capital and the interest from the first year. In the third year you earn interest on your capital and the first two years' interest. You get the picture. The concept of earning interest on your interest is the miracle of compounding. The same idea applies to buying an asset that appreciates in value. 1. Start Early! The earlier you start investing, the more time you leave for compound interest to take effect. In the following examples, you save $100 per month, and deposit your savings into into a 5% interest account. Starting Age / Age End Deposits / Est. Value at Age 62 20		62		$170,000. 20		40		$125,000 You stop saving when you're 40, and leave the account alone. 30		62		 $80,000 You didn't start to save until you were 30 and put money in until you're 62. 30		40		 $49,000	You didn't start to save until you were 30 and only put in money until you're 40. Waiting to start saving is a mistake. Taking money out of savings early on is a mistake. 2. Small differences in return matter a lot!

Over long periods of time, the difference between investing at, say, 5% and 8% is enormous. In the above compound example, if your interest rate was 8% instead of 5%, here's how the numbers would change. Starting Age / Age End Deposits / Est. Value at Age 62 20		62		$412,000. 20		40		$340,000 You stop saving when you're 40, and leave the account alone. 30 		62		 $177,000 You didn't start to save until you were 30 and put money in until you're 62. 30		40		 $18,000	You didn't start to save until you were 30 and only put in money until you're 40. 3. Don't squander your capita on parties, booze, and fast cars. Investing, like most things in life is a balance between enjoying yourself now and providing for your future. Not only though do these take a toll on your investment program, but they also endanger your financial future by increasing your risk of serious liability. It only takes a careless moment for you to cause serious injury to someone else, potentially destroying their life, and ruining your future as well. An arrest record can be a significant "roadblock" to your career. Even without causing an injury to someone else, or an arrest, too much "partying", or even a single incident of experimenting with the wrong "substance", can lead to significant enduring health problems for you, forcing you to expend your life savings in medical care rather than enjoying a healthy carefree retirement. 4. Tax free / Tax deferred. Over time, regular saving of quite small amounts can build up an astonishing sum of money. The miracle of compound interest works best for you if your savings earn interest without the need to pay income tax each year on the interest. Otherwise, that small bite that "Uncle Sam" and your state taxes takes each year can make a significant difference in your "bottom line". Accounts that avoid, or delay taxes include: Tax free money market account. Available from many sources, this type of account typically provides you with a "checkbook" from which you can write checks to access your money. (Good for short-term savings.) Series E savings bonds. Defers taxes on the interest until the bonds are cashed. (Good for short-term savings, as well as money that is for "emergencies", in that if the emergency does not strike further deferred is possible when the bond matures.) Thrift Savings Plan (TSP). Provides deposits from your salary that are pre-tax, which is a bonus to you even before interest starts to accrue. "Uncle Sam" also has a matching program where money is deposited on your behalf that is in addition to that which is withdrawn from your salary. All of these deposits grow tax-deferred, but with limitations on withdrawals. The investment options within a TSP account are limited to the choices the government offers. While TSP contributions (i.e. due to employer matching) should take priority over an IRA, when used as part of a comprehensive investment plan, perhaps you should consider your TSP as your cash / interest bearing "safe haven". (Good for long term investments.) Individual Retirement Accounts. (Traditional IRA and ROTH IRA) While your IRA deposits can be placed into a simple interest bearing account, in that these accounts provide an almost unlimited range of choices for investment, when used in conjunction with a comprehensive plan that includes a more limited choice such as the TSP, perhaps you should consider an IRA as money used more for seeking capital gains (profit on the increased value of an investment, rather than a guaranteed interest rate). Taxable accounts. Bank Checking and Savings. (Includes credit union accounts) Certificates of Deposit. Provide a guaranteed rate of interest, for a fixed period of time, with a guarantee that the original amount will be repaid at the end of the term. Bonds. (NOT U.S. Savings Bonds) Corporations, cities, States, etc. will often issue "bonds" as a means of financing projects. The interest rate is fixed for the entire period of the bond, which is sometimes as long as 30 years. There can though be serious risk of LOSS when you invest in this type of bond. 5. Persistence and patience are required. Saving for 40 years is obviously something you can't do overnight. You must consistently exercise restraint and avoid the temptation to withdraw your long term savings for the latest commercial "toy". The Rule of 72 Although a spreadsheet can help you work out exact estimates of the effects of compound interest there is also a handy shortcut known as the Rule of 72. It states that you can find out how many years it will take for your investment to double by dividing 72 by the percentage rate of growth. So it will take 9 years for your investments to double if they grow at 8% a year (72/8=9). But it will only take 6 years if your investments grow at 12% and so on. FINANCIAL PLANNING INFLATION, PRICE INCREASES AND CAUSES

In planning for your family to go on without you should you die, or for a future expense such as college for your child, or your retirement, history shows that failure to include the concept of inflation in your plans could be devastating.

Inflation - Inflation is not necessarily the same thing as a price increase. While it appears as a general increase in prices, is in other terms a decrease in the value of currency.

Modern inflation is often exampled by Germany in the 20's, when the government, lacking tax revenues to cover expenditures, and lacking the ability to sufficiently borrow, started printing money without any backing to the currency.

Eventually, they printed a billion Mark note on only one side, to save ink.

The German inflation includes a classic story of a man who took a wheelbarrow of money to the store to buy bread. When he couldn't get the wheelbarrow thru the door, he left it outside, certain no one would steal the worthless money. He was right, someone dumped the money and stole the wheelbarrow.

We've lived with inflation for so long, that it almost sounds irrational to consider an economy without it. But nothing in economic theory for a stable community requires inflation.

History - Inflation dates back to the earliest currencies. The government of Rome and other early civilizations which used precious metal coins inflated their currency by mixing other metals, clipping the coins, or making coins smaller or thinner.

Coin Debasement - To most who were involved in financial transactions, it would be fairly obvious that something was happening to the currency. It would not be unusual for "old" currency to continue to be able to purchase the same goods, while a greater quantity of the "new" currency would be required for the same goods. Therefore it was still possible to hold on to purchasing power simply by keeping "old" currency.

Something similar happened in the United States in 1964, the last year that our dimes, quarters, half and dollar coins were made of a silver alloy, and in 1982 when we ceased to have our penny made of copper. In early 2006, the U.S. mint estimates that by the end of the fiscal year the value of the metal in a penny, and in a nickel, will exceed 1 and 5 cents respectively, so further changes are likely, perhaps soon.

What if you, like the Roman who held "old" coins out of circulation, had set aside these U. S. coins. Completely ignoring coin-collector values, we get a scenario something like the following.

1964 and earlier silver coins sell today in "junk" bags. This doesn't mean there is anything wrong with the coins, it's just that they are not sorted into coin type or conditions, and you just buy a bag of some set face value that contains a mix of dimes, quarters, and half-dollars. When originally minted, $1,000 of these coins would have contained 723.4 ounces of silver. Today due to wear the weight averages 715 ounces.

For every dollar of these silver coins you had set aside, it would be worth around $7.90 today. If you had invested a dollar back in 1964 and, ignoring taxes on your annual profits, it had earnings that matched the inflation rate, each dollar invested would be worth around $6.30.

The silver content of a dollar in face value of coins is approximately:

Coin Type		Ounce fraction Dollar			.773437 Half-Dollar		.72337 Quarter			.72337 Dime			.72337

Averaged out over the years, the old silver coins held their purchasing power, while the paper money dwindled in what it could buy.

In 1981, you could have easily "lost" two rolls of pennies in your desk. 100 pennies weigh about .68 pound. Spot price for copper this year has been between $3.21 and $4.08 per pound. Your two rolls of old pennies have a value somewhere between $2.18 and $2.77. Perhaps coincidence, but this also tracks the changes in the consumer price index (see below) since 1981.

Paper Currency - Inflation of paper money does not require physical alteration of the currency to shrink its valuea, and unless the paper money has a guarantee that it can be exchanged at a fixed rate for some commodity that retains value, holding the "older" paper currency is not a valid strategy.

Most early paper currency was officially "backed" by a supply of precious metal; where essentially the paper money was a receipt for some quantity of gold or silver. In theory, everyone could return to the storage vault and trade in their paper for gold. In reality though it's not hard to imagine though that a few "extra" receipts get issued, or the gold makes it way out of the vault, making it impossible for everyone to get "their" gold, and making the paper currency worth less.

"Fiat Currency" - "Fiat" currency, currently in use by essentially every government, does not have any tie to any physical commodity. It has value based on the government directing its use in commerce and in payments to/from the government. Currency value is free to fluctuate in response to a variety of factors.

Weakness of Fiat Currency - Debasement of coins is an easy to understand aspect of the concept of currency losing value. In a fiat currency situation, there are further aspects that can readily erode the purchasing power of currency.

Printing Press - The government has the ability to simply print more money and use it to pay government obligations, or otherwise put it in circulation.

Government Debt - Government borrowing allows a government to spend more than it collects in tax revenues. You as an individual can borrow, and temporarily increase your money supply, but usually you must repay within some fixed period, with every debt finally due at your death. Governments have a much greater capability to roll over old debts, and add new ones, effectively permanently increasing the money supply (and inflation).

Unfunded Obligations - An additional category of debt worth noting are unfunded obligations. For example, while the government has various recognized debts with specific interest rates and other terms, there are also many programs which have created debts that are far less clear in terms, but nevertheless in existence and effecting the economy. Government pensions and retirement benefits, including prospective Social Security payments fall into this category. For example, although we as military and civilian employees of the government are able to calculate the pension benefit we accrue with each year of service, the government is not setting-aside any amount to create a fund to pay such a pension.

Counterfeiting - It is difficult to "fake" gold or silver. "Paper" receipt or fiat currency is inherently subject to counterfeiting, which dumps "extra" money into the economy.

Documenting Inflation - Online the Bureau of Labor Statistics has consumer price index (CPI) annual changes dating back to 1914. Using their information, the same purchases that cost a dollar today would have cost only three cents if purchased in 1913. An example perhaps more on point, for someone who retired 25 years ago in 1980 on essentially a fixed income, each fixed income dollar from 1980 is only worth thirty seven cents today. Fixed income retirees during this sample time period have lost essentially 2/3 of their purchasing power.

Losers to Inflation - In general in an inflating economy depositing money in fixed percentage income investments (bank accounts, bonds, etc.) can be a guaranteed LOSS for you, if the rate of return after all applicable taxes does not clearly exceed the rate of inflation. This guaranteed loss also applies to anyone who is living on a fixed income, whether from investments or a pension.

Break Even in Inflation - As shown above, durable commodities that have ongoing demand, such as silver coins or even the metal copper, are a means to hold on to value vs holding "shrinking" paper money.

Winners in Inflation - In a continually inflating economy, in general those who borrow at fixed rates, and use the money in carefully selected investments, will be able to pay off their loans with cheap dollars, and build fortunes thru leverage. This plan of course requires appropriate selection of investments.

A simplified example using the 1964 silver coins mentioned above. In 1965 the prime lending interest rate was around 5%. Imagine a huge loan (for the time period) of $10,000 at 5% for 40 years, using the loan to walk right back into the back and leave with $10,000 face value of silver coins. Your payments would have been around $48.50 per month. You would have paid off the loan in 2004, having taken $23,280 out of your pocket over the 40 years. Those silver coins would today be worth around $79,000.

Speculation Caused Price Increases - Real estate is often presented as an appropriate inflation protection investment. But in any deal, there needs to be a willing buyer and seller. There are locations where the real estate market can serve as an example of prices driven up by speculators. (The term flipping has been recently used to indicate a purchase with intent to quickly make some change and resell.) If any particular market is seen as "hot", speculators who buy for the purpose of re-selling (flipping) at a higher price, can flood the market such that the price of homes clearly exceeds the ability to pay of the "typical" family that would ordinarily be expected to purchase a home in the area.

When this happens with stocks, once the speculators move on and the artificial demand abates, the stock typically falls in value. There may be those who decline to sell, hoping for prices to rise again, but all shares of the same stock being fungible, overall prices fall.

When this happens in a real estate market, even after the speculators have moved on, the high prices tend to linger. Real estate, typically purchased with a mortgage, locks more owners into retaining their purchase even if they wanted to sell at a lower price.

Demand Based Price Increases - Short of speculators who move into a market with the intent of deliberately driving up prices, the economic "law" of supply and demand effects prices. Demand increase can take the form of greater use per person, or an increase in the population. Of these two increases, it is of course the increase in population which rationally has the broadest effect on prices market wide, as the increase in population increases demand for virtually every product or service. If demand for a fixed supply product rises, or the quantity of a product falls while demand remains fixed, prices rise. If there is no ready substitute and people are not willing or able to do without, the price is bid higher. This type of price increase is generally not represented by the across the board increase in prices and wages that is typical of inflation, but rather it is an increase that requires reduction in some other spending.

Rising Electrical Prices - Just in time for the summer cooling season, in June electrical customers of Arizona Public Service (APS) got a 7.6% increase in the charge per kwh, the third increase approved by the Arizona Corporation Commission since January. APS reported to the Commission, it lost $5.5 million during the first three months of 2006, primarily attributed to its mounting tab for fuel to operate its plants, and leading months later to increased electric rates.

For example then, do you believe that electrical rates are likely to remain at this level, or rise? If you own your home it may now, or soon, make financial sense to install additional insulation, a new more efficient HVAC system, or even photovoltaic panels in a grid connected system. All of these have the potential to eliminate some portion of your present demand without a "sacrifice" in quality of living. Provided of course you act before the price of p/v panels and equipment also rises.

For APS customers who install a p/v solar power system, at this writing APS will even reimburse you for part of the cost of a p/v system. In Arizona, as in many states now, the power companies are required to allow private power generation to be grid connected. This means that at such times as your home generation exceeds the use of your house, the meter "spins backwards". If for example you are on the APS plan where you pay more for power during the day than the evening, you could receive a higher value for each kwh you put into the grid during the day, than the power company charges you for what you use in the evening. Rising Fuel Prices - Also, as we enter the summer vacation season, according to Energy Department statistics the average retail price of gasoline is $2.93 a gallon, or 36% higher than a year ago, which is reported as appearing to have some impact on fuel consumption. As we saw with APS, the costs of fuel are embedded in many goods and services. Even putting food on the shelves of stores represents significant amounts of fuel for farming, processing, and shipping. For example, the higher cost of fuel for the operation of tractors is not yet reflected in the price of the already processed food on the shelves. Then the higher prices are added to the new crops, we should expect that prices will be higher in some relationship as to the amount of fuel used in growing and processing the crops. Price Change Planning - Taxation - The consensus of traditional wisdom is to expect your income tax rate to be lower in retirement than while you are employed, and defer income until after you have retired. To the converse, for estate tax purposes long-term guidance has been to get as much property out of your estate as early as possible. A change in applicable taxes clearly changes the effective value of the spendable funds you have available.

This is one of those areas though where you must "keep up" with the news, as tax law keeps evolving. For example, at this time after retirement it appears to make sense to roll your TSP into a traditional IRA, for the greatly enhanced investment opportunities. In the year following retirement, if you are in a lower income and tax bracket and still investing for the long term, it may then make sense to convert the "traditional" IRA into a ROTH. Under present law you will incur a one-time taxes on the amount converted, but can then later withdraw all further accumulation of profits tax-free.

If you pass on, and leave the ROTH to a young beneficiary, they will be required to make some minimum annual withdrawals, based on existing IRS rules at the time, but the required withdrawal may be less than the annual profits, so your ROTH inherited by your child could continue to be growing tax-free. Under current law.

Medicare Drug Option - 	The prescription drug benefit took effect in 2006. Under the program you must select a plan that you believe meets your needs. If you fail to select a plan, and try to add it later, there appears to be a permanent "surcharge" added to your costs of 1% for each year you delayed. Before making a decision to not enact this coverage, perhaps you should spend the money for a thorough physical exam to determine your actual condition, and take into account medical history of your family, and exposures during your life. You need to investigate your other coverage options and weigh the costs and benefits. This plan benefits some who would otherwise not have been able to afford drugs, or who would have had to use personal funds. It also represents an increase in federal spending and in effective personal spending on drugs, and therefore may contribute to overall inflation and depending on the marketplace potentially to an increase in drug prices.

Employment Based Benefits - For military and civilian federal employees our cost of living adjustments (COLA) are subject to funding in the federal budget. Be aware there are already existing programs where the COLA is set at something LESS than the annual CPI changes. You need to be prepared to deal with these in your planning.

Social Security - Social Security (SS) is a tax funded benefit which can be changed, means tested, or eliminated. The amount collected in the Social Security tax exceeds the current costs of the program. The deliberate excess is then spent, with a bookkeeping entry made in the SS trust account. However, before any amount in this trust fund can be used, the money needed must be taken from the taxpayers a second time. As discussed in greater detail in a separate article, if all promised payments to the soon to retire "baby boomer" generation are actually made, the impact on the federal budget, taxes, and inflation, may be quite significant. FINANCIAL PLANNING - SECURITIES INVESTMENT FOR CAPITAL GAINS.

What are securities?

Beyond "cash" savings in interest bearing accounts, you can invest in securities. Think of them as a document that you purchase from a firm, which can represent a share of ownership in the firm, that the firm owes you money, or that the firm and you have entered into some type of financial agreement.

Securities investment can be in the form of a "mutual fund", in which your money, and those of numerous other investors are combined to purchase not an investment in an individual firm, but in a selected spectrum of firms. Low risk of loss of stated dollar amount, but high risk of actual value loss are accounts where the interest rate fluctuates, as with a back demand deposit. These though have little “market risk”. Market risk is the risk of fluctuations in the value of securities which result from changes in overall market rates of interest. (See the discussion below on the changes in value of bonds and bond funds.) A Fixed Income Index Investment Fund is a commingled bond index fund which holds a representative sample of a wide range of bonds in which the assets of many plans are combined and invested together. Fixed-income securities represent obligations of issuers (who "borrow" your money) to repay the amount borrowed (the principal) to holders of the securities when the securities mature. "Fixed-income" refers to the fact that the coupon rate (annual interest rate) of each such security is set, or "fixed," in advance. These securities usually pay interest semiannually until maturity. Bonds and their funds carry the inherent risk that the issuer of the bond will go bankrupt, or otherwise simply be unable to pay as agreed. You, as the purchaser of a bond / bond fund, take this risk. In such a fund, you money is NOT guaranteed. In addition to the risk of non-payment, bond funds also carry market risk. This is the risk that the market price of a bond, or the entire fund, may fluctuate as interest rates fluctuate. To explain this aspect, let me example a simple one company bond. In 2001, ABC Company, seeking to expand its "widget" manufacturing facilities, marketed $1000 bonds, paying annual interest of 10%, with a maturity date 10 years in the future. You purchased one of these bonds, and at the end of 2001, ABC Co. paid you $100.00 interest. In 2002, the interest rates in general went down, and the reputation of ABC Co. gained. Together, in 2002 ABC Co. found it could further expand its facilities, and it issued more bonds. In 2002 though, it found it only needed to promise to pay 5% interest annually, for a ten year bond. What does this mean to you? In 2002, everyone who bought the 2002 bonds receives only $50 for each $1000 they invested, while YOU are still being paid $100. If you wanted to sell your 2001 bond, how much should you ask for it? If we ignore the slight value difference between the 9 years left on your bond, and 10 years on the new bonds, we directly compare the interest rates. If the 2002 bonds only pay $50 per $1000 invested, and yours pays $100 per $1000 invested, your bond is now worth $2000 if you decide to sell it. In general, when interest rates are DROPPING, you can expect a "capital gain" on a bond or bond fund. In general, when interest rates are RISING, you can expect a "CAPITAL LOSS" on a bond or bond fund. The market price fluctuation due to interest rate changes works against you as follows. If you bought the 2002 5% bond, and ABC Co. finds in 2003 that it must return to offering a 10% interest rate, your 2002 bond is only paying $50 per year, while the "new" bond again pays $100 per year. If you wanted to sell your 2002 bond, the best offer anyone would make to you would be $500, so that the interest they received from ABC Co. on the 2002 bond ($50) would be the same they would get if they were to invest their $500 directly with ABC Co. There are other "risks" to bonds, such as a "call". The example would be when ABC Co. finds, in 2002 that the interest rate is needs to pay has dropped to 1/2 of the previous year. ABC Co. may "call" some of its old bonds, pay you your $1000 principle early, and eliminate a high 10% debt from its books. Stock funds. The price of individual stocks or mutual funds comprised of such can vary sharply with changes in economic conditions, an industry, or even an individual company. Depending on the size of a decline, the total return on the stocks held by a stock fund could be negative, resulting in a loss to the fund holder. This is true whether the stocks held by a stock fund are tracking an index, or otherwise. There is no assurance that any investment in a stock funds will provide any given rate of return, or even that you will receive your original investment back. Under the current laws for corporations, you as a stockholder (directly or thru a mutual fund) essentially have no right to access the company your “own”, or contact / control your “employees”. To digress, and example a corporation. Envision a 100 unit apartment building, held by a corporation that only owns only the facility. The three corporate officers live in the building, getting a free apartment but no salary as a requirement of their management of the operation and maintenance of the building. The overall averaged net unit monthly rental income is $500 per unit. There are 10,000 shares of stock outstanding, 1% owned by each officer. The stock does not pay dividends, but instead re-invests all profits in improvements in the facility. Total annual profit for the facility is $600,000, or $60 per share. If you were looking for 5% annual earnings, in theory you might be willing to pay $1,200 per share, at a facility estimated value of $12 million.

As inflation raises the dollar “value” of the facility, and the rents, it makes it look like the cash value of each share is greater. Would you buy this stock as an investment? Is it an investment?

Your officers gain from the new pool and recreation area, the investment in solar panels, insulation, geothermal heat storage, etc. Do you?

Your investment has no actual cash-flow value. Your investment brings no right to any physical possession or facility use. The numbers look good on paper, but you only make any profit if you can convince someone else to buy your shares at a later inflated value. It appears this is a “speculation” (perhaps something short of a gamble) where the only way you physically gain is to run a successful campaign for corporate officer, and get a free apartment (worth $6,000 per year). In a self-directed IRA, set up for example with a brokerage firm, you typically have the greatest freedom to select investments. You not only have access to stock and bond FUNDS, but to select stocks and bonds from individual firms, as well as in some cases gold coins, option contracts, and real estate holdings. Stock. One share of stock in theory represents one "piece" of ownership of the company. There may be different "classes" of shares, with different rights and benefits, such as the ability to vote on company management or major decisions, or the receipt of dividends (annual payments to you from profits). As was demonstrated in the news in the ENRON incident, there is no guarantee that an investment in a stock will produce any promised outcome. You can lose your entire investment. Individual stock selection therefore carries a greater inherent risk than investing in a stock fund, but if you select well (i.e. if you had bought Microsoft in the early 1980's) you can enjoy SIGNIFICANT profits. Bonds carry the opportunity for profit or loss, not only from the general business climate, and the specific aspects of the company you select, but from the general interest rates of the marketplace. To restate the general guidelines regarding interest rates and bonds: In general, when interest rates are DROPPING, you can expect a "capital gain" on a bond or bond fund. In general, when interest rates are RISING, you can expect a 	"CAPITAL LOSS" on a bond or bond fund. Gold. Herein, I bring up gold as an example of investing in physical personal possessions. Gold has the "unique" aspect in that gold, silver, and platinum in the form of American Eagles (special bullion coins produced by the U.S. Mint) are perhaps the ONLY such items that can be purchased within your IRA. (There are probably better uses for your IRA money.) Option Contract. Within an IRA, a limited number of custodians will, in a set of limited circumstances, allow the purchase of an option contract. So, what is that? Consider an option contract to be like putting a NON-REFUNDABLE earnest money deposit on a house. Your contract fee (earnest money) purchases for you the "right" to the contract, or the house, for the agreed period. In the option, you're hoping that the price of the item in the contract moves in your favor, so that you can "sell" your contract for a profit. For example: In January 2003, you pay a broker $1000 for the right to purchase 100 ounces of gold, at a price of $400 per ounce, anytime up to 01 JULY 2003. On the day you bought it, gold was selling at only $375 per ounce. YOUR hope is that between the date of your purchase, and 01 JUL 03, the price of gold goes up enough for you to make a profit. If you had wanted to actually purchase the 100 ounces in January, it would cost you $37,500. The option contract gives you the ability to "control" 100 ounces of gold, for a six month period, for "only" the $1,000. If 01 JUL 03 passes, and the price of gold has never exceeded $400 per ounce, you're probably NOT going to "exercise" your option (actually buy the gold), you probably won't find someone else to buy the option from you, and at the end of June your option will "expire" (become worthless). So, how do you make money? If you're right and the price of gold goes high enough, you can make a profit. If the price of gold goes up to $410 per ounce, then (ignoring fees) you could sell your contract for the $1000 it cost you. For every $1.00 that the price goes up beyond $410, because you "control" 100 ounces, you stand to profit $100. When the market price of the underlying commodity (in this case, gold) is making large changes, it is possible to make large profits, in a short period of time. But the price must move in your favor, within the timeframe of the contract, AND you must time your sale. If you hesitate, and the price drops back down, you have missed your opportunity. Real Estate. A relatively recent addition to the IRA investment choices offered by account providers is real estate. There are a limited number of custodians willing to handle this type of investment, but despite claims of some custodians, you are not limited to the purchase of real estate within the United States. There are additional restrictions, such as your IRA cannot purchase land that was previously owned by you, or a member of your immediate family. Accepting the restrictions, it does provide you the opportunity to, for example, make a long-term "capital gains" investment in that piece of wilderness property that you'd love to have at retirement, or purchase a rental home for a mix of capital gains and rental income to your IRA. An investment such as a rental home has the potential to provide a source of retirement income that exceeds the annuity options (both the TSP and most private sector annuities), as well as providing a solid asset that you can leave to your heirs. Beyond the tax deferred account. For most investors, it is probably in your best interest to make the maximum possible use of tax free or tax deferred investment accounts, prior to other investments. All of the mutual funds, stocks, bonds, options, etc. available inside a tax deferred account are also available in the open marketplace. A security that is not available inside tax deferred accounts is commodities trading. Commodities Trading. The basic concept is similar to that of Options Trading, described above. Your intent, is to purchase a contract (to BUY or to SELL), with the hope that the price of the commodity (gold, oil, pork bellies, beans, etc.) will change sufficiently, during the time period of the contract, so that you can sell of the contract at a profit. I've even seen commodities trading advertised on Yuma's local TV. WARNING: The risk in Commodities Trading is NOT limited to your investment money. In this type of contract, at the expiration (execution date) your are obligated for the full amount of the contract. In the Options gold example above, at the end of the six months, if you do not sell off your contract, or balance it with a sufficient counter contract, you would be obligated to make the full $37,500 gold purchase, even if the price of gold had fallen dramatically. Yes, it offers great profit potential, but it also entails great risk. Collectibles. Gold, silver, jewels, paintings, other works of art, firearms, rare books, etc. While physical items, and not "securities", they example further ideas for investment. Investment Clubs. So, with all of the investment options out there, how do you decide where to put your money? You can always "...go it alone...", the web, the Yuma library, and of course our YPG Post library has materials that can explain what to look for in investments, and how to evaluate companies. If you happen to know someone in an "investment club", and can persuade them to invite you in, you may be delighted at the wealth of knowledge available, and the guidance you receive. If there is no local club available, perhaps you may want to start one. Perhaps you've heard in the national media of the Beardstown Ladies' Investment Club. This group of women, who range from 45 to 90 achieved national fame for reported consistent annual returns of 24% and greater, far outstripping some of the best advisors at Wall Street during the same years. FINANCIAL PLANNING INDIVIDUAL RETIREMENT ACCOUNT "OPTIMIZED"

The U.S. Internal Revenue Code provides two versions of what may be a significant means available to help you prepare for retirement. I am referring to "Individual Retirement Accounts" (IRA's). The IRS refers to the two versions as Traditional, and ROTH. Each has annual limits on deposits, withdrawal requirements, etc. If you want to read the complete details regarding either version, I'll refer you to IRS Publication 590. In this update, I just want to briefly touch on the taxable difference of the accounts, and then set out a concept for investing your IRA that provides the greatest possible opportunities.

Traditional IRA - Depending on your income, you may be able to deduct some or all of your annual deposit from your regular income, lowering you tax bill for the year. This has the effect of reducing the amount of money you need to take "out of pocket" to make your IRA deposit. Within a Traditional IRA, the earnings can accrue tax-deferred, until you start withdrawal. At that time, all withdrawals based on a deductible deposit, or profits inside the IRA, will be taxed at the tax rate applicable to you at the time you make the withdrawals.

ROTH IRA - Deposits to a ROTH are not tax deductible when made. Their advantage however is that under present law you may be able to withdraw all of the money, including earned profits, without incurring ANY tax. While there are further details on such tax-free withdrawal, in general if you are 59 1/2 or older, and 5 years have passed since your last deposit, there should be no tax on withdrawals. If you have taken risks with your ROTH account, and made particularly profitable investments, it can make a BIG difference at withdrawal time. Traditional to ROTH Conversion - If "you" (single or married) earn less then $100k per year, you can shift your traditional IRA to a ROTH, and while you will be required to pay income tax on the amount coming out of the "traditional" account, you can avoid penalties. On 17 APR 2006 President Bush signed a change in the tax law which allows even high-income taxpayers (for the conversion rules, "high income" is a couple with $100,000 or more of earnings), to convert their "Traditional" IRA into a Roth IRA. The bad news: The law as written does not make this program available for "high income" taxpayers until 2010. Starting in 2010, this law will suspend the current $100,000 income limit for Roth conversions for two years. In addition, included in the new tax-cut bill is a provision that if taxpayers convert their Traditional IRA to a Roth in 2010, they won't have to pay any taxes on the conversion that year. Taxpayers will be allowed to pay half their tax bill in 2011, the other half in 2012.

In both types of IRA, profits earned inside the IRA are not taxed. The advantage of a ROTH is that it also allows tax-free withdrawals. The concept behind the conversion program is that it allows you the option to convert, and pay tax at the conversion, for the long term benefit of not paying a greater tax later. This aspect is significant if you anticipate "hot" returns on your account.

General Rules - Either of the IRA account types can hold any of the investments allowed for an IRA. The limits you encounter at any particular IRA custodian, for your TSP, 401(k), etc. of a fixed list of "funds" is typically imposed by your custodian, not the IRS. For example, at the time of this writing, TSP accounts are held with Barclays Global Investors, and are limited to 5 mutual funds. Short of the limits imposed by the firm holding your account, for an IRA there is a short list of investments, types of transactions, and prohibited parties. Everything that is not prohibited is allowed.

Your IRA cannot purchase: Collectibles - Works of art, rugs or antiques, stamps or coins, alcoholic beverages, metals or gems. Your IRA cannot purchase or sell goods or services:

To/from you, your spouse, your ancestor or descendant.

To/from anyone who makes decisions for the plan.

To/from an officer director or shareholder (10% or greater) of the plan.

To/from a partner of any of the above.

To/from a business owned 50% or more by any of the above.

The above list is not as long as you might have expected. All of the other restrictions you typically see restricting your IRA investments are the policies of your IRA custodian, not the IRS.

IRA Outer Limit - If your custodian limits your investment to a money market, stock, and bond funds, it's usually because their business is to sell those funds. Consider the following, which in a very simplistic manner sets out a scenario where you have probably the greatest possible discretion in management of your IRA:

1.	You shift your IRA funds to a custodian who is willing to make and hold IRA investments in not only publicly traded securities, but also private securities, such as shares of a privately held Limited Liability Company (LLC).

2.	After appropriate legal consultation, you create a new LLC, ensuring you are not an owner. (Anyone can create an LLC, not necessarily the "owner".)

3.	You direct your IRA custodian to obtain ownership of the LLC.

4.	You direct the IRA custodian to appoint you as the "General Manager" of the LLC. As the general manager of the LLC, you open an appropriate business checking account for the LLC.

5.	You direct the IRA custodian to transfer funds to the LLC account for use by the LLC in its business operations.

6.	You now have in your possession a checkbook for an account where you are the only authorized signer, which potentially contains all of the money in your IRA.

Extreme Example - Taking examples to the extreme, consider: You use the checkbook for your ROTH IRA to purchase a $300 million "Powerball" lottery ticket, and win. Under present apparent tax law, your ROTH does not owe income tax on the payments as received, and your withdrawals after age 59 1/2 are tax exempt. Transaction Waivers / Letter Rulings - If you want to seek an advance letter ruling to approve a transaction that "might" violate the rules, you may be, as I, surprised to note that it is NOT the IRS that you contact. It is the Department of Labor that holds the responsibility for these.

IRA Out of the Box - I admit the above is an extreme example, which is intended simply to spark interest in what an IRA can do for you. This article provides only a very simplistic introduction to the steps necessary to create such an IRA investment tool, and you should personally consult with legal counsel and your IRA custodian if you are considering any of the actions indicated above. There are numerous websites which describe this process, and for the appropriate fee will do the legal work for you. Please note, the fees vary widely.

Without the complication of the above investment in a private LLC, there is still much that can be done with an IRA account, provided you have a cooperative custodian. As touched on in other articles, an IRA can purchase and hold as an investment in the IRA real property, whether vacant land, or rental property.

As indicated above in the restrictions, you and certain other individuals/entities cannot enter into transactions between you and your IRA. This would of course include lending money to your IRA, or the LLC, or you borrowing from such. It also means you cannot personally sign as guarantor for a loan to your IRA from another entity. It does NOT however mean that your IRA cannot make loans. The IRA rules DO permit your IRA to loan money. When your purchase a bond, you are making a loan. Your IRA can legally loan money to your friend, niece, cousin, brother, sister, etc. You IRA can also borrow money.

There are financial institutions which will make non-recourse loans to an IRA, depending of course on the intended investment of the loan, with the understanding that if it turns out the IRA cannot repay the loan, that the lender has no legal recourse against you, or anyone else, or any other asset, other than the particular IRA account which you authorized to enter into the loan.

Your IRA could "partner" with other IRA's. For example, say you wanted to purchase a small rental apartment building, but you do not have enough cash and/or loan resources to make the purchase. If you know of others who have also set up such IRA accounts with cooperative custodians, your accounts can be combined to make the purchase. You could even enter into a partnership between "you", and your IRA to make a purchase.

Summary - Limited IRA investment options merely example presentations that tell only a selected part of the story. Research the history and full scope of investment information, or any other news, and think outside the box.

FINANCIAL PLANNING WHAT'S NOT AN INVESTMENT?

Your Car. Unless you have an antique, or some type of "collector car", the purchase of a motor vehicle is far from being an investment.

What does driving a car cost you? For demonstration purposes, assume we start with an 18 year old, who drives for 50 years.

Fuel. A low average annual driving is considered to be 12,000 miles. If your vehicle gets 20 mpg, that's 600 gallons per year. If we ignore inflation projections, and assume a flat price for a lifetime of $2.25 per gallon, each year you spend $1350. Had this money been invested for the long term at 8%, it would be an account of around $800,000.

Purchase Costs. Say you purchase a $20,000 car every five years, and get $5,000 trade in value on the "old" car. You "lose" $15,000 every transaction. Had this lost money been invested for the long term at 8%, it would be an account of around $1,900,000.

Tax and Insurance. Estimate the tax at $300 per year, and insurance at $600. Had this money been invested for the long term at 8%, it would be an account of around $590,000.

A lifetime of driving a "new" car can easily cost you over $3,290,000 that you would otherwise have available at retirement. FINANCIAL PLANNING - TAX PLANNING 2006 CHANGE TO THE KIDDIE TAX

For more than a decade, the "unearned" income of children under the age of 14 has been taxed by allowing a small amount to be tax free, and then placing a similar small amount on a tax return filed by the child ($850 for 2006), and the rest on the parents tax return, at the parents rate.

Congress has "retroactively" changed this back to 31 DEC 2005.

Starting with the filing for calendar / tax year 2006, ALL "unearned" income of a child under the age of 18 will be required to be reported and taxed as part of the parents return.

Unearned income of a child is investment income such as interest, dividends, and capital gains. If the child is actually employed such employment income is to be reported on the child's own tax return, and taxed at the child's rate.

FINANCIAL PLANNING SPECIFIC GOALS FINANCING YOUR CHILD'S COLLEGE EDUCATION

If your child is newborn or still young, it's NOT too early to start planning for your child's college education. The sooner you start investing for your child's education, the longer "compound interest" works for you. Start early, and time can be your ally.

The good news is, as your child grows, you'll gain greater insight into their abilities, interests, and capabilities. The bad news is that if you wait until your child is in high school to contemplate their college education, you may find their abilities outreach your financial resources.

Approaches to college costs:

Long Term Investing Student Loans and Grants Scholarships (sports and academic) Military Academy Military Service Distance Education

http://www.cosc.edu/

http://www.tesc.edu/

Long Term Investing. The first step in making a plan is to estimate what the total cost of your child's education is likely to be.

In January, 2003, at the community college in Yuma, the first 60 credits of a degree (essentially an Associates Degree) cost $30.00 per credit. The 60 upper level credits needed for a Bachelors Degree cost $133.00 per credit. Therefore, in tuition alone (remember fees, books, pizza...) a Bachelors Degree from our local institute will cost at least $9780. (Round up to $10,000) This cost is well below the national average, which is about $40,000.

Premier colleges can cost much more. (i.e. the tuition at Harvard in 2002 was $23,457 per year)  I would suggest you consider the "purpose" behind obtaining an undergraduate degree, before selecting the institution.

At five percent inflation per year, the estimated cost of a four year degree in Yuma 18 years from now would be around $24,000 (10 years from now the cost would be approximately $16,000).

Once you have estimated how much your future cost is going to be, the amount of money you need to invest each year depends in significant part on what you estimate the annual increase of your investment will be.

For the mathematically inclined, the formula is:

F = A ((1+r)n -1)/r)

F = future amount A = amount you put away per time period (i.e. each year) r = interest rate during the time period n = number of years, used as an exponent in the formula

For the computer inclined, you'll want to use the "Future Value" function in your spreadsheet.

Assuming you consistently earn 5%, a quick estimate of what you would need to save annually:

College in Yuma		Harvard

Goal	 $24,000		$226,000

For your newborn.

$900.00/year	$8,100.00/year

For your 4 yr old. $1,300.00/year	$11,500.00/year

For your 6 yr old. $1,550.00/year 	$14,500.00/year

To reach these goals, you probably want your money growing tax deferred. The readily available approaches include:

Educational IRA 529 Plans Regular IRA

Educational IRA. These accounts have been improperly referred to as an "IRA", but the name now appears stuck. They are accounts, which are available at almost any financial institution (banks, brokerage firms, insurance companies, etc.) into which you make annual deposits, up to the present limit of $2,000 per year, provide a wide choice of investment options. Prospectuses on individual plan investment details are available directly from the issuing companies. The investments grow tax-deferred, and if the money is withdrawn to pay the types of educational expenses authorized, there will be no tax even on withdrawal. The accounts are limited to clearly defined family relationships. Note though, DEPOSITS to the account are not tax deductible, and withdrawals that are not used for proper education purposes may not only be taxed but have an additional 10% penalty imposed. 529 Plans. These college savings programs are created by state law, and will vary in their details. The plan created in Arizona is called the Arizona Family College Savings Program at the College Savings Bank (CSB), and is limited to the investment options set out in the state law. Deposits are not tax deductible. Deposits grow tax deferred, and when withdrawn for authorized education purposes, are tax free for federal and Arizona State income taxes. Arizona has no annual limit on deposits, but does have a total deposit limit of $187,000. Please note, that deposits in any year which reach or exceed $10,000 for any one person may require you to file a federal "Gift Tax" form. (Yes, there are laws which impose a tax on money you give to someone else.) You CAN make contributions to BOTH an Education IRA and a 529 Plan. With the 529 plan, "anyone" can open the account, on behalf of anyone else.... Therefore, if you could convince grandparents, or that rich aunt or uncle to help...

Regular IRA. If you have set up a "Traditional", or "ROTH" IRA for yourself (or retired and rolled your TSP into an IRA), you can withdraw your money for qualified education expenses, and avoid the 10% penalty. (You'll still have to pay income tax on what you withdraw though.) If you don't have the "extra" money to set up a dedicated education account for your children, this may be a practical option.

Student Loans and Grants. If you've been dedicated and conscientious in saving for your child's education, yet fall short of being able to pay in full, you may be dismayed if you or your child seek a guaranteed student loan or grant for the remainder. In this regard, your savings will "work against you".

Grants, are great. If you qualify, it's "free" money.

Loans, are, well, loans, that MUST eventually be repaid. If you get a federally backed student loan, payments can be put "on hold" for a variety of reasons. If for example after finishing school, your student enters into active duty in the U.S. military, payments on a guaranteed student loan can be put on hold, and "Uncle Sam" will make the interest payments. This provides an opportunity to either make payments directly on the principle of the loan, or invest money with the aim of paying the loan in full at the end of the loan deferment period. Note for these loans, since bankruptcy law comes from the government, the government protects itself. If you find yourself bankrupt, you should expect that you will NOT be able to get rid of these loans in bankruptcy proceedings.

Scholarships (sports and academic). These are programs specific to the institutions.

Military Academy. Perhaps the most challenging means of obtaining an undergraduate education is one of the military service academies. It is four years of intensive effort, followed by some minimum required period of active duty service.

Military Service. Even if you have saved, consider the benefits of a term of enlistment.

Credits for service. In certain college programs (i.e. distance education) you may receive college credit for "boot camp", other military schools, or even for your MOS/Rank.

Tuition Assistance. All of the services have some program where the government pays some portion of your tuition to attend classroom, correspondence, or other distance learning programs.

Credit by Exam. There are a wide variety of examinations available thru the Defense Activity for Non-Traditional Educational Support (DANTES) for which you may earn college credit. While on active duty, these exams are FREE.

Examples of what is available in the civilian are include:

CLEP http://www.collegeboard.com/student/testing/clep/about.html

GRE - These tests may be "worth" as much as 39 credits. The website has available free introduction study guides. http://www.ets.org/portal/site/ets/menuitem.1488512ecfd5b8849a77b13bc3921509/?vgnextoid=efc42d3631df4010VgnVCM10000022f95190RCRD&vgnextchannel=cfd946f1674f4010VgnVCM10000022f95190RCRD

Distance Education. Not that long ago, this would have referred only to "correspondence schools". Today, there are many options, and you can earn Associate, Bachelor, Masters, even some Ph.D.'s thru distance programs. BE SURE though that the "school" is legitimate. A self-motivated student, capable of independent research and study, can complete a degree thru one of these programs in far less time, and at far less cost, than in any other program.

At the undergraduate level (B.S.) I am aware of three programs thru which it is possible to earn a Bachelors Degree, issued by a state agency COMPLETELY by taking exams. (Remember, the tests are FREE for active duty members.) The cost of the exams for civilians are moderate, compared to classroom tuition costs.

Excelsior College (New York) https://www.excelsior.edu/ Thomas A. Edison University (New Jersey) http://www.tesc.edu/ Charter Oak Collge (Connecticut) http://www.charteroak.edu/

There are numerous other legitimate institutions, which will grant varying levels of credit for exams, correspondence courses, "online" courses, etc., almost all of which have lower costs that traditional classroom credits. FINANCIAL PLANNING - RESIDENCY AND COLLEGE TUITION. Why are tuition costs different for non-residents? In most states, there is a significant difference in college tuition rates for bonafide residents of the state, and those from outside the state. The general reasoning is that institutions of higher education are funded or subsidized by state taxpayers. Since non-resident students (and their families) generally have not contributed to the source of this funding, they are required to pay fees which more closely represent the actual cost of the education.

Beyond residency status consideration, in an era of tightening budgets if states reduce educational subsidies, you can expect tuition to rise for everyone. For the present, qualifying for in state tuition makes a significant difference in what college will cost. For example, tuition costs at the University of Arizona are: Undergraduate Tuition

Resident            $3,593.00 Nonresident     $12,113.00

Who determines college residency rules? In Arizona, the rules and regulations for establishing residency for tuition purposes are defined by the Arizona Board of Regents, which is authorized by Arizona law to set different rates for resident and non-resident students. The requirements to establish residency for tuition purposes are independent from those of other types of residency, such as voting or holding public office. Who qualifies for Arizona resident tuition? Under current law, a resident for tuition purposes is: Adults. An adult (18 years or older) must physically reside in the state for the twelve consecutive months immediately preceding the term for which resident classification is requested, who has demonstrated an intent to "Establish a Domicile" here. Intent to be a resident of Arizona is demonstrated by the absence of ties to the former state of residence for twelve consecutive months, evidenced by such as: Registering a Motor Vehicle here Obtaining an Arizona driver's license Employment history, including assured future permanent employment in Arizona Transfer of major banking services to Arizona Applications for loans, scholarships, grants-in-aid, or other such assistance Date and state in which registered to vote Place of prior attendance in educational institutions, including high schools, and any information held by such schools affecting domicile Marital status and work record of registrant and spouse Change in permanent address on all pertinent records State in which registered with Selective Service Military records Ownership of real property All other material of whatever kind or source, which may have a bearing on determining domicile or resident status Note: any act considered inconsistent with becoming an Arizona resident (such as voting, securing or maintaining a driver's license or automobile registration in another state) will result in a non-resident decision. Exemptions to 12 months residency. There are some specific exceptions to the twelve months rule, which may entitle a person to resident classification if all conditions have been met by the last day of regular registration.

Dependent - You will be classified as a resident student if you can establish that on or before the last day of registration you are domiciled in this state AND the domicile of one of your parents is in this state, and the parent is entitled to claim you as an exemption for federal and state tax purposes. Please note, living in Arizona with a relative other than parents or legally appointed guardians will have no influence on residency status. Transferred Employee - You will be classified as a resident student if you can establish that on or before the last day of registration you are an employee of an employer, which transferred you to this state for employment purposes, or you are the spouse of such an employee. Military Stationed in Arizona - Active duty members of the Armed Forces of the United States stationed in this state pursuant to military orders, their spouse or dependent child (as defined in A.R.S. §43-1001) will be considered as an Arizona Resident for tuition purposes. Military Stationed outside Arizona - Active duty members of the Armed Forces of the United States who are per the Servicemembers Civil Relief Act residents of the State of Arizona for the preceding 12 months, even if stationed outside of this state pursuant to military orders, will, along with their spouse or dependent child (as defined in A.R.S. §43-1001) will be considered as an Arizona Resident for tuition purposes. Procedures. The admissions office at each university will determine your residency status when the completed application for admission is received and processed. The decision is based on the information contained in the application for admission, transcripts, and other documents required for admission. The residency status determined at this time remains in effect until the student either (1) fulfills the requirements for residency and petitions for a change of classification or (2) loses residency by his or her absence from Arizona with intent to become a resident of another state. In many instances, active duty military members select a new state of legal residency based on the income tax benefits offered. However, if you are planning the pursuit of a college education, whether for yourself or your dependent, the ability to establish residency for tuition purposes could easily be a significant factor in selection of a school. Financial Planning - Bankruptcy Law Changed in Late 2005

ONE OMINOUS WORD Bankruptcy - a word that previously evoked shame, but which has grown in acceptability, and in generated necessity, such that over 1.6 million Americans filed for bankruptcy last year (American Bankruptcy Institute). The dramatic rise in bankruptcy filings in recent years prompted Congress enacted the Bankruptcy Reform Act (BFA), in October 2005. While the BFA is viewed by some as harsh or unfair treatment of debtors, others view it as leveling the playing field for creditors by making bankruptcy filing more difficult and expensive, especially for unscrupulous borrowers to simply walk away from incurred debts. During the past 40 years, there has been a dramatic increase in pressure for the average American consumer to obtain and maintain good credit. Gone are the days when the only items financed were houses and automobiles and only a small portion of society had credit cards. Today, everyone is expected to have at least one credit card and one can purchase most anything, large or small, on credit. In a perfect world, people would only borrow what they could afford to pay back. This is not the reality in the world today, which heavily promotes a “have now – pay later” way of life. In basic terms, bankruptcy is a court process which provides a mechanism for debts to be modified or eliminated when it is impossible for the debtor to fulfill their financial obligations. According to the U.S. Supreme Court, this would allow the debtor, “a new opportunity in life and a clear field for future effort unhampered by the pressure and discouragement of pre-existing debt.” TWO DIFFERENT METHODS Before going over the changes, note that bankruptcies can generally be described as "liquidations" or "reorganizations." Both kinds of bankruptcy have numerous rules -- and exceptions to those rules -- about what kinds of debts are covered, who can file, and what property you can and cannot keep. Chapter 7 bankruptcy is the liquidation variety -- property is sold (liquidated) to pay off as much of your debt as possible, while leaving you with enough property to make a fresh start. A court appointed trustee will negotiate with your creditors, handle the selling of all nonexempt property, and split the proceeds amongst the creditors. Normally, exempted property can include a portion of your residence or property allowance, immediate personal possessions, household utensils, tools (if related to your occupation), and provisions to support a family for six months. Oftentimes, however, creditors are not paid in full and the remaining debt, including most credit card debt, is canceled. Under normal circumstances, a person can only file for Chapter 7 bankruptcy every six years. Chapter 13 is the most common type of "reorganization" bankruptcy for consumers -- you repay your debts over three to five years. Under this program, the court appointed trustee creates a repayment plan to the creditors which is submitted to, and must be approved by the court. If approved, all disposable income is paid to the trustee, who in turn makes all distributions to the creditors. Although this plan is designed to have the debtor to live a “bare bones” lifestyle, it is not totally rigid. The court may modify the required payments given good cause. THREE KEY CHANGES The new 2005 changes place a greater burden on the debtor to prove their debts cannot be paid, and to ensure that bankruptcy is used as a “last resort”: 1. Debtors must first complete a court-approved credit counseling course, at their own expense, within 180 days of filing. 2. Debtors must undergo an extensive and complicated “means test” administered by the court to determine bankruptcy eligibility. 3. Significant changes to the “homestead exemption” rule. Under the previous rules, the home could, depending on state law, be made safe from being affected by bankruptcy. The federal law requires a “home history check”, which only allows for homestead exemptions of up to $125,000, for any property bought or acquired within 40 months of the bankruptcy filing. This prevents people from trying to hide their assets by buying expensive properties at the last moment and incurring further debt. MOST ASKED QUESTIONS: 1. Are there other financial assets that I can protect, or will I have to forfeit most all of my accounts to pay off my debt? Under the new law, certain types of assets, such as IRA’s and 401(k) plans may be exempt. Additionally, college savings plans (529s) are also exempt if held for at least two years, or up to $5,000 if held between one and two years. 2. Can my spouse file bankruptcy without my consent? Yes. 3. If I file for bankruptcy, are all my debts dissolved and will I be completely debt free? Under the new law, certain types of debts are normally not discharged. These types of debts include taxes owed, student loans guaranteed by a government institution, alimony, child support, property obtained under false pretenses and debts not listed in the bankruptcy petition. 4. If I have a joint account with someone, and I file for bankruptcy, does the entire debt or loan go away? No. Your co-signer will not be released from the debt. 5. How long can a bankruptcy negatively affect me? Bankruptcy filings may remain on all your credit reports for up to 10 years. 6. My personal finances are my personal business, so how can it affect my employment with the government? Military personnel and all other U.S. Government employees with a security clearance should understand that both the accumulation of large debts and bankruptcy have a negative impact on your clearance, as fiscal conduct is an important aspect in obtaining and maintaining a security clearance. For many occupations in the U.S. Government, to include military service, the lack of a security clearance, and the inability to get one, could result in discharge or job termination. 7. Where can I go to seek help if I have a debt problem? Most military installations, to include Yuma Proving Ground, have both a financial / budget advisor at the Army Community Service, and the installation Legal Assistance attorney who can provide assistance to authorized customers. Additionally, there is a bevy of other alternatives one should try prior to filing for bankruptcy, such as negotiation with creditors, debt consolidation loans, or challenging a disputed debt in court. Remember, bankruptcy should be the last stop in attempting to overcome a severe debt problem, not an easy fix to become debt free.

FINANCIAL PLANNING - MEMBERSHIP IN PRIVATE ORGANIZATIONS AND CLUBS Are you a member, official, or organizer of a club, or some other type of private organization? Do you know what the basic legal organization of your club is? Do you know what your personal legal liability is regarding activities of the club, or other members of the club? Consider: If your club owes taxes, fees, rent, etc. to some other private entity or the government, who can be required to come up with the payment? In a worst-case scenario, if a club member while on an errand for the club has an accident and causes serious damage, or a death, against whom could a Court judgment for the costs and damages be placed? Risk of an Informal Structure for a club. In general, if two or more people start to work together on a common goal, whether a business, or a club to share a common interest (say flower gardening) absent some other clearly established structure for of organization (discussed below) legally the club will be considered a partnership. In a partnership, the general rule is that every partner is "jointly and severally" liable for all of the debts of the partnership. That means that anyone the club has a debt to can sue any and every member of the club for the full amount of the debt. If one club member is wealthy, and the rest are without assets, a judgment for a debt can be taken completely from the sole member with money. In the accident and death scenario mentioned above, every club member could be named as a defendant in a lawsuit, even if they had nothing to do with club management, sending the other member on the errand, etc. Benefits of Incorporating. If your club operates as a corporation, and properly follows the rules for corporations, in general lawsuits would be against the corporation, and the member who causes damages. The other members have at least some level of protection from being personally sued, as they are not the owners of the corporation. Members just own membership certificates in the corporation and thus have the right to vote in the election of corporate directors. Consider federal income taxes in a situation where your informal club does fundraising to regularly provide gratuitous good or services to others. If you did this absent official non-profit status, you could easily find yourself at the wrong end of an IRS audit that determines your "business" was a "hobby", your deductions are denied, and you all owe taxes and penalties. Beyond providing a level of safety for your personal finances, incorporating and obtaining non-profit status from the Internal Revenue Service (IRS) provides tax benefits, and depending on the activities of your club, the ability to receive tax-deductible donations. Creating a non-profit entity. This article provides only general information, and is far from a legal guide or checklist. The links are provided merely as reference sources. If this brief article arouses your interest, I suggest you contact an appropriately licensed and experienced attorney in the state you would like your charity to primarily operate. The State of Arizona has available forms and instructions for creating an Arizona non-profit corporation online at it's website: http://www.cc.state.az.us/corp/filings/forms/packets.htm If you would like to read the Arizona statutes regarding corporations, they are online at: http://www.azleg.state.az.us/ArizonaRevisedStatutes.asp?Title=10 What does Arizona non-profit corporation designation mean? While Arizona makes it relatively simple to CREATE a "non-profit" corporation, it doesn't yet mean you're exempt from taxes, it's just the framework of your organization. With our multi-level government the state and federal levels are completely distinct. Once you have obtained your state non-profit corporation, you've got to file for federal tax-exemption with the Internal Revenue Service. There must be a meeting of directors and members, by-laws written and approved, and membership certificates issued. The IRS will want your by-laws submitted. While the IRS requires you be a non-profit entity to apply for tax exempt status, the state non-profit status DOES NOT mean you have reached tax-exempt status until you receive your IRS designation. You will not even be considered for state tax exemption until you have been approved by the IRS.

Why go thru the hassle of qualifying as a "Charity"?

If you would like to solicit for donations to your organization, and be able to provide your benefactors the ability to deduct their donations from their individual income taxes, you must file an application with the IRS for 501(c)(3) status. Until and unless you receive a 501(c)(3) exemption letter from the IRS, you are NOT yet a charity. IRS Publication 557 discusses what organizations qualify, and application procedures, and is available online at: http://www.irs.gov/pub/irs-pdf/p557.pdf The related application package is online at: http://www.irs.gov/pub/irs-pdf/k1023.pdf The major benefit of 501(c)(3) status is the ability to solicit tax-deductible donations. Within Arizona, it also provides other benefits, such as the ability to legally operate fundraisers such as "bingo" games and raffles, which would be criminal under Arizona law without the charitable designation. There may be other benefits of qualifying as charitable under 501(c)(3), such as qualifying under U.S. Postal regulations for special bulk mail rates Charitable Disadvantages   If you want to lobby legislators, or advocate for legislation to the public, don't do it with your 501(c)(3) entity. Don't use your charity to assist in any way candidates for elected office or to political parties. Limits are covered in IRS Publications 557 and 578

http://www.irs.gov/pub/irs-pdf/p557.pdf http://www.irs.gov/pub/irs-pdf/p578.pdf What qualifies as a charity?

Section 501(c)(3) organizations are nonprofit corporations which are formed exclusively to accomplish one or more of the following purposes:

1.Religious purposes, 2. Charitable purposes, 3. Scientific purposes, 4. Literary purposes, or 5. Educational purposes.

"Charitable purpose" is broadly defined as anything that aids the public. Examples of charitable purposes have been:

1. Protecting the environment. 2. Providing food to the elderly. 3. Providing education. 4. Providing medical services to the indigent. 5. Operating a museum. 6. Operating a library. 7. Operating a park. 8. Operating a hospital. A charity is permitted to make money from its activities. It is permitted to pay employees. It is just not permitted to distribute the money earned to any shareholder or member. The profits of the charity must be used to achieve or further the charitable purpose for which the nonprofit corporation was formed. There are two types of 501(c)(3) tax-exempt organizations: the public charity and the private foundation. The main difference between a public charity and a private foundation is who runs it and where does it get its money. A public charity must receive a minimum amount of support from the general public or governmental agencies. In addition, public charities must have boards which are open to the public. By comparison, private foundations do not have fixed minimums for public or government support. In addition, the boards for private foundations are often closed to input from the public. Non-profit but not a charity If you don't need to accept deductible charitable donations or can't qualify as a charity, you may consider 501(c)(4) status, which provides that organizations which exist exclusively to "promote social welfare" or employee associations which are composed of employees from one employer for "charitable, educational or recreational purposes can be tax exempt. Examples: volunteer fire companies, search and rescue companies, homeowners associations, etc.. Form 1024 is used to get the tax exemption. Contributions to the nonprofit corporation are usually not deductible to the donor. Such contributions can be deductible only when they are to be used exclusively for public purposes rather than to benefit the members of the organization. State Tax-Exemption  Both 501(c)(3) and 501(c)(4) provide exemption from federal corporate income tax. Arizona policy is that your charity will also be exempt from Arizona income taxes, but it is not automatic. You must submit a copy of your federal exemption and corporate by-laws to: Arizona Department of Revenue Corporate Income Tax Section 1600 Washington Avenue Phoenix, AZ 85007 (602) 542-3345 ext. 116 Retail sales made by a non-profit charitable organization that is recognized by the IRS and the state as a non-profit charitable organization should be exempt from collecting Arizona state "sales tax". (Note, purchases by the organization are not exempt.) Federal Annual Tax Returns (Form 990 or 990-EZ)  Federal tax "exemption" does not necessarily mean you don't have to file. Check with your accountant regarding the annual filing of Form 990 or 990-EZ, the Exempt Organization Annual Report Form, and the right date for your entity to file, as it does not generally match the individual filing date. Even though an organization holds federal tax-exempt status, an income tax may still be applicable. The "unrelated business" income tax applies to otherwise tax-exempt organizations when they engage in activities regularly that are like those of commercial entities. Again, see your accountant. Annual State Returns Also check with you accountant for the specifics of filing a non-profit state income tax return. Should you go thru the process? Incorporating, obtaining, and maintaining legal status as a non-profit requires more effort and attention to detail than an informal organization. But the protections and other benefits should clearly outweigh the costs and time involved. Unfortunately, while I can provide a "preventative law" brief on the risks inherent on club membership, management, and organization, actually providing one-on-one personal assistance on creating or operating such an entity appears beyond the scope of services authorized by regulations. FINANCIAL PLANNING LIFE INSURANCE

Overview - Life insurance is a means of providing financial security for your family should you die prematurely. In general therefore, the purpose of life insurance is to provide for a sum of money, payable should you die, that will replace your prospective earnings and retirement income.

So how much life insurance do you need? It's really a personalized calculation, based on a combination of factors, such as:

How old are you now? Based on your health, and information such as your family history, what is your expected lifespan? Do you smoke? Even if you never smoked before, and you just lite "one"cigar before a life insurance physical, don't be surprised if your rates are the higher "smoker", for at least five years. How much are you earning now, and how much do you expect your real earnings to rise during your anticipated career? What expenses do you have that you want to ensure are covered? (Do you want to leave your family a fully paid for home, money for college for the kids, etc.?) Based on your understanding of the economy, what do you believe is going to happen to prices of goods and services in the relevant future? Into what type of investments do you expect your heirs will place the life insurance payment? What other benefits are available for your survivors, such as the Survivor Benefit Plan and Social Security. In particular for service members thinking of life insurance from a commercial company, specifically ask if the policy has a "war clause." Such clauses typically allow insurance companies to avoid payment on a contract of insurance if the service member is killed in war or by a "military service hazard."

An example to demonstrate determining the amount of insurance needed: John is 25 years old, active duty, married to Jane. They have two children Jack (age 4) and Jill (age 2). John is E-5 with 7 years of service. Jane does not work.

John's base pay is around $2130/month. He expects he will retire as an E-7, and then move on to a private sector job earning about the same as he was on active duty when he reached retirement. He plans to work until he is 62, and then retire. He wants to be able to fund college for his two children, and ensure that Jane does not have to work, at least while the children are still in school.

Aspects to consider:

Interest rates are around 4%.

Replacing 13 years of John's military salary (I’m using just base pay). Replacing 24 years of John's private sector earnings. Replacing 42 years of John's military pension (assume a lifespan to 80) Provide for Jack's 4 years of college starting 14 years from now. Provide for Jill's 4 years of college starting 16 years from now.

If John expects to make E-7 early enough for his retirement "high three" to count it, he needs to make it by 17 years. Projecting his promotions as more or less evenly, the present cash value of his base pay thru to retirement is:

$352,000

If John retires at age 38 as an E-7, 50% of high three, and expects to live an additional 42 years, the present cash value of his active duty retirement checks are:

$270,000

If John expects to work from age 38 to 62 at the same pay as he retired at, the present cash value of his private sector wages is:

$408,000

Therefore the minimum insurance needed to replace John's wages and pension, if all done by insurance, is $1,030,000.

Today, a Bachelors Degree from a local institute will cost around $10,000 in tuition, well below the national average, which is about $40,000. Add room, board, books, etc. and the present cost ranges from $30,000 to $120,000. If John wants to have college for both children covered, and not effect the other monthly income of the family, he needs an additional $250,000 of insurance, for a total of $1,280,000.

Even though Jane is not working, that doesn't mean the family does not need insurance on her life. As the primary caregiver for the children, Jane is raising the children, watching out for them, teaching them motor skills, play, basic language, etc. If Jane were to die, John could not simply go off to work every day and leave the children alone. The minimum to consider would be daycare, projected here as around $180 per week, per child, until the child is say twelve. (Without Jane, the kids are probably going to be in some sort of pre or after school program, at least until they are teens.)

Merely to provide the limited daycare for the children set out above requires present cash value of life insurance on Jane of around $141,000.

(The formulas to calculate "Present Cash Value" or "Future Cash Value" are generally available in spreadsheets.)

You have the right to name any person(s) you choose as the beneficiary(ies) of your life insurance policy(ies). If you specifically want a portion to be used to provide for your child's education, you may not want to leave the money directly to the child. (What would YOU have done if you turned 18 and had $100,000 paid to you…) Instead, you could leave a portion to someone as Trustee for your child.

For a family of modest earnings to purchase insurance in the above amounts probably requires the purchase of "term insurance", which is what the SGLI program is. Term insurance provides a much higher amount of coverage, for much less cost, because it has no "investment" aspect. As with SGLI, when the policy ends, nothing remains. The "term" aspect generally refers to the period of time during which the company has agreed to provide insurance coverage and the costs for that period.

Your first priority must be the above "safety net" for your family. After the safety net is met, whole life can then be considered as one of they many means (including also the world of "TSP", "Individual Retirement Accounts", mutual funds, money market accounts, real estate, etc.) available for investing for your future.

A "whole life" investment type policy is one where the policy accumulates some "cash value" which can be "borrowed" or considered as a form of investment. It is generally a type of life insurance where the coverage can be maintained for your entire lifetime. The documents presented to you as part of the "sales pitch" often include projections of significant profits within the policy. Read the details carefully, and look for the amounts that the company guarantees, rather than mere estimates. (The fact that any particular class of investment advanced significantly in the PAST, does not necessarily mean it will do so in the future.)

In general, after establishing your safety net my recommendation is that considering "whole life" insurance as an investment should be at or near the bottom of your investment priorities. Financial Planning - Warning on Misleading Life Insurance Programs We have received a 26 page report from the Congressional General Accountability Office, entitled ACTIONS NEEDED TO PROTECT MILITARY MEMBERS, on "flawed" financial products sold to military consumers and the questionable techniques being used to sell them. At a Senate Banking Committee hearing, in his opening remarks, Senator Richard C. Shelby, Republican of Alabama and the committee's chairman, alerted the Pentagon representative at the hearing that he would be in for tough questioning about why the Defense Department "has not moved more aggressively in this area heretofore." It appears that last year a New York Times article documented a decades long series of the sale of insurance and other "financial products" on some military facilities, sanctioned by military leaders, that were clearly contrary to the best interests of the members convinced to make the purchases. The report appears to particularly disdain a practice of selling to soldiers high-cost, low payout "life insurance" policies with savings components (typically referrred to as whole life). The report points out that those who need insurance beyond SGLI would be financially better off with anther lower cost term insurance policy, then "banking" the difference in cost in the Thrift Savings Plan. FINANCIAL PLANNING LONG TERM CARE INSURANCE Health problems can greatly change your life, and if you're not prepared to deal with the costs they can devastate the rest of your financial and retirement planning. Because you cannot predict the future, it is a good idea to think about long-term care as part of your estate plan. What is long-term care? It is assistance to help you if you have a disabling or chronic illness and cannot care for yourself. It is not necessarily traditional medical care in that it may not be intended to improve or correct a medical problem, but rather to help you cope with your condition. Consider, people are living longer, medicine allows us to continue on with conditions which only a few decades ago would have clearly meant death. Some examples of long-term care are: Home Health Care:  Trained personnel come to your home on an ongoing basis to help with activities of daily living, such as bathing, dressing, or eating. They may also help prepare meals, run errands, and do light housekeeping. Respite Care:  This provides a break for family members when they are the  primary caregivers for the disabled person at home. A respite caregiver usually comes to the home and may be a volunteer. Adult Day Care: Typically at a center that provides both health care and social services for people who cannot be left alone during the day. Assisted Living Care: This is a combination of housing, personalized support services, and health care designed to meet the individual needs of people who require some help with daily activities but not the skilled care of a nursing home. This care is ideal for someone who is too frail to live alone but does not need to be in a nursing home. Assisted living facilities may be independent facilities, combined with skilled nursing facilities, or part of a continuing care retirement community. Most costs are paid by the resident and family members. Nursing Home Care: This is for people with chronic or disabling illnesses who cannot care for themselves but who do not need hospital care. Nursing homes offer up to three levels of care—skilled nursing care, personal care, and professional care. The key question for your financial plan is, How do I pay for long-term care?

Costs for long-term care vary depending on the amount of care provided, type of care provided, and location where the care is provided. You may use one or more of these ways to pay for long-term care.

Personal Funds: Your own personal resources, such as personal current income, savings, or investments. However as medical procedures have become more complex and expensive, and expansive, the "middle class" is caught in a bind. After paying tax throughout their life to support the Medicaid program, which was originally intended for the poorest segment of the population, in their old age the "middle class" find if they've saved and invested, they're not eligible for assistance until their lifetime assets are expended.

Contributions from Family Members: If you do not plan ahead for long-term care, do not have sufficient personal resources, and do not qualify for such government assistance as may be available, you may have to rely on your family members to pay for or to deliver care. This can be burdensome on your family if family members do not have the financial resources to pay for care or the necessary skills or time to provide the proper care. In addition, family members, who in the past would have been relied on for assistance, often live great distances apart.

Medicare: Medicare  covers very little of the long-term costs that most people need. Medicare will pay for up to 100 days of care in a skilled nursing facility after you have been hospitalized for at least three days. Medicare covers the first twenty days entirely. The patient pays a daily coinsurance after the twentieth day until day 100. After day 100, Medicare covers none of the costs. Medicare does not pay for custodial care.

Medicaid: Medicaid is a joint federal and state program intended to pay for health care for people with limited income and resources. It does pay for custodial nursing home care. Each state sets its own standards for Medicaid eligibility, determines the type of services provided, and administers the program under federal guidelines.

These rules are complex, vary from state to state, and are of course subject to change by the legislatures. If you expect to have significant assests and retirement income, yet want to qualify for Medicaid, there are legal steps you can take, such as transferring assets to carefully and specifically worded trusts.

Some brief information for coverage in Arizona is:

Income not over $1656/month.

Resources (cash, bank accounts, stocks, bonds, etc.) not more than $2,000 value for an individual. For a married couple, the non-applicant spouse may keep up to 1/2 of such resources, or a total value of $90,660, whichever is less.

If you believe you may need long term care, and your plan is to rely on Medicaid, you must realize you will probably need to make specific and significant changes in your assets and financial plans, lest you essentially lose on a lifetime of earnings. The asset rules have lead many senior citizen couples to the decision that a divorce is necessary for them to protect their life savings.

Veterans Administration (VA) Health Benefits: Many larger VA hospitals offer extensive long-term care services. You should contact the nearest VA hospital to determine your eligibility for the services the hospital offers.

Long-term Care Insurance: This is private insurance for which you pay designed to cover long-term costs. Depending on the policy, long-term care insurance may cover nursing home stays, home health care, adult day care, assisted-living facility care, and respite care. In general, the younger you are when you initiate such a policy, the lower the payments.

Do I need long-term care insurance?

Maybe, depending on your health, age, and financial situation, among other factors. It is a personal decision similar to whether you need life insurance. If you think you may need long-term care and believe you have adequate other funding sources then you may not need long-term care insurance. What should I look for in a long-term care insurance policy? There are several issues to consider when evaluating a long-term care insurance policy: Services Covered: Many policies cover only long-term nursing home care. You should make sure your policy also covers other types of care desired (e.g., home care, adult day care). Amount of Benefit: A typical policy allows a fixed dollar amount for each type of service, regardless of the actual cost of the service. Paying a higher premium may buy a policy that will pay more for the service. Find out if the policy pays a different amount depending on the type of care provided. For example, is the payment for a day of nursing home care different from the payment for a day of home care? You may have more flexibility in planning later on if the policy makes the same payment for the different services. Deductibles, Co-payments, and Waiting Periods: Generally the higher the deductible, the lower the premium. Also, most policies have a waiting period of 30 to 90 days during which time you have to pay for services from your own funds. Also, many policies only pay benefits for a fixed period of time rather than indefinitely. After the time period runs, you will have to rely on your own funds or other sources to pay for the services. Payment of Benefits: Find out the requirements to start coverage under the policy. Some insurance companies accept a covered person's doctor's statements while others require certification from the company's medical staff. Find out if there are restrictions on illnesses covered or transfers to a nursing home not following a hospital stay. Forfeiture Provisions: Find out if the policy has any forfeiture provisions, which may permit you to recover some of the accrued value of the policy if you can no longer afford to pay the premiums. This could mean you might be able to keep the policy with reduced benefits, convert it into term life insurance, or borrow against or receive the cash value of the policy if it has any cash value. Inflation Protection: Expect the cost of long-term care to rise over time, and see which policy offers inflation protection. How can I compare long-term care insurance policies?

Read the fine print, and prepare a side by side checklist to compare the policies. It is, in the end, a personal decision and a personal purchase. Is there a federal employee long-term care insurance program? Yes, beginning in 2002, military members and civil service employees became eligible for the Federal Long-Term Care Insurance Program administered by the Office of Personnel Management. Information is online at http://www.opm.gov/insure/ltc/faq/eligibility.asp#100 When do I need to act? Well before your retirement, or the onset of an illness. If you already need to enter a nursing home, you're not likely to be able to purchase insurance. Also, if you already need to enter a nursing home, it's too late to make changes in your assets. If you try to give away your property, you'll find the government denying any medicaid payment for their "lookback" period. It works something like this. They estimate the value of your current property, and any property you gave away in the preceeding years (i.e. five years). This total value is divided by the monthly cost of nursing home care, and government assistance for care is then denied for the time that your assets COULD have paid for care. Economically, the projections for the cost of nursing home services, and the portions paid by the government, are not good. The post World War II "baby boomer" generation will in 2008 start to reach retirement age. At that point and for the following several years, this group which is among the highest earning, highest tax paying portion of the population, will cease paying taxes, and become eligible for government benefits such as Medicaid nursing home coverage. Statistics would indicate that the demand for nursing home services should jump, while tax revenues fall unless taxes are raised dramatically. What, if anything, this will prompt lawmakers to do will be up to the representatives in position at that time. FINANCIAL PLANNING SOCIAL SECURITY A significant portion of the anticipated old age income for soldiers (and FERS civil serve employees) is Social Security. You need to understand the aspects of this potential benefit. Social Security and Your Paycheck. The social security tax which shows on your earnings statement is 7.65% of your gross wages. This is however only half of the tax, the other half is required to be paid by your employer. Since the other half of this tax is based on your status as an employee, your earnings, and with your prospective social security benefit based on both portions of the tax, in economic terms it is part of your wages which you would otherwise be paid were it not for existence of the tax. Therefore in effect you pay the entire 15.3% tax. The income tax allows deductions for certain medical insurance expenses, 401K, TSP, IRA deposits, etc. No such deduction applies to your social security tax. Likewise, your social security tax is NOT deducted before the regular income tax is calculated. The Social Security tax rate for 2004 is 15.3 percent on all wages up to $87,900. In terms of days worked, the tax represents about 9 weeks out of each of your working years. You must have 10 years of taxed wages in order to qualify for an old age benefit. Background of the program. The initial social security tax back in 1935 was 2% of the first $2,000 of wages earned. In the past, as increases in social security distributions reduced the amount of money being transferred to the general treasury, Congress increased the tax rate, and the level of income subject to the tax. This allowed the increased payments, while keeping the subsidy of other government spending. But with the system as written, it also meant that those paying the increased social security tax were promised higher benefits when they retired. The latest information at the Social Security Administration website shows that in 2003 they collected $468.6 Billion SS taxes on payroll and benefits. The program paid out $406 Billion in benefits, and cost the taxpayers $600 Million in administrative costs. By law, the remaining $62 billion of Social Security taxes collected was transferred to the treasury in exchange for a special class of federal security. The Social Security Administration lists as an "asset" $1.3553 Trillion in such securities, which is the Social Security "trust fund". All money deposited in exchange for these securities is then spent on other government programs. Your Social Security Benefits: 62 is considered as the minimum age for "early retirement" and beginning to collect a payment from social security. Initially, 65 was considered the age for "full retirement", but there is now a sliding scale where your birthdate determines your full retirement age. If you opt for early retirement, your social security payment is PERMANENTLY reduced, based on a scale of how much before your personal "full retirement" you started your request for benefits. Your projected social security old age benefit payment is based on the total tax collected on your wages. If you have not recently received a benefit projection from social security, you can request one online at: http://www.ssa.gov/mystatement/ Note though, there no legal basis on which any of us have an "entitlement" to receive social security. The laws relating to the program clearly indicate it is a benefit which can be changed, or eliminated. A Supreme Court decision in 1960 upholds this position. Challenges for the Program: Beginning in 2008, the first of the "baby boom" generation will reach retirement age. This spike in age distribution in our population represents a sudden increase in births in the post World War II period. This group is a significant percentage of the population. The financial challenge facing the social security system is that this group of people, who are paying the highest social security taxes will cease paying, and suddenly be eligible for large payments. Reports at the social security website clearly show that when the baby-boomers retire, annual income from the present social security tax is well below the amount that is scheduled to be paid out. Simple math on data available from the social security website shows that the payments promised to the baby-boomers can't be paid without tapping the trust fund. Therein lays the concern for your retirement planning, as Social Security starts to make "withdrawals" from the trust. The economic reality of Social Security is there is no pool of money. Every penny of social security tax collected has either been paid out to a recipient already, or has been spent. Every new penny of social security that is paid out to a new recipient, or as cost of living payments to existing recipients, means that less of the "excess" is transferred to the general treasury for spending. That means that the government must cut other spending, increase the general income tax, or increase the deficit. Every penny that social security "withdraws" from the "trust fund" means that the government must cut other spending, increase the general income tax, or increase the deficit. What does it mean for your retirement? You must draw your own conclusions as to how the government, and you, will deal with the financial discrepancies of the social security program. It appears the major options for the government are: Make the promised payments by dramatic increases in some combination of the social security, general income, or other taxes, or nflating the currency. Come up with a program where payments are made from within the actual and reasonable taxes collected. This would be some combination of payments smaller than promised, or a means to determine retirees who will be denied the promised payment (i.e. by a "Means Test" such as with welfare, where if you have another source of income, or assets, the payment is denied.) Were the Social Security program a failing private sector pension or annuity plan, in Bankrupcty, the court would apportion the benefits from the program in the same percentage as those who contributed. That is, those who have paid the most into the program would receive the greatest payout. The "fail safe" approach is to plan for your retirement as though social security will not be available to you. What to do? There have been discussions in D.C. that a partial remedy to the Social Security situation could be to allow you to divert a portion of your tax to an account that could be invested in stocks and bonds, but no such legislation has been successful. You could consider though creating your own program. Maximize your other retirement investments. TSP, IRA's, money market, stocks, bonds, mutual funds, real estate, etc., all of which are explained in further detail in other financial planning articles. Examples of Personal Savings vs Social Security. Look at what happens if YOU could take the 15.35% of your gross wages and invest it: Example: A minimum wage worker ($5.25/hour), graduates high school at 18, never manages to work above minimum wage, works full time until age 62, then retires. In this demonstration, the worker is able to divert the 15.35% being paid to Social Security into a private sector investment at 5%. Social Security payment on the amount if taken as taxes would be around $484 per month starting at retirement. If you die, your spouse or minor child may be eligible for a one time death benefit payment of $255, and may be eligible for some               portion of your monthly payment. If you have no such qualifying heir, all of your social security tax payments "disappear" as far as your estate is concerned. By making a private sector investment instead, at age 62 the worker has around $266,000. The monthly interest on this amount would be around $1108, that could be withdrawn indefinitely, and still leave the principal to heirs. If you withdraw from the private sector account only the $484 per month that Social Security would have paid, and lived to age 80, you would be able to leave to your heirs around $480,000. At the moment, there are no options available for you to divert any portion of social security. Active duty members still however have the option to divert, tax deferred, 9% of their base pay to a tax deferred account. The financial history of TSP type accounts shows that it is not unreasonable to project earnings on such an account in excess of 5%. For example, the TSP website http://www.tsp.gov/rates/monthly-history.html shows the "C" fund having a 10 year average of 10.99%. Example: In boot camp, the new (18 year old)  E-1 sets up a TSP at the maximum 9% salary deduction. (This soldier SOMEHOW makes it        thru a 20 year career, and never got promoted beyond E-1, and never got credit for any longevity increase.)  At 10.99% compounded interest, when retiring at age 38 the "recruit" would have around $93,000 in the TSP account. Making no further contribution, at age 62 the TSP could have over $1,200,000 in it. Not a bad "nest egg" for a career E-1. The examples demonstrate the benefit of consistent savings and compound interest. A vital aspect is starting early, and letting the compounding work for you. For specific advice on selecting individual investments, you should review appropriate publications, private counsel, your accountant, or other trained and qualified financial planning professionals. FINANCIAL PLANNING SPECIFIC GOAL, A HOME

For the average working American, the purchase of a home is the largest investment of their lifetime. Looking at home ownership as an investment, you want the best "deal" and features in your investment.

Pursuit of an active duty career in the military does not preclude you from investing in a home. Quite the opposite, I would argue that a soldier's ability to visit, live, and work in a variety of areas, while maintaining a single career, provides you greater insight into where is a "good place to live".

Why put money into a home? Purchase vs. Renting (or living in government quarters). The really short answer is, at the end of renting for 30 years, what do you own? Flippancy aside, let's examine an example:

E-5, in Yuma, monthly BAH around $838.

$105,000 home, purchased with VA "nothing down", 30 year mortgage, monthly payment of $605. Insurance and real estate taxes, averaged monthly, will probably bring your total monthly payment up to your BAH.

Inflation protection. In economic terms, inflation is not the increase in the value of things, rather it is the DECREASE in the value of currency. Absent inflation, the dollar you found in the crack of the sofa would, today, purchase the same amount and type of goods that it would when it was lost. Such is not however the case. In general, any amount held as cash, without being on deposit or invested in some manner, will consistently be useable to purchase less and less.

Historically the greatest significant cause of inflation is when the entity that issues the currency progressively puts more currency into       circulation. The two primary methods are to PRINT more currency, without any asset or financial activity to back it, or for the government to progressively fall into debt, spending money it does not have.

Absent factors which effect its true value (i.e; a growing, or declining, community), real estate prices tend to track the overall national        inflation rate, providing some protection against value loss for your money. Improvements you make to the property may result in increases in value beyond your "out of pocket" costs.

In recent years, the annual inflation rate has been 3% to 4%, meaning your $105,000 home increases in value each year by $3,000 to $4,000, while your payments reduce the principle you owe.

Your property taxes, and the interest you pay to your finance company, are deductible from your income for income tax calculation purposes, which may lower the income tax you are required to pay.

Rental Income. Owning real property which you rent out provides you the opportunity to earn a return on your investment which probably exceeds the interest rate of any deposit account, "profit" from inflationary as well as real increases in real estate value, while also providing some extra income tax deductions.

Tax Benefits. Under present tax law, when you rent out real property, you can deduct your operating expenses, property taxes, finance charges, insurance, even pencils, paper, postage, etc. related to the property. A significant consideration is "depreciation" of the structure and other non-land aspects of the rented property. Depreciation involves an assumption that such items wear out, and allows you to subtract this wear allowance, even if the items have not actually worn out.

If the expenses for your property total to more than your rental income, you get to subtract your "loss" from your other earnings, before you calculate how much income tax you owe.

Over the years, it may be possible for you depreciate the value of the structure to "zero", even thought the true value of the property has increased significantly. If you then sold the property, the IRS would consider everything above your depreciated "basis" in the property as        profit, which would be taxed…  Unless you took some additional steps. If your intent in selling a rental property is to obtain another rental property, you can postpone taxes on the increased (real or inflationary)       by a procedure referred to as a "1031" exchange. While the legal fees for this process may cost several thousands of dollars, they will often be        far less than the taxes otherwise due.

You may also avoid taxes on the profits if you convert your rental property to your personal residence. (There are restrictions if you just        did a 1031 exchange)

Once the property is your personal residence, and you have lived there for an accumulated period of two of the preceding five years, current tax law allows you to exclude from income taxes all profit on the sale, even what would otherwise be recovered depreciation. (This is a great deal to save taxes if you have the two years to live there.) The exclusion from income is $250,000 per person, $500,000 for a married filing jointly couple.

The Military Family Tax Relief Act of 2004 (MFTRA) added new rules. A taxpayer or spouse of such, serving on qualified official extended duty as a member of the uniformed services my suspend the running of the five year period of ownership and use during active duty for up to 10 years.

Lawsuit Protection - Homestead Exemption

Arizona law provides that anyone who resides within the state, who is 18 years or older, married or single, may as an automatic action of law hold exempt from a judgment creditor, other than your voluntary mortgagee, a homestead of up to $150,000 value in equity. The homestead may be your interest in "…one compact body [of land] upon which exists a dwelling… a condo… or a mobile home… " In less legalese, if you live in Arizona and own a home, if you are sued and lose, you get to keep the first $150,000 value of your home. If you have just $150,000 or less, in equity, you keep it all. You need to cross-check this though with the 2005 bankruptcy law changes. Planning and implementing an estate which is as "judgment proof" as is allowed, can be a significant factor in avoiding lawsuits. First, I like to think that if you're looking far enough ahead to protect your assets, that you are also looking ahead to avoid problems in the first place, and to obtain sufficient insurance. But also, if someone is considering a lawsuit against you, and a preliminary investigation finds       you have no assets which can be taken, perhaps they won't bother even starting a nuisance lawsuit. (One of the initial guidelines for a personal damage lawsuit is to find someone with "deep pockets", in otherwise lots of money.) As written, the statute restricts a married couple who own real estate to a $150,000       exemption as a couple. Yet, if an unmarried pair of individuals was to co-own the same piece of property, and be living there in the same manner as a married couple, the statute would allow each of them to exempt $150,000, for a total of $300,000 of protected equity. Why NOT buy a home? When you live in a private sector rental, or government quarters, many times utilities service and maintenance are included in the rental payment. When you're the owner, the costs are your responsibility.

You pay your own electricity, other heating if applicable, water, sewage, trash, etc. You also pay for your own repairs.

If you buy in a "bad marketplace", for example in a town where a major employer goes out of business, the value of the home may fall.

If you are transferred, you will need to rent the home, sell it, or make payments on a vacant house.

So, how do you get a home?

Inherit It. From an economic standpoint, it should seem strange that you need to make a large cash outlay to acquire a home. What happened to the home of your parents, your grandparents, great grandparents, etc.? In ideal economic theory, the family home, or at least the economic value of one, should continue to be passed on within the family, with each generation not only maintaining the home, but providing enhancements. Theory fails however in the "real world" for various reasons.

Liens against the property (involuntary and voluntary). The property was not maintained, or is located in a declining community. The heirs "squander" the inheritance. There are too many heirs. In theory, a family of two children can pass on to each child the averaged inheritance of the parents. A family with one child accumulates assets. A family with more than two children dilutes assets.

Buy it. The typical "first thought" to purchasing a home is the local real estate agent. If you contact the firm that is the "listing agent" for a particular piece of property, keep in mind that the listing agent is required to represent the interests OF THE SELLER. In general, the same rules apply to all sellers' agents.

While selling agents are prohibited from knowingly providing false information, they cannot represent your best interests. Even if they know that a property is not, per the market, worth the asking price, they won't tell you.

Employ a "Buyers Agent". Typically, you make an agreement to pay this agent some type of flat fee for finding a property and helping to negotiate the best price for you.

Employ a licensed "home inspector". You're looking for someone who can recognize the difference between faded paint, and a hidden leak. A comprehensive inspection report gives you a much improved "picture" of the home's condition, and the risks you take if your purchase it.

Build it. If your day to day living needs are already being met, consider building your retirement home. When you buy an existing home, you purchase whatever mistakes and shortcomings the builder and previous owner made. If you build, you get to make all of your own new mistakes... or possibly, end up with a home that suits you perfectly, that can serve you and your heirs for a long time.

Most current design and construction is focused on quick and easy methods, with superficial attention to quality and durability of materials, energy efficiency or orientation on the site.

With appropriate design and construction, the operating and maintenance costs of your home can be greatly reduced below that which is the present "standard", and the home can remain a valuable asset for generations to follow.

Repossessions / Seizures. There are various ways whereby homes are sold at below "market" rate.

Bank Repossession. When a financial institution (i.e. a bank) forecloses on a mortgage, many times the company seeks to sell the property as quickly as possible. The same typically holds true for those who "guarantee" a loan (Veterans Administration, FHA, etc.), as well as law enforcement agencies (federal, state, and local) who seize property which was used to commit a crime. You will probably need to contact each such agency individually to determine what is available.

Delinquent Property Tax. In Arizona real estate on which property taxes are delinquent are NOT sold outright. Rather, you must bid on the right to collect the tax lien. Once you have completed all of the legal prerequisites you may pursue a court case against the title holder to transfer actual ownership to you.

Individual Retirement Account (IRA) Investment. If you've noted that the ability for an IRA to purchase real estate "pops up" throughout my financial planning articles, it's because I consider this one of the most significant opportunities available. Just as your TSP can be invested in a stock fund, or an IRA invested thru a brokerage can hold individual stocks, with the right IRA custodian your IRA can hold real estate as in investment in your account.

Inflation protection. As described above, as a physical asset property provides a means to avoid loss of value of your money. It also offers real "upside" opportunity, with far less of "crashing". A stock, bond, mutual fund, etc. can readily plummet in value and essentially become worthless. It typically though takes a dramatic set of physical events for a given parcel of real estate to completely lose its value.

Annuitization. I've made "side by side" comparisons of investing IRA funds in various annuity opportunities, vs rental real estate. Not only does the rental real estate typically provide a higher monthly return, but there is a physical asset which can be left to your heirs.

Lawsuit Protection. Almost every state provides some level of protection for the real estate which is your home, typically referred to as "homestead". In Arizona $100,000 of the equity in your homestead is protected from being taken and sold in a lawsuit. But homestead protections typically do NOT apply to a property you are renting out. Your rental investment need different protection. For real estate, ANY real estate, held as an asset within your IRA, it has federal protection as a retirement account. Therefore even if you had $100,000 of equity in the home you're living in, if you had another $100,000 (or more) of equity in rental property, held within your IRA, it would also be exempt from being reached by someone who sues you.

Factors to consider in a home.

Energy Efficiency. You can pay now, or you can pay later, over, and over, and over... A poorly designed and constructed home probably requires heat in the evenings and winter, and cooling in the day and summer. A properly designed, oriented, and protected home can maintain comfortable internal temperatures without the need for large amounts of external energy input.

Solar Orientation. Very modest differences can make a HUGE difference in the livability of a home, the size of HVAC unit required, and of course your utility bill. A large factor which must be taken into account is the change throughout the year in the path of the sun across the sky.

While you can calculate the exact position for the sun at any time of the year, in general remember that in the summer the sun rises North of true East, and sets North of true West. Therefore East, North, and West walls and especially windows need vertical shade to protect them, and significant insulation. In the summer path thru the sky, the sun will shine directly on the south walls of a structure only during the noon hours, and from an angle high enough that modest overhangs can shade the south wall from the heat.

In our Arizona climate, if mechanically and aesthetically practical the outer "roof" should be a well vented shade structure with an open air flow between it and the waterproof insulated ceiling of the living area. In the winter the sun will rise South of true East, and set South of true West. It will also rise to a maximum angle above the horizon which is       much lower than it does in the summer. Therefore in the winter the south wall will be exposed to the sun the entire day. If the south wall is masonry, brick, adobe, etc. it will slowly warm during the day and release the heat thru the night.

This storage of solar heat for slow release can also be accomplished by something like sliding glass doors on the south wall, with a concrete, brick, tile over concrete, etc. floor mass on which the wintertime sun can shine thru the glass.

Solar Utilization. There are a great deal of published materials available, and a growing number of inventions for the use of the suns energy to heat, light, generate electricity, and even cool your home.

Photovoltaic (p/v). In an area such as Arizona, where the largest demand for electrical power is when the sun is shining the most, p/v panels can make economic sense, even in an in-town, grid connected system, if the "return" on the money invested in the panels meets or exceeds the cost of present and future electrical utility rates.

Example: A 120 watt p/v panel costs $489, and is warranted for 30 years. A reasonable average in our area is 6 hours of sun for 360 days per year. On the average, the panel can produce 21.6 kilowatt hour (kwh) per month. The present Yuma utility daytime charge is $.12 per kwh. Investing in the solar panel provides you an economic "return" on your investment essentially equal to a 5% tax-free account. If the utility rate increases during the next 30 years then your electrical power savings, and the effective return on your p/v investment also increases.

Skylights. Beyond the primitive big hole in the roof, covered by glass or plastic, there are now devices which put a small clear dome on the        outside of the roof with flexible mirrored "pipe" to allow the light to be routed to a selectively placed diffusion dome which can be mounted in         the ceiling or in some cases the wall. The natural light brought in can easily save the "wear" on and power for an electrical bulb.

Energy Cost Savings. An initial investment in energy conservation, or cost avoidance, can be the economic equivalent of a significant tax-free account.

Example: At age 40, you've finished an active duty career and settled into your "retirement" home. You're sure that adding insulation in the attic would save $30 a month in utility bills, but the contractor wants $600 to do the job. Should you have it done?

Certainly! The quick calculation "payback" period is only 20 months, after which that insulation goes on saving you money every month for as long as you live there. Think of it as putting $600 into an account that then pays you $30 per month for life. The value of such an upgrade is far greater than its cost.

Materials Quality. You can buy, build, or remodel with quality durable materials and fixtures, or accept you will encounter the need for repeat repairs.

Beware of Toxic Materials. There are various laws which require you be advised of certain hazards, such as whether the home has lead-based paint, asbestos, underground heating oil storage tanks, etc. There are though many dangers which are not required to be listed. You may want to run specific tests for hazards such as:

Most particle board, adhesives, plastics, formed fiberglass items, foamed materials, etc. used in typical construction today releases dangerous gases, such as formaldehyde.

Radon is a radioactive gas which seeps naturally from the ground in many areas. In some homes it enters thru foundation cracks and accumulates in the indoor air, reaching levels that can pose a danger, primarily to your lungs.

Carbon monoxide is an odorless, colorless gas, which can kill. It is a natural product of any burning, therefore to the extent possible all        flames should be kept outside of the weather-tight portion of the home.

Mold. Relatively new to be recognized as a danger are certain varieties of mold, which can be toxic. While personal inspection, or the smell, may "give away" the presence of mold, proper testing can reveal the presence, and type, of mold when it is far below the threshold of        detection by non-scientific means.

Homeowners Associations. Whether buying a condo, or remote desert acreage, if there is a homeowners association, read the rules carefully before you buy. These associations MAY leave you alone. You may also find though that new "leadership" results in votes where you essentially lose control of "your" property.

Zoning. City and County governments typically impose zoning ordinances, which control land use in the jurisdiction. If you're buying, do not rely solely on statements from the agent as to the status of the property. Maybe the agent does not know of changes, or forgot. Check the details. For example, if you buy to build yet find the property is just a bit too small for the current zoning to allow you to build, your options are to seek a variance (agreement by neighbors and the zoning board to change the rules just for you), or to sue the seller (But read your contract. I'll bet "due diligence' puts the burden on you to ensure you can do what you want BEFORE you close.)

Permits. Related in spirit to zoning is the permit system. Imagine your surprise, after your purchase, to find the structures, or the sewage system, was put in without the right permits, and since it's out of compliance, you can't use it until you get a permit and fix it. Check that all that you believe to be part of the deal is legitimately there. Yuma in particular has areas where existing septic systems are for "new" owners suddenly found to have groundwater too close to the surface for the system to be used, requiring costly changes.

Insurance. From the moment the home becomes "your's", you should ensure that it is properly insured. If your home burns to the ground, and you did not have insurance, this will NOT excuse you from making the mortgage payment! Typically, earthquake and flood insurance are not part of a "normal" homeowner's insurance policy. They must be added as separate additional charges. Yuma IS considered to be subject to earthquakes, and there are areas susceptible to flooding as well.

Location. As I mention earlier, I would argue that a military career exposes you to a wide variety of communities, climates, and lifestyles, and provides you insight into where is a "good place to live". Beyond finding a community that has the right "feel" for you, consider:

Cost of Living. Even if you manage to pay off your home prior to retirement, if you can't afford to live in the community after you retire, it may not be a good choice. Property taxes, income tax rates, and just simply the cost of day to day necessities are likely to continue to increase, probably at a rate faster than COLA for your pension. Even if we got a home in Beverly Hills as a gift, I doubt that many of us could        afford to live there.

Local Infrastructure. Does the area have the products and services you'll want to have access to? It can quickly become a "drag" to have        to make long trips for simple supplies or services. In particular remember that in retirement you may need increased or quick response medical services, which might rule-out that mountain top retreat.

Economy. If you intend to pursue a second career or sideline business, does the area have the need for your goods or services? Is the economic base of the community stable? (I.e. does it have a wide variety of income producing activities, or is the community dependent on the local gold mine, and the vein is almost exhausted.)

Local Resources. Is there ready local access to water, food, reliable power generation, etc., or is for example the city water pumped hundreds of miles over the mountains, as is much of the Los Angeles water supply. In the event of a fire, flood, earthquake, transportation shut down, etc., does the community immediately become a disaster area, or is it likely to be the source of rescue activity?

Natural Risks. The news clearly shows us that certain areas are at higher risk for fire, flooding, earthquake, tornado, hurricane, and even volcano activity. To be covered, most of these require a specific insurance policy. For example, if you're in a "flood plain", the federal government sells flood insurance policies, thru normal insurance agents. But why not look before you buy and avoid areas with recurring threats?

Human Generated Risks. You certainly don't want to buy a home on top of another "Love Canal" site. (In New York, toxic waste was         buried and then a housing development put on top of it.)  You may also be concerned if there is a particularly noxious chemical plant, nuclear        reaction location, etc. "upwind" from your contemplated home. Even major highways and railroad lines can be associated with risks, depending on what is being transported there and the likelihood of an accident causing a spill. FINANCIAL PLANNING YOUR CREDIT

In our present economy, it's difficult to function without a good credit record. A bad credit history can prevent you from getting a loan for a car, a home, etc. Landlords may decline to rent to you if you are a credit "risk". Many federal positions, active duty or civilian require a security clearance. Credit problems can affect your clearance, and therefore your job.

To find your present credit status, the three major national credit bureaus are:

Equifax, P.O. Box 740241, Atlanta, GA 30374-0241; (800) 685-1111. Experian (formerly TRW), P.O. Box 949, Allen, TX 75013; (888) EXPERIAN (397-3742). Trans Union, P.O. Box 1000, Chester, PA 19022; (800) 916-8800.

Federal Trade Commission (FTC) rules now clearly require credit reporting agencies to provide you a free report once per year.

Online at http://www.equifax.com/ this particular credit reporting agency has a link listed as, "FACT Act and obtaining a FREE Credit Report". It requires you enter your personal information, after which you can view or print your credit report.

FTC rules also require that these agencies must provide to you a free copy of your credit report, if you are: •	Are unemployed and intend to apply for employment in the next 60 days •	Are on public welfare assistance •	Believe your file contains inaccurate information due to fraud •	You are also entitled to a free report if you have received notice of an adverse decision (such as denial of credit, insurance, or employment) within the past 60 days How long is "bad" information going to remain in my report?

Seven years, with some exceptions:

Information about criminal convictions may be reported without any time limitation.

Bankruptcy information may be reported for 10 years.

Information reported in response to an application for a job with a salary of more than $75,000 has no time limit.

Information reported because of an application for more than $150,000 worth of credit or life insurance has no time limit.

Information about a lawsuit or an unpaid judgment against you can be reported for seven years or until the statute of limitations runs out, whichever is longer.

What if my credit report is wrong?

You are protected by the Fair Credit Reporting Act (FCRA), 15 U.S.C. 1681, et seq., which allows access to credit reports and an opportunity to correct errors, and the Fair Debt Collection Practices Act (FDCPA), 15 U.S.C. 1692, et seq., which limits the methods creditors can use to collect debts.

How to "fix" an error on my credit report?

First, don't bother with the "Credit Repair" advertisements. At best, they're charging you a fee for something you can easily do for yourself. At worst, they're a fraud. No one can legally make accurate, but "damaging", entries be removed from your record.

Start by writing to the credit bureau(s) and to the firm that provided the erroneous entry. Tell them what you believe is wrong, why, and how the incorrect entry is causing you harm (i.e. you've been denied credit for a car or home, employment, rental opportunity, etc.) Send ALL communications via certified/return receipt mail. The bureau must reinvestigate you complaint, usually within 30 days, as must the information provider. If the information provider finds it made a mistake, it must notify all nationwide credit bureaus so that they can correct this information in your file.

If they don't respond by 30 days, write again sending a copy of the first letter, demanding to know why you're being ignored, with, at your discretion, copies to the FTC and the state attorney general.

If the investigation does not resolve the dispute in your favor, you should insist the bureau(s) include your statement of the dispute in your file and in future reports.

Even if an entry is verified, you can also negotiate with the information provider. For example, if you have actually forgotten about a debt, perhaps you can persuade the firm to withdraw their "bad" entry if you pay the debt. Customer Service departments clear debts every day. If the firm agrees, if possible get them to send the agreement to you in writing. If not, when you send your payment, send it to whomever you negotiated with, include a letter clearly stating the agreed terms, and include on your check reference to the terms, including "aid in full account number…" if that is the case. This does not "guarantee" results, but is significant evidence in any subsequent court proceeding.

What happens if someone else gets your credit card?

As soon as you know your card is missing, notify the issuing institution. If a thief uses your card before you can notify the issuer, you may be liable for up to $50.00 of unauthorized use of the card prior to you making such notice. Finally, unless the card itself provides some means of identifying the holder, such as a photograph, no liability will be incurred for unauthorized use.

Even if your card is not missing, someone may have still gotten your number. Whenever you get your statement, review the charges carefully. Thieves don't necessarily have to make huge charges, to rob you via your credit card number.

"SPOOF" CREDIT CARD EMAIL

If you receive an email, phone call, etc., that identifies itself as being from one of your credit cards, asking you to click a link, write back, or call, check your credit card first.

If you are solicited to make contact in any manner other than calling the number on your card, please, first call the official number on your card to see if the request is legitimate.

The computer fraud types apparently never sleep. Email requests, and the webpages at links in them may look authentic, but if you start entering your account number, personal information, and pin, you may find your account with surprise entries.

Today, most credit card companies have computer programs that detect sudden unusually large charges activites, and put the account on hold, pending contacting you for potential fraudulent use. The new theft approach is to make small charges, on a lot of stolen account numbers. Would you notice a $9.95 charge to a store?

If you lose your ATM card, the situation is different.

If you report the loss before it's used, you're "safe". In general, if you wait to report the loss within:

2 business days you're responsible for up to $50.00

2 to 60 days you're responsible for up to $500

Over 60 days you're responsible for your entire account balance.

Somehow, I missed payments on a debt. What can happen to me?

If you fall behind in repaying your creditors, or an error is made on your accounts, you may be contacted by a "debt collector." You should know that in either situation, the Fair Debt Collection Practices Act (FDCA) requires that debt collectors treat you fairly and prohibits certain methods of debt collection. Of course, the law does not erase any legitimate debt you owe.

Personal, family, and household debts are covered under the Act. This includes money owed for the purchase of an automobile, for medical care, charge accounts, etc. For purposes of the FDCA, a debt collector is any person who regularly collects debts owed to others. This includes attorneys who collect debts on a regular basis.

A collector may contact you in person, by mail, telephone, telegram, or fax. However, a debt collector may not contact you at inconvenient times or places, such as before 8 a.m. or after 9 p.m., unless you agree. A debt collector also may not contact you at work if the collector knows that your employer disapproves of such contacts.

You can stop a debt collector from contacting you by writing a letter to the collector telling them to stop. Once the collector receives your letter, they may not contact you again except to say there will be no further contact or to notify you that the debt collector or the creditor intends to take some specific action.

Please note: Sending such a letter to a collector does not make the debt go away if you actually owe it. You could still be sued by the debt collector or your original creditor.

If you have an attorney, the debt collector must contact the attorney, rather than you.

If you do not have an attorney, a collector may contact other people, but only to find out where you live, what your phone number is, and where you work. Collectors usually are prohibited from contacting such third parties more than once. In most cases, the collector may not tell anyone other than you and your attorney that you owe money.

Within five days after you are first contacted and if you dispute the debt, the collector must send you a written notice telling you the amount of money you owe; the name of the creditor to whom you owe the money; and what action to take if you believe you do not owe the money.

A collector may not contact you if, within 30 days after you receive the written notice, you send the collection agency a letter stating you do not owe money. However, a collector can renew collection activities if you are sent proof of the debt, such as a copy of a bill for the amount owed.

Debt collectors may not harass, oppress, or abuse you or any third parties they contact. For example, debt collectors may not:

Use threats of violence or harm. Publish a list of consumers who refuse to pay their debts (except to a credit bureau) Use obscene or profane language Repeatedly use the telephone to annoy someone.

Debt collectors may not use any false or misleading statements when collecting a debt. For example, debt collectors may not:

Falsely imply that they are attorneys or government representatives Falsely imply that you have committed a crime Falsely represent that they operate or work for a credit bureau Misrepresent the amount of your debt Indicate that papers being sent to you are legal forms when they are not Indicate that papers being sent to you are not legal forms when they are. Debt collectors also may not state that:

You will be arrested if you do not pay your debt. They will seize, garnish, attach, or sell your property or wages, unless the collection agency or creditor intends to do so, and it is legal to do so. Actions, such as a lawsuit, will be taken against you, when such action legally may not be taken, or when they do not intend to take such action.

Debt collectors may not:

Give false credit information about you to anyone, including a credit bureau. Send you anything that looks like an official document from a court or government agency when it is not. Use a false name. Collect any amount greater than your debt, unless your state law permits such a charge. Deposit a post-dated check prematurely. Use deception to make you accept collect calls or pay for telegrams. Take or threaten to take your property unless this can be done legally. Contact you by postcard.

If you owe more than one debt, any payment you make must be applied to the debt you indicate. A debt collector may not apply a payment to any debt you believe you do not owe.

You have the right to sue a collector in a state or federal court within one year from the date the law was violated. If you win, you may recover money for the damages you suffered plus an additional amount up to $1,000. Court costs and attorney's fees also can be recovered. A group of people also may sue a debt collector and recover money for damages up to $500,000, or one percent of the collector's net worth, whichever is less.

If you elect not to sue a collection agency, you should still report any problems you have with a debt collector to the state Attorney General's office, both where you live and where the collection agency is located, and the Federal Trade Commission (FTC). Although the Attorney General and the FTC will not resolve individual problems for consumers, they can act against a company if they receive reports that show a pattern of possible law violations.

OFFICE OF THE ATTORNEY GENERAL Consumer Information and Complaints 1275 W. Washington Phoenix, Arizona 85007-2926 Telephone: 1-800-352-8431

Consumer Response Center Federal Trade Commission 600 Pennsylvania Ave, NW Washington, DC 20580 Telephone: 1-877-382-4357 Debt Re-Negotiation. There are companies that promise to reduce consumers’ debt, negotiate with creditors, and stop harassment from debt collectors in exchange for various fees. Some such firms are legitimate and actually initiate active negotiations. I've also read of firms which are frauds, taking your fee, and simply sending your creditors a change of address, or other document such that you don't hear from the creditor again for some time - long enough for the "agency" to collect a pile of fees, and disappear. Investigate carefully before you make any payment. YOU also have legal responsibilities.

You could be charged and prosecuted for mail or wire fraud if you use the mail or telephone to apply for credit and provide false information. It's a federal crime to make false statements on a loan or credit application, or to misrepresent your Social Security Number. For example, numerous "new credit file" claims urge you to obtain an "Employer Identification Number" (EIN) from the Internal Revenue Service, and use it as a new Social Security Number. Getting or using an EIN under such false pretenses may be criminal.