Highlights

• A financial plan should be an annual exercise.
• Saving is job one after paying off credit card debt.
• Less market risk means more inflation risk.

“Economic conditions … are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.”

That sentence, pulled from an Aug. 9 Federal Reserve statement, should send a chill through the heart of any serious saver. Because with those words, the Fed essentially said savers shouldn’t expect higher rates on their deposits for at least two years.

Ouch.

The Fed doesn’t directly set the rates banks and other depository institutions pay consumers on certificates of deposit, or CDs, checking accounts, savings accounts and the like. But the Fed has plenty of influence over the level and direction of consumer rates. When Fed rates stay low, banks normally follow its lead.

That bleak outlook begs an obvious question: What, if anything, can savers do to improve their position in light of the Fed’s decree?

Here are three sound strategies.

Get a financial checkup

Even if you’ve already crunched the numbers, created a budget, cut back discretionary expenses and laddered your CDs, financial planning shouldn’t be a once-done task, says Ronit Rogoszinski, a wealth adviser at Arch Financial Group in Long Island, N.Y. Instead, she says, “this exercise needs to happen every year, regardless of what the economy is doing.”

If you haven’t updated your financial plan in a while, start from square one. Review your income, expenditures, accounts and investments. A strategy that didn’t make sense last year or in 2008 or 2009 might be a good option today. One idea to consider is a CD ladder — an investment strategy in which you put your money in multiple CDs with different maturities — with a longer time horizon, perhaps two or three years, instead of a year or less, Rogoszinski says.

A financial adviser or consumer credit counselor can help, she says, especially if you already have pinched every penny and have nowhere else to turn.

“If you feel paralyzed and just don’t know how to make ends meet, speak to someone who can very objectively look at your expenses from buying gum to paying your mortgage, and see how your income is structured,” she says.

Build your savings

Regardless of interest rates on savings accounts, saving is a must and should be top priority.

“A savings mentality is something you need to have during good times and bad times,” Rogoszinski says. “We all have to get into the mode of ‘I’m going to put money away first, and then pay my bills, and then, if there is something leftover, I will spend it on something I don’t really need.’”

One exception: consumers with credit card debt at sky-high interest rates. They might need to forgo putting money in a savings account, so they can pay off what they owe, says Alfred McIntosh, principal at McIntosh Capital Advisors in Los Angeles.

Consider riskier investments

Savers who have zero risk tolerance might be loath to move cash into stocks or bonds, yet there are risks of not doing so as well.

Rogoszinski says the choice is often less about financial objectives and more about experience, style and mindset. Someone who has a lifelong history of buying municipal bonds or CDs isn’t likely to plunge into preferred stocks or even mutual funds that buy preferred stocks today, she says.

Still, these cautious types might want to experiment, reallocating 10 percent of their portfolio at a pace of 1 percent per month, she says. If that gets uncomfortable, the pace can be slowed, stopped or reversed, moving money back to safer investments. Buying a dividend-oriented mutual fund rather than a single company stock can help to diversify the risk.

McIntosh says savers who avoid market risk must still contend with inflation risk.

“One risk is that your investment will drop in value,” McIntosh says. “But the other risk, which is equally as great, is that your investment won’t increase at a rate of inflation plus taxation. Inflation is around 2.5 percent. Money funds are paying less than 1 percent, and they’re going to be taxed on that, so they’re already losing money.”

Investments currently on his shopping list include short-term bond funds, inflation-adjusted Treasury funds, international bond funds and emerging market bond funds, particularly those issued in the local currency.

“Emerging markets are doing really well right now economically and to the extent that their currencies will be strong versus the dollar, (that’s) an added benefit.” McIntosh says.

Either way, savers should take to heart what may be Rogoszinski’s best tip: “There needs to be a lot of cold objective thinking … because every single thing you do carries a certain amount of risk. It’s really a matter of aligning your risk tolerance with the right product structure.”

And that’s true regardless of what the Fed says or does next.

Read more. This Article was Posted on: Beat Low Rates On Savings Accounts | Bankrate.com http://www.bankrate.com/finance/savings/beat-low-rates-savings-accounts.aspx

Avery Allen isn’t your typical 12-year-old. Unlike most of his peers, he doesn’t see his parents as a limitless source of financing, nor does he assume that his own financial acumen will develop on its own.

That’s why Allen recently turned to Alfred McIntosh, a certified financial planner, for help deciding on a good investment strategy. “My parents bumped up my allowance,” says Allen, whose desire to work with McIntosh at the Los Angeles-based McIntosh Capital Advisors Inc., surfaced after the youngster completed a six-week financial course based on the book Rich Dad, Poor Dad. “With the increase I also took on more responsibility for my own money,” says the youngster.

Allen took that new role seriously. He asked the financial planner if investing in stocks and bonds was an option for a 12-year-old. He also wondered what options (beyond a traditional savings account) someone his age might have for growing his money.

In Avery’s case, says McIntosh, the key financial concern is cash flow, or the “need to make money” through sources such as allowances, gifts from relatives, and part-time jobs. “When you work with someone this young, the primary focus is on generating some income and investing it in a way that allows them to buy the things they want,” says McIntosh, who sees the pre-teen years as a transition time for most children as they begin to realize the value of fiscal responsibility. “If you can instill that understanding before they go off to college, they’ll wind up managing their finances more effectively and avoid the credit card debt that many graduates have.”

McIntosh gave Avery all the information he sought. McIntosh, who works on a fee-only basis (receiving compensation directly from clients on an hourly, percentage of assets, or flat annual fee basis) is no stranger to the Allen family. Avery’s parents, Harold, 50, and Allyson Allen, 45, have worked with McIntosh for three decades. Avery’s maternal grandparents, Tony, 70, and Vivienne Wynne, 71, are clients as well. The Allens first worked with McIntosh to get their finances in order, and have since introduced their young son and Allyson’s parents to the planner for advice on preparing for his own financial future. In this article, we’ll look at some of the lessons this multigenerational family has learned.

Starting in the Middle 
Young Avery’s consultations with the family financial planner are becoming a rite of passage in the Allen family. Harold and Allyson were first in line to sign up for McIntosh’s advice in the early 1980s. The relationship started when Allyson needed guidance on properly allocating assets within her 401(k) retirement plan. “At the time I didn’t even know the difference between a fee-only and a commission-based planner” says Allyson, a physician’s assistant, “but Alfred came highly recommended by a friend, so I set up a meeting with him.”

Allyson’s initial list of financial planning needs included retirement planning, cash management and budgeting, tax and insurance assistance, investment advice, and portfolio management. Those needs have changed somewhat over the years as the Allens had children (along with Avery, they have a 6-year-old son, Harrison) and progressed in their careers (Harold is a medical sales professional). The couple, for instance, worked with McIntosh to set up 529 college savings funds for both of their sons. As the years went by, their planning shifted away from cash flow management to retirement planning. They moved from a comprehensive planning program to a more “modular” approach wherein McIntosh provides specific services instead of a broad plan. “[Their]  focus has changed, most recently about five years ago, when they enlisted me to help with portfolio management and investments,” says McIntosh, who manages 401(k) plans for both Allyson and Harold. “Alfred now manages our entire portfolio,” explains Allyson, “which includes stocks and bonds that fit well with our plan for retirement.” The Allens and Wynnes agree that having a planner who takes a holistic approach to their finances has been beneficial, since many pieces of the puzzle (college savings, retirement planning, portfolio management, and so forth) are interrelated.

As the Allens and many other investors discovered last year, financial planners deliver more than just advice and counsel. During the recent stock market downturn, the Allens worried that the kids’ 529 accounts—which they plan to use to pay 50% of their higher education cost, says McIntosh—were shrinking. “I kept calling Alfred for reassurance,” says Allyson, who typically meets with McIntosh in person once a year and consults by phone and/or mail on an as-needed basis, for example, when her quarterly 401(k) statements arrive in the mail and need attention. “He reminded me that the same situation occurred in the 1980s, and that we came through it just fine.”

The Allens are on track to achieve their retirement goals, according to McIntosh. They are contributing at least the corporate matching percentages to their corporate 401(k) plans and are also putting money into their Roth IRAs. He predicts that the couple will need about $1.86 million in liquid assets to realize their retirement lifestyle (which includes the purchase of a beach home).

Generational Planning 
Like the Allens, the Wynnes signed up for McIntosh’s fee-only services based on a referral—from their daughter Allyson. After hearing Allyson’s glowing stories about how her planner was helping with important financial decisions, the Wynnes set up an appointment. It was the late 1980s and Vivienne, a recently retired American Airlines employee, says she needed to roll her corporate retirement account.

“Whomever American Airlines was using to allocate my retirement plan wasn’t meeting my expectations,” recalls Wynne, whose husband worked for the Los Angeles fire department for 30 years. The pair originally used the financial planner’s portfolio management capabilities, but over time have added other services. “Having successfully rolled over Vivienne’s retirement plan, the Wynnes called on me to manage other assets and handle additional financial issues for them,” says McIntosh. Take estate planning, for example. While not necessarily on the Allens’ radar screen right now, the Wynnes are taking measures to ensure that their hard-earned assets are distributed appropriately after their deaths. “We’ve reached that age where we have to start considering the tax implications and other issues involved with estate transfer,” says Vivienne, who also relies on her financial planner to help make prudent decisions regarding retirement distributions. “At age 71 you have new considerations, based on what Uncle Sam says you can and can’t do with your money.”

McIntosh says the Wynnes planned their retirement before becoming his clients, and that they have since rebalanced and reallocated their investment accounts in order to reduce overall risk, while at the same time improving their returns. “These changes protected their assets during the last two market downturns,” says McIntosh, who believes that the Wynnes are well-braced to sustain their retirement lifestyle, despite threats like inflation. “I keep them aware of the impact of inflation, and let them know that their portfolios must be managed in a way that keeps pace with it,” says McIntosh. “Because they are retired, for example, they can’t invest solely in fixed-income options. Instead, we put a percentage of their portfolio in equities, which historically provide more protection against inflation.”

According to McIntosh, the most significant difference between the Allens’ and the Wynnes’ financial situations is that the latter are focused on making sure  their portfolio carries them through retirement, and that they “don’t run out of money.” Living in the same home they raised their children in, the Wynnes are relatively debt-free, and enjoy a simple lifestyle that is characteristic of their generation.

The Allens, on the other hand, have young children who they intend to send to college, a mortgage, and other financial responsibilities that Allyson’s parents are without. Even with two full-time incomes, McIntosh says the Allens have to pay careful attention to budgeting and cash management. “When you have a four-person household in Los Angeles it’s easy to rack up a lot of expenses,” says McIntosh, who calls the Allens’ financial planning needs “much greater” than the Wynnes’. “They have to worry about meeting current household expenses, funding their kids’ college educations, saving for emergencies, and planning for retirement all at once. That can be daunting.”

The Allens may be able to learn from their parents’ generation, who paid off their homes and cars, and didn’t readily sign up for financial burdens like credit cards. McIntosh agrees, reminding consumers that mortgages alone can curtail a family’s retirement plans. “If someone has a mortgage of $2,000 a month going into retirement, they’ll need about $600,000 in retirement funds to cover that expense alone,” says McIntosh, who sees satisfied mortgage debt as a “big plus” for anyone looking to retire in the next five years. “Someone whose home is paid off needs far less at retirement than the person with a mortgage.”

Allyson credits her early decision to pay a fee-only planner for ongoing services with helping her and Harold work through life’s financial challenges. Now aware of the differences between fee-only and commission-based financial planners, both Allyson and Vivienne feel they made the right decision to go with the former. Allen expects the third generation of her family to participate once they begin investing and planning for retirement on a regular basis.

“The best thing about fee-only is that Alfred never pushes any products on us, and keeps our best interest in mind,” says Allyson. Wynne concurs, and says that she was particularly impressed with the planner’s ability to go above and beyond what her American Airlines retirement planner could provide in terms of investment choices and strategies. She advises other consumers to consider the various financial planning business models (commission-based, fee-only, or a hybrid of the two; See “How to Choose a Financial Planner,” Moneywise, December 2009) before selecting the right one. “American did what they wanted with my money,” says Vivienne, “and it wasn’t always necessarily in my best interest.”

Compare and Contrast
Within the Allen and Wynne households, there are differences in the way day-to-day finances are handled. Allyson confers with her husband on important financial decisions. “We’re on the same page” when it comes to the household, she says  “but he has a lot of financial responsibility at his job, so I handle most of the financial stuff.”
The Wynnes have a slightly different setup, as would be expected from members of the nation’s Silent Generation, that cohort of Americans born between 1925 and 1942. “I leave most of it up to Tony because he has a better knowledge of financial matters,” says Vivienne. “He’s also a bit thriftier, and wants to make sure the money is handled correctly all the time.”

The two women talk frequently and openly with each other about their families’ financial strategies—including investment opportunities, the current economic crunch, and the children’s college funds—that are sure to carry on to the third generation. According to McIntosh, the long-term plan is for the Wynnes to leave their primary residence and any remaining liquid assets (in no specific dollar amount) to their children. The Wynnes have also set aside assets for their grandchildren, and intend for that money to be used for college. However, McIntosh expects the third generation of the family to use a different financial approach. He says the recent economic crisis and the impact that it’s had on working families will go a long way in convincing someone Avery’s age of the value of saving.

“Anyone who lived through the Great Depression was forever changed by it, and came out smarter and more conservative about money,” says McIntosh, who is looking forward to helping the third generation develop a financial plan for the future, while continuing to assist  the Wynnes and Allens achieve their financial goals. “It’s very rewarding to see how solid financial planning can make a difference across generations.”

“The best thing about fee-only is that Alfred never pushes any products on us, and keeps our best interest in mind,” says Allyson. Wynne concurs, and says that she was particularly impressed with the planner’s ability to go above and beyond what her American Airlines retirement planner could provide in terms of investment choices and strategies. She advises other consumers to consider the various financial planning business models (commission-based, fee-only, or a hybrid of the two; See “How to Choose a Financial Planner,” Moneywise, December 2009) before selecting the right one. “American did what they wanted with my money,” says Vivienne, “and it wasn’t always necessarily in my best interest.”

Compare and Contrast
Within the Allen and Wynne households, there are differences in the way day-to-day finances are handled. Allyson confers with her husband on important financial decisions. “We’re on the same page” when it comes to the household, she says  “but he has a lot of financial responsibility at his job, so I handle most of the financial stuff.”
The Wynnes have a slightly different setup, as would be expected from members of the nation’s Silent Generation, that cohort of Americans born between 1925 and 1942. “I leave most of it up to Tony because he has a better knowledge of financial matters,” says Vivienne. “He’s also a bit thriftier, and wants to make sure the money is handled correctly all the time.”

The two women talk frequently and openly with each other about their families’ financial strategies—including investment opportunities, the current economic crunch, and the children’s college funds—that are sure to carry on to the third generation. According to McIntosh, the long-term plan is for the Wynnes to leave their primary residence and any remaining liquid assets (in no specific dollar amount) to their children. The Wynnes have also set aside assets for their grandchildren, and intend for that money to be used for college. However, McIntosh expects the third generation of the family to use a different financial approach. He says the recent economic crisis and the impact that it’s had on working families will go a long way in convincing someone Avery’s age of the value of saving.

“Anyone who lived through the Great Depression was forever changed by it, and came out smarter and more conservative about money,” says McIntosh, who is looking forward to helping the third generation develop a financial plan for the future, while continuing to assist  the Wynnes and Allens achieve their financial goals. “It’s very rewarding to see how solid financial planning can make a difference across generations.”

11 Signs You May Need a Financial Adviser

Families and individuals seek out financial advisers for any number of reasons. The National Association of Personal Financial Advisors has compiled a list to help you determine whether you need professional help with your finances. Here are some reasons people decide to work with an adviser:

1.  You have a sense of confusion and “information overload” about your finances.
2. Your financial planning has been forced to the back burner by your career and personal life. You hate having to think about finances and investing but know it is important to your family’s ongoing security.
3. You want to clarify your personal goals as they relate to money.
4.  You’ve reached your “middle” years, and need to plan for your last 30 years.
5.  You’ve decided to retire from the work that’s providing most of your income, and you need help managing your savings to last through retirement.
6. Your investments have been neglected for too long and you don’t know what to do about it.
7. You used to enjoy taking care of your investments, but now you want to devote more time to other pursuits.
8. You’ve been through the ”canned” investment plan programs some financial firms offer, and you now want to work with someone who’ll tailor a plan specifically to you.
9. You’ve become instantly wealthy—whether it’s by way of the lottery, stock options, an inheritance, or a legal settlement.
10. You want to work with someone who is not compensated by commissions so you can have a totally objective financial planning engagement.
11. You want to work with a professional who’s skilled in all financial planning areas, such as goal-setting, taxes, retirement, investments, educational funding, risk management, and estate planning.

The bond market sell off may not be over just yet. The message for investors: stick to the short end

NEW YORK (CNNMoney.com) – The Fed is close to ending its interest rate hiking campaign, but Treasury yields may yet have some room to climb. What’s a bond investor to do?

Central bank policymakers are all but certain to hike the target for the Fed’s key short-term interest rate to 5 percent Wednesday, but many market observers are expecting the Fed to pause with its now 22-month old rate-hiking campaign in late June.

With the Fed almost done raising rates, Treasury bonds, whose prices move inversely to yields, are likely to become more attractive to investors.

“If you look at history, every time the Fed has stopped raising rates, bonds as an investment have done very well a year and a half later,” said Michael Cheah, manager of the SunAmerica GNMA and SunAmerica U.S. Government Securities fixed-income mutual funds.

Financial markets generally have interpreted an end to rate hikes as a sign the economy is slowing, and in times of an economic downturn, demand for government bonds — which are considered safe-haven investments — tends to rise, along with price.

But it can take months before the effects of monetary policy are felt in the market, and several bond analysts said Treasury yields aren’t likely to drop off sharply until the end of the year, when an economic slowdown becomes more evident.

That leaves many analysts expecting Treasury yields to keep rising for the next few months.

“We think bond yields still have some room to go before they peak out in the 5.25 percent range in the summer,” Brian Bethune, U.S. economist for Global Insight, said, referring to the yield on the benchmark 10-year Treasury note.

Stay short

Bonds face tough competition for investors from stocks, which have been on a tear lately, as well as from high-yield savings and money market accounts, whose rates have soared above 4 percent. But the tide may be starting to turn for bonds.

“It’s been a tough four months for most bond funds, but with the Fed nearing an end to its cycle, bond funds are starting to look more attractive, particularly short-term bond funds,” according to Morningstar analyst Scott Barry.

He likes shorter-dated maturities since their yields are nearly as high as intermediate and longer-term bonds but don’t carry as much risk. Some of his top picks are Fidelity’s Short-Term (Research) and Ultra-Short Bond (Research) funds, as well asVanguard’s Short-Term Bond Index (Research), which have solid track records and low management costs.

Andrew Clark, a senior research analyst at mutual fund firm Lipper, also recommends shorter-dated maturities. He said there’s risk on the longer end of the yield curve since longer rates are likely to rise, even if the Fed pauses in June. (Confused about yield curves? Click here.)

“If you want to be preserving capital, as best as you can with a bond fund these days, you want to be fairly short,” he said. Shorter-dated bond prices tend to be less sensitive to interest rate changes than longer-dated bonds.

But short rates may start to come back down over time, according to Margo Cook, head of fixed-income management at the investment arm of the Bank of New York. “I think the intermediate part of the curve is attractive,” she said, referring to two and five-year notes.

But analysts cautioned there’s no road map for where rates will go when the Fed takes its foot off the brake, since rates will ultimately be determined by the market and economic forces. Hence, it can be tricky for investors to time the market.

To choose an investment strategy, investors need to determine their risk appetite as well as their objective and time frame. “Yields are pretty attractive right now, the question is what is the investor horizon? If they’re strictly trading, that is a different objective from looking just for yield pickup,” Bethune said.

Alfred Mcintosh, a certified financial planner in Los Angeles, said he’s staying away from bonds maturing beyond 10 years and will only feel more comfortable moving money to mid-term maturities when the Fed makes a strong statement it’s ready to stop raising rates.

To smooth out volatility in his clients’ portfolios, he recommends spreading investments between corporate, government, high-yield, and international bonds.

“Rising interest rates won’t affect all of them the same way and that reduces volatility,” he said.

Retiring as a single person presents special challenges. Here are some tips for planning ahead

Whether it’s intentional or not, 19% of men and 40% of women over 65 live alone. This includes people who may be divorced, widowed, or just temporarily without a partner.

Because of the inevitable changes that arise with aging, including some physical limitations and, for most people, a reduction in income, living alone in retirement poses special issues that should be addressed up front. Among the top issues are getting and paying for necessary care if you become ill or disabled, choosing someone to make key health and financial decisions for you in these cases, and structuring a rewarding lifestyle that guards against loneliness and isolation.

The majority of older single women may face especially difficult choices because on average they live longer, but have less retirement savings and other resources to rely on than men. The Web site of the Women’s Institute for a Secure Retirement has extensive information on women’s retirement issues.

Individual Planning

But for solo retirees, regardless of age and sex, as well as for paired retirees, the basic challenge is the same: to plan and save ahead of time, choose a retirement date and lifestyle, and know you’ll be able to afford it.

John LeBlanc, a financial planner in Boston, says that many single people “tend to procrastinate [in planning]. They don’t have the partner to push them along.” This is a mistake because single retirees don’t have the advantage of two Social Security checks, 401(k)s, or investment accounts to pay their bills.” LeBlanc says that in his experience, the cost of one person living alone is more than half the cost of two people who live together.

Joan Gutknecht, a planner in St. Petersburg, Fla., also finds that many single people lack “a person with whom they can discuss confidently and confidentially” their financial issues. If you feel that way or need technical help, you can work with a planner to develop your retirement strategy. Otherwise you can try to do it yourself, using tips such as those in one of my previous columns (see BusinessWeek.com, 5/10/01, “Retirement Planning for Do-It-Yourselfers”).

Health-Care Concerns

In case of illness, even short-term or non-serious, single retirees may not have a family member or friend who’s available to help out, so a key part of any plan should be preparing for two aspects of potential health-care needs: who will provide the care, and how to pay for it. “Think through what your support system would be should you face incapacity,” says Susan Elser, a financial planner in Indianapolis. “If you needed the typical hip replacement, who would take care of your home? Who would care for your pets? Will it be your children? Your friends?”

Often, the answer will be one that costs money—visits by a home health aide or an in-home companion, or moving to an assisted living situation or a nursing home. In 2006, the average cost of a private room and bath in assisted living was more than $35,000 per year; the average nursing home cost for a private room was $206 per day, or $183 per day for a semiprivate room; and the rate for a home health aide was $19 an hour, or $17 an hour for a homemaker or companion. These costs vary widely depending on where you live. The MetLife Mature Market Institute, a research organization, lists the costs by state for assisted living and for nursing homes and home health care.

Jack Bejna, 67, of Seminole, Fla., retired as a sales engineer for GTE 10 years ago. He has long-term care insurance because “being single, one of the fears we have is you’ll outlive everyone else, so you’ll be stuck when you’re incapacitated and your support group has died.” If he gets into this situation, he figures that the insurance “at least will get me into some place where they could take care of me.”

Premiums and POAs

The average annual premium for policies covering care in either the home or a nursing home was nearly $2,000 in 2005, according to the latest federal government figures. The cost rises with your age. Alfred McIntosh, a financial planner in Los Angeles, suggests buying a policy by the time you’re in your late 50s, before premiums escalate too much and before you may develop preexisting conditions that disqualify you or raise your premiums. But whether this insurance is the best move for you depends on several factors, including health status and medical history, age, and availability of other financial resources. To help evaluate insurance and other options for paying long-term care costs, see the Web site for the federal Administration on Aging.

A related issue for solo retirees is appointing someone to make health-care or financial decisions if they’re incapacitated. Tom Medsger, 67, retired earlier this year from his job as art director for a Los Angeles publishing company. But 10 years ago he gave his nephew, a policeman, power of attorney (POA) to make health and financial decisions for him and serve as executor of his will. The AARP Web site has information on financial POAs and the American Bar Assn. addresses POAs on its Web site.

Relishing Retirement

Once you’ve put your financial, health-care, and legal houses in order, it’s time to focus on the fun side of retirement—enjoying your newfound time. Medsger, the former art director, is excited about his upcoming trip to Mexico to serve as a volunteer English teacher. Bejna, a self-described “consummate rail fan” who treasures his forays around the country to museums and other railroad landmarks, says that in retirement he does “pretty much what I want.”

And therein lies the attraction of solo retirement. Financial planner Elser points out that there’s “a lot more flexibility. Finances are always at the top of the list that a couple argues about. As a single, you have full control over the spending as well as the flexibility” to choose the lifestyle that suits you, with no compromises required.

In addition to writing Your Retirement for BusinessWeek.com, Hoffman is the author of The Retirement Catch-Up Guide and Bankroll Your Future Retirement with Help from Uncle Sam. You can contact her through her Web site, www.retirementcatchup.com.

Creating a winning bond strategy: with the right approach, bonds can achieve outstanding returns in a volatile market. Here’s how:

While shopping for mortgages to refinance her three-bedroom, loft-style home in a Los Angeles suburb and her vacation condo in Nevada, Karen Ellis couldn’t find anything better than a 5.8% interest rate on a 30-year fixed loan. That’s lower than the 7.25% rate she now carries, but hardly the giveaway she could have gotten in 2003 when mortgage rates fell below 5%. It’s important for Ellis, a 57-year-old pathologist, to trim as much cost as she can now because her expenses are rising in a number of areas. She’s seen gas prices spike in the last year, which had her shelling out $45, which is 50% more than the year prior, each time she filled the tank of her Lexus sedan.

A conversation with her financial adviser, Alfred McIntosh of McIntosh Capital Advisors L.L.C., hipped Ellis to the fact that interest rates were rising and she needed to make some adjustments. With roughly 40% of her investments in bonds, Ellis’ portfolio could suffer if rates go even higher. Since Ellis wants to retire from her job at a local hospital by 2009, it’s important that she prevent her principal from taking a major hit before then.

McIntosh helped Ellis come up with a solution. They moved a portion of Ellis’ bonds to shorter maturities–the date when the bond’s value should be paid–because they are less sensitive to interest rate swings. High-yield bonds, better known as junk bonds because of their low credit rating and low sensitivity to interest rates, were added, with a smattering of mutual funds that invest in bonds overseas. Finally, McIntosh recommended church bonds: debt issued by houses of worship that pay higher rates. Church bonds with a 6 1/2-year maturity yield between 5.2% and 5.9%. Bonds with a 9 1/2-year maturity yield between 6.2% and 6.9%.

While most investors have been focusing on the equity portion of their portfolios, conscientious investors like Ellis are tweaking their bond portfolios in light of today’s economic forecast. Bonds should be an important part of everyone’s investment strategy. “I’m afraid that interest rates are going higher,” says Ellis, “that’s why I have diversification in my bonds, so they provide more security in my portfolio.”

If interest rates rise, some bond holdings could take a hit that individual investors wouldn’t expect from such safe instruments. Bonds are supposed to he that portion of every investor’s portfolio that helps them sleep at night. You’re not likely to get rich, but you’re not likely to lose your shirt either. That’s not to say that there isn’t any risk

For the last five years, the average bond portfolio has returned a cumalative 46.4%. The same investment in the Standard & Poor’s 500 Index, however, has produced a 8.6% loss. Even though bonds have performed better than equities in the last five yeas, long-term interest rates are now at 40-year lows. Bond prices drop when interest rates rise because investors aren’t willing to pay premium prices for older, lower-yielding bonds when new ones pay more.

Going forward, industry observers are predicting that bond performance will be much slower. “The tailwind for bonds has abated,” says Edwin Ek, chief investment officer of RhumbLine Advisers in Boston (No. 3 on the BE ASSET MANAGERS list with $7.4 billion in assets under management). “There’s no doubt that we’ve hit bottom and are bouncing back up.”

Some analysts are even more gloomy. “We think we’re in a bond bubble,” declares Mark Lay of MDL Management in Pittsburgh (No. 5 on the BE ASSET MANAGERS list with $3.81 billion in assets under management). Lay’s firm, which specializes in bond investing, believes interest rates have stayed low for so long because investors around the world have turned to bonds as a safe haven to park their money in light of so much global uncertainty. That huge demand has boosted long-term bond prices and sunken yields.

But Lay says economic changes are afoot. The U.S. gross domestic product is now growing at 4% a year, a healthy clip of economic activity after the recession of 2001 and 2002. When the economy is doing well, investors prefer stocks, so they’re likely to pull money out of bonds, causing prices to fall and rates to rise.

Another argument that rates will rise is that inflation, long thought dead, has recently resurfaced. Just look around. Job-based health coverage costs are 60% more today than they were five years ago. Home prices in areas like California and Nevada have surged 80% in the last three years, according to the National Association of Realtors. Inflation, the byproduct of increased economic activity, is every bondholder’s fear because it erodes the total returns of fixed-income portfolios.

To curb inflation, the Federal Reserve raised short-term rates six times, from 1.0% to 2.5%, since June 2004. But the Fed only controls the shortest rates. The market takes care of the rest. Ten-year Treasury yields haven’t budged at all; in fact, they’ve fallen. In January 2004, the 10-year logged a 4.26% yield. A year later, it had a 4.19% yield. With yields so stubbornly low, it might be a cue that all the hype about the improving economy may be just that.

“I think that bonds will have a decent year,” says Mary Pugh, president and CEO of Pugh Capital Management in Seattle (No. 15 on the BE ASSET MANAGERS list with $674 million in assets under management). “They’ll be in more of a trading range, with a possibility that rates will go down.”

Pugh’s view of bonds stems from her bearish thoughts on the economy. She believes that globalization and technology will put downward pressure on inflation and employment. At the same time, economic activity could be moderate because the refinancing boom has slowed and consumers don’t have as much money in their pockets to spend. Overall, Pugh thinks the 10-year bond could end the year just about where it started.

“I know I may be in the minority,” says Pugh, but it often pays to heed contrarian calls. A year ago, the investing pros thought interest rates were going to rise too. They were wrong.

So what’s a bond investor to do? We’ve laid out four bond strategies that should help you make money in the asset class no matter which way the economic wind blows. We’ll also tell you how each type of strategy works when interest rates rise to help you minimize any damage.

Laddering For the last five years, G.G. Washington, a retired information technology director, has devoted the bulk of his fixed-income investing to laddering, a strategy that spreads money among different investment bonds that mature at different intervals and are reinvested at the best possible rates up until a designated time horizon. Washington divides his money into five equal pieces. Every two years, he invests in bonds with maturities ranging from two to 10 years. Among his holdings are bonds from General Electric, Loews, Lehman Brothers, and Ford, his former employer. Because bondholders are taxed on income from corporate bonds, Washington holds them in his 401(k), which is tax-deferred.

When a bond matures, Washington puts the money into a new 10-year bond. Every two years, a fifth of his portfolio comes due and he invests the proceeds into the longest dated bonds available.

“These are investment grade bonds, so I was pretty comfortable the corporations would not default,” says Washington, 58, who now does IT consulting for businesses and schools. “I hold them to maturity, so I’m not impacted by interest rate fluctuations.”

Should rates rise, though, Washington can reinvest at the higher rate when a bond matures. If they fall, which has happened over the last few years, the overall yield of the bond portfolio will fall too if reinvesting is done in lower interest bonds. However, this strategy allows for reinvestment in other fixed-instruments until corporate bonds are favorable. But, Washington still has a corporate bond in his portfolio issued by GTE North Inc. that yields 8.25%. He purchased the bond in 2000 when rates were higher. The bond matures in 2005.

By laddering between one and 10 years, “effectively, what you end up with is the risk characteristics of a five-year bond,” says Steve Bohlin, manager of the Thornburg Limited Term Income Fund in Santa Fe, New Mexico, which uses a laddered approach. “Historically that’s been the best risk-reward relationship.

Most advisers caution that you’ll need at least $10,000 to invest per bond. Otherwise the hefty commissions will greatly reduce the returns you’ll receive. Investors can achieve results similar to Washington’s laddering strategy by investing $10,000 or more through bond mutual funds.

Intermediate Bonds You would think that with interest rates being so low, you’d want to invest in longer dated bonds because they’d pay more. Hardly.

“Given the current interest rate environment, I think long-term bonds are not a good choice,” says Stephanie Hancock, financial planner and owner of Hancock Wealth Advisory in Los Angeles. “I tell my clients to stay in the one-, two- and three-year range.”

If the purpose of your bonds is to provide stability to your over-all portfolio (as opposed to generating income to live on), invest in bonds that are the least volatile. Prices for shorter dated investments don’t move around as much as those maturing later on.

Of course, short bonds yield less than those with longer time horizons, since investors don’t expect the same kind of reward for lending money for five years as they would for 10. Therefore, a 10-year Treasury note yields 4.17% today, but the five-year sports just a 3.5% yield. “I would be focusing on figuring out the point where you get the most yields for the least amount of interest rate risk,” says Pugh. “For an individual, it’s the intermediate maturities.”

You could put new money to work in the shortest dated bonds to even out longer bond holdings. Or you could sell everything and simply buy within the five-year range. Alternately, you can invest in a fund that plays the intermediate segment of the bond market such as the Vanguard Intermediate-Term Bond Index Fund (800-662-7447). The fund has a 6.8% three-year annualized rate of return.

Junk Bonds Another way to stem the damage from rising rates is to look at junk, or high-yield, bonds–those given a grade of BB or lower by one of the credit rating agencies such as Standard & Poor’s or Moody’s Investors Service. The juicy yields make them less sensitive to interest rates, since investors determine prices by judging a company’s ability to pay back its debt, not the direction of interest rates.

Over the last two years, as the economy has revived and corporate finances have improved, investors have become downright smitten with junk. Whereas in mid-2002, high-yield debt paid over 10 percentage points more than Treasury bonds with similar maturities, today that yield differential is just 3.5 percentage points. Last year, junk bonds returned 10.9% on top of a 28.2% gain the year before–results that bested equities.

“There’s some bang for the buck in high-yield bonds,” says Ek. “You might say that the risk/return is not as fat as it has been, but you are still being rewarded incrementally for taking on that credit risk.”

Extra yield, plus less interest rate sensitivity. Sounds good, right? Not so fast. Putting just 5% to 10% of your bond portfolio into junk bonds is plenty. “When things go bad in high-yield, it happens very quickly,” says Ned Notzon, a bond manager with T. Rowe Price Investments in Baltimore. “It can happen in just a few months’ time. You’re very unlikely to see investment-grade corporate [bonds] behave that way.”

Try a fund like T. Rowe Price High-Yield (800-638-5660). It has an 11.3% three-year annualized rate of return.

Mutual Funds For the vast majority of investors, a low-priced bond fund will suit them fine. Just ask Donna Ginn, owner of a Miami-based organization and management development firm, Ginn Scroggins & Associates. Ginn, who is in her mid-50s, is worried that interest rates will wreak havoc on the 40% of her portfolio she has allotted to bonds. So she’s shortened the over all maturity of her portfolio, bought international fixed-income securities, and added some floating-rate bonds that respond quickly to rising rates. But she’s done it all through mutual funds.

“I know there will be a point when I won’t be working as much, and I don’t want to compromise my lifestyle one bit,” Ginn says. “Bond funds will help me do that.”

Individual bonds certainly have their merits. If you plan to bold them until maturity, price fluctuations don’t matter. The amount you invest is the amount you’ll receive when the bond comes due. Mutual funds, however, price their bonds daily. So when interest rates rise, their returns are likely to suffer. With individual bonds, you won’t pay the 1.14% management fee that the average bond fund charges. But remember, just as you wouldn’t buy one or two stocks and call your portfolio complete, you should have enough diversification so that if one bond defaults, it won’t be your portfolio’s undoing. Given how expensive it is to buy individual bonds, it’s almost impossible to put together a diversified portfolio for less than $100,000

One exception is Treasury bills. They’re simple to buy directly from the Treasury Department in increments of $1,000 and, since it’s the world’s best quality bond, there’s no credit risk. Go to www.publicdebt.treas.gov to find auctions.

If you’re looking for just one all-weather bond fund, try Harbor Bond Fund (800-422-1050). It has a 6.6% three-year annualized rate of return and is managed by Bill Gross, who is considered to be the best bond investor in the world. It’s a virtual clone of Gross’ flagship PIMCO Total Return Bond Fund, without the sales charge.

Karen Ellis portfolio

10% Ultrashort corporate bonds Scudder Preservation Plus Income

22% Intermediate government bonds American Century Inflation-Adjusted Bond and Dimensional Intermediate Government Fixed-Income Fund

18% Intermediate corporate bonds Calamos Convertible Bond and Calvert Income

23% International bonds Oppenheimer International Bond and Payden Emerging Markets Bond

27% High-Yield California Baptist Foundation church bonds One maturing in 2007 yielding 6.3% and another maturing in 2011 yielding 7.8%

40% OF ELLIS’ OVERALL PORTFOLIO IS IN BONDS.

56% Bond Ladder Various corporate bonds

15% Foreign and domestic bonds PIMCO Diversified Income Fund

15% Floating rate bonds PIMCO Floating Income

14% Intermediate bonds PIMCO Total Return

35% OF WASHINGTON’S OVERALL PORTFOLIO IS IN BONDS.

Donna Ginn’s portfolio

40% Intermediate bonds T. Rowe Price Spectrum Income

20% Floating-rate bonds ING Senior Income Fund

20% Long government bonds PIMCO Real Return

20% Short bonds Scudder Preservation Plus Income Fund

40% OPF GINN’S OVERALL PORTFOLIO IN BONDS.

COPYRIGHT 2005 Earl G. Graves Publishing Co., Inc.
COPYRIGHT 2005 Gale Group

Bibliography for: “Creating a winning bond strategy: with the right approach, bonds can achieve outstanding returns in a volatile market. Here’s how”

Ilana Polyak “Creating a winning bond strategy: with the right approach, bonds can achieve outstanding returns in a volatile market. Here’s how“. Black Enterprise. FindArticles.com. 30 Jan, 2012.

COPYRIGHT 2005 Earl G. Graves Publishing Co., Inc.

COPYRIGHT 2005 Gale Group

Son’s college costs undermine retirement prospects for a thrifty Santa Monica woman.

As a divorcee and single mother, Sandy Andrews has been resourceful. When her only son was growing up, she bartered for piano lessons, took in foreign exchange students to help pay the mortgage and skimped on dining out.

But now Andrews, 55, has run out of money-saving ideas. To help pay for college for her son, Chris, she’s stretched her finances too thin. Meanwhile, she’s saved little for retirement.

“It doesn’t look pretty,” said Alfred McIntosh, a financial planner in Los Angeles who reviewed Andrews’ finances. “If she continues at this rate she’ll run out of money when she’s 78 years old.”

Andrews earns $88,000 a year as a registered dietitian at a hospital that’s close enough to her Santa Monica home that she walks to work. She has $204,000 in retirement accounts and $2,500 in rainy-day savings.

Yet she struggles to pay about $2,300 a month on her debts. They total about $260,000 from a mortgage, a home equity line of credit, a car loan and a credit card balance. She is using the home equity line of credit to help fund Chris’ college education in Maine. Largely because of that, she winds up $800 a month short, leaving her further in debt.

“I don’t want to put my son in the position where he has to work so much to put himself through school,” explained Andrews, adding that it took her seven years to pay her way through college. “He needs to have some fun.”

But by paying for Chris’ schooling, Andrews is sacrificing her own financial well-being, McIntosh said.

“My recommendation is to pay for absolutely none of it,” he said. “I am recommending to her in the strongest terms possible not to do this.”

McIntosh, like many planners, believes that middle-income parents short on savings can’t afford — and shouldn’t try — to pay for their children’s college education. Those costs can be devastating at a time when parents need to convert more of what is usually their highest-earning years into retirement savings. Their children have years to pay off their loans, he reasons.

Chris also worries about how the costs of his schooling affect his mother’s finances. The college sophomore works part time and scrimps, even borrowing textbooks from friends, which saves hundreds of dollars.

“I’m mostly concerned about what I can do to help her,” he said.

Last semester, he made the dean’s list at the University of New England in Portland, where his tuition, room, board and fees run about $39,000 a year.

A former Eagle Scout who wants to become an anesthesiologist, Chris earned a scholarship and took out a bank loan and small federal Stafford loans to pay for nearly two-thirds of the cost. His father pays part of the remainder and Andrews contributes about $12,000 a year.

She says she pays about $1,800 a year to cover the interest on Chris’ $15,000 bank loan so his debt doesn’t balloon. She also pays for trips back home and other needs, such as a laptop computer.

From the $100,000 home equity credit line, Andrews has borrowed $34,000 so far, using $18,000 several years ago for needed repairs and kitchen remodeling in her condominium. The rest of the borrowing went to her son’s college costs, and she had expected to tap the line more for his school expenses.

Her only major expense was replacing the Volvo station wagon, which she drove for 20 years, with a Subaru Forester. She took on $13,000 in debt to buy the car in 2007. Her credit card balance is about $9,000, mostly from property taxes and medical expenses.

Overall, Andrews is frugal. Her household budget showed so little for dining out and entertainment that McIntosh worried about her self-sacrificing lifestyle. Andrews said, for example, that she spends only about $5 a month on video rentals.

“The numbers don’t represent a lifestyle of someone who is leading a fulfilling life,” McIntosh said. “They represent the lifestyle of someone who is sacrificing for someone else.”

McIntosh wants Andrews to change that. He wants her to help Chris take out more student loans to cover all of his educational costs, and he suggested several student-aid counseling services.

“If all goes well, he should be able to get the loans to pay for his schooling,” he said.

What’s more, McIntosh said, if Andrews got out of debt and started saving now, she might be able to help her son pay off his student loans later. She also could downsize when she retires, for example, and sell her home. Andrews owes $206,000 on the condo, but she said it’s valued at $750,000.

“The help she may be able to provide for him in the future will be greater than the help she can provide now,” McIntosh said.

Aside from nixing tuition from her budget, McIntosh recommended that Andrews sell her car and get the Volvo, which she still owns, back on the road.

“I don’t see why she needs such an expensive car, especially when she walks to work,” he said.

Meanwhile, he wants her to boost her savings, contributing $300 a month to her Roth Individual Retirement Account and putting away another $300 monthly in an emergency savings fund. Ultimately, he wants her emergency savings to grow to $30,000.

“All it takes is for one illness to completely change the costs,” McIntosh said. “She needs to build up her reserves immediately.”

To help create that fund and give her more cash from her paycheck, McIntosh said Andrews should borrow the remaining amount of her home equity line — $66,000 — and use some of the proceeds to pay off her credit card bills and car loan and save the rest. What makes this usually risky strategy work now is that, under her credit line terms, she could borrow the money at a 2.5% interest rate and could get a savings rate of 3%.

McIntosh’s caveats are that she mustn’t touch the savings and that she continue to pay down the line of credit.

He also suggested that Andrews buy long-term care insurance to offset her medical bills as she grows older.

Andrews also should revive her consulting practice to bring in more money, he said. Previously, she made as much as $4,000 a year by teaching diabetics how to administer insulin. Renting out a room might be another way to supplement her income, he said.

McIntosh also wants Andrews to rebalance some of her existing investments, shifting them into a mix of 60% stocks and 40% bonds. She now has half in stocks and half in bonds.

If she follows his advice, Andrews should have about $6,200 in inflation-adjusted monthly income, or $74,400 a year, by age 66, he said. By 78, she would be out of debt and have enough money to last into her 90s.

Andrews said she planned to talk with Chris about her finances, then help him get financial aid and transfer to a less costly school.

“I feel like I’m letting him down. I really wanted to do this for him, but I can’t,” she said.

She’s also realized how stingy she’s become with herself over the years.

“It’s not like I don’t have a good time,” she said. “But it would be nice to go to the theater or take a class or go to San Francisco and see an exhibit I’ve wanted to see.”

She refuses to sell her car, though, joking that if things got really bad she could sleep in it. She plans to give the Volvo to Chris.

But she’s already putting some of McIntosh’s advice into place, having recently arranged with her bank to borrow the remainder of her credit line and stash it in a savings account. Andrews also decided to devote some of the time she used to spend caring for her stepfather on the weekends to resurrecting her consulting practice.

“I know what I have to do, and now that I have a road map I’ll just start and see where it takes me,” she said.

–

Do you need a money makeover? Each month, the Sunday Business section gives readers a chance to have their financial situations sized up by professional advisors at no charge. To be considered, send an e-mail to makeover@latimes.com. Include a brief description of your financial goals and a daytime phone number. Information you send us will be shared with others.

–

This month’s makeover

Who: Sandy Andrews

Income: $88,000

Goals: Reduce the burden of paying for her son’s college education; save for retirement

Assets: $750,000 condominium; $181,000 in an employee retirement account; $23,000 in a Roth Individual Retirement Account; $2,500 in savings

Debts: $206,000 mortgage; $34,000 home equity line; $13,000 car loan; $9,000 credit card balance

Recommendations: Stop funding her son’s college education and help him get student loans and financial aid. Plow money into savings, contributing $300 a month to her Roth IRA and building an emergency fund of $30,000. Use the $100,000 home-equity line to improve short-term cash flow and reduce car loan and credit card debt. Renew consulting practice to bring in more money. Purchase a long-term care insurance policy. Start spending some money on fun things such as entertainment and dining out.

About the planner: Alfred McIntosh is a certified financial planner with McIntosh Capital Advisors Inc. in Los Angeles.

A financial advisor tells the Pico Rivera residents to postpone their wedding until they can pay for it without going deeper into debt.

To hear Summer Brown and Briana Biddle talk about it, their upcoming wedding and civil commitment will be a fairy tale, complete with happily ever after.

But fairy tales can turn dark pretty quickly, and a look at the couple’s finances shows that the poisoned apple in this story could be money.

Let’s start with the wedding: Brown has a $986 wedding dress and a $2,600 engagement ring, both bought on credit. Then there are older debts: a $20,000 time share on which Biddle is not making payments and $17,000 in student loans for Brown, among others.

To the rescue rides financial planner Alfred McIntosh, who has agreed to look at the couple’s finances as part of The Times’ Money Makeover series.

Except here’s where the fairy tale skids into reality: If the couple, who together earn about $79,000, don’t clean up their finances, happily ever after is going to be awfully hard to reach.

“This situation requires change from both of you, quite honestly,” McIntosh, founder of McIntosh Capital Advisors in Los Angeles, told the women when he met with them this month.

Biddle, 28, and Brown, 27, met four years ago as students at Cal State Northridge and fell in love last year. They share a Pico Rivera apartment with an affectionate, high-energy pack of three small dogs and a cat.

Like many young people, they’re learning the hard way about managing their money — by overspending, underestimating how much income they need and generally getting in over their heads. Now, they say, it’s time to get out of debt and set realistic goals for saving and spending money.

Although a domestic partnership between two people of the same sex is not legally considered to be a marriage in California, Brown and Biddle would assume many of the same risks that married couples run, such as the higher earner potentially becoming responsible for spousal support of the other, according to family law attorney Melissa Mayer of Mayer & Glassman in Los Angeles.

Because they plan to register as domestic partners with the state, any dissolution of the partnership would have to be legally formalized, often involving many of the same costs and complications as in a divorce, she said.

Brown earns an annual salary of $45,000 from a nonprofit social services agency where she counsels troubled children to help them stay with their families. She is working toward her license as a therapist. Biddle makes $34,000 a year from the Greater Los Angeles Agency on Deafness, where she advocates for deaf people who are looking for jobs. It’s exhausting work for both of them.

“I don’t know how she does what she does every day,” Biddle said of her partner’s job. “I get just one case of discrimination against a deaf person, and I’m destroyed.”

Brown has saved $2,200 in a retirement account, and they have $57 in their joint savings account. But their balance sheet is dominated by debt.

Biddle carries about $11,250 in debt on two credit cards, at interest rates of 25% and 30%, and $553 in a line of credit associated with her checking account. Brown carries about $1,450 on one card at a 7.23% interest rate.

They’re racking up 45.2% interest on the credit line they took out to buy the engagement ring because they stopped making payments and the rate jumped. And they owe $3,000 on two more credit cards that they hold together.

Brown also has $17,000 in student loans at 2.48% and a $21,000 car loan at 4.99%.

It was during the discussion of debt that the meeting with the financial planner became tense. With a hollow look on her face, Biddle confessed that she hadn’t been completely straightforward about her debts and spending.

Brown became upset.

“I’m bitter now,” Brown said, “because I’ve done everything I was supposed to do financially and she didn’t.”

McIntosh slipped into his therapist role.

“Since you don’t like letting her down,” he told Biddle, “and you want to do better at this, you have one choice: to get better at this.”

All that debt — and its continued accumulation — is the most pressing problem and the first thing the pair need to address, McIntosh said. “Stop using those cards,” he told them.

Brown and Biddle can start taking responsibility for their finances by holding weekly meetings. To start each one, each should share the progress she has made that week on financial issues. Then they should discuss ongoing challenges. The meetings could end, he added, with a discussion of their goals for the coming week.

He praised them for coming in to see him now, more than a year before their planned wedding. “They need to be on the same page if this marriage is going to work,” he said.

Right now, their financial goals are somewhat different: Biddle wants to get a master’s degree in education. Brown wants to buy a house.

They need to talk about priorities, McIntosh said. But neither of those goals will be attainable if they don’t get their finances under control. Both have spending issues that are sending them into debt at more than $800 a month.

They’ve overspent on going out in the evening and traveling for work and family obligations. They’ve also been to Las Vegas three times and are planning a fourth trip.

Biddle goes to Starbucks twice a day five days a week at a cost of $2.65 a trip. She also smokes a pack of cigarettes every two days, at $5 to $6 a pack.

The costs of just those two habits add up to 10% of her net income, McIntosh calculated.

In fact, McIntosh said, it costs as much to smoke and go to Starbucks as it does to make several trips a year to Vegas.

Because Biddle is the smoker and coffee drinker and Brown is the one who likes to go to Las Vegas, they could each cut back and save significant money, McIntosh said. He urged Biddle to drop her Starbucks visits to once a week and Brown to go to Las Vegas just once a year.

“If Briana is going to give up going to Starbucks each day and smoking, then Summer has to forgo some of the trips to Vegas,” he said. “It’s a beautiful compromise.”

Over the course of their meeting and discussions with McIntosh, the couple decided against getting married at a banquet facility at a country club with a base cost of $11,000. Now they’re looking at renting a local recreation center for less than $1,000. They think they can limit the full wedding budget to $5,000.

McIntosh told them to pay for their wedding with money earned outside of their regular salaries. Brown believes she can bring in about $1,000 a month by throwing parties to sell products out of her home. Biddle predicts she can bring in $1,300 extra a month by doing freelance interpreting for the deaf.

“You should get married only at the time that you can pay for your wedding without taking out any more debt,” he said. “This is making a dream come true.”

The planner also recommended that they reduce the number of their checking and savings accounts to track funds more easily and carry only one credit card at a time to use solely for emergencies. Although both carry short-term disability insurance from the state through their employers, they should look into buying additional long-term disability insurance policies that would replace 60% of their current salaries, if necessary.

Brown, he said, should stop paying more than the minimum required every month for her student loans; she needs to take care of the credit cards first. He praised Brown for applying to a program that could pay off $15,000 of her student loans in exchange for two years of work for an underserved population, a condition she might already be fulfilling.

Biddle runs the risk of being sued by the company that sold her the time share, said real estate lawyer Robert Mayer, who is Melissa Mayer’s father. If that happens, she should contact an attorney, perhaps through a free service such as Public Counsel in Los Angeles.

The couple should also contact a nonprofit credit counseling agency to make their debt payments more manageable.

The couple’s meeting with McIntosh provided a stark encounter with reality. At one point, the two listened to him with tears streaming down their faces.

They swore that they would change their ways — and McIntosh said he believed them.

“Maybe Alfred can be my best man,” Biddle joked.

–

Do you need a money makeover? Each month, the Sunday Business section gives readers a chance to have their financial situations sized up by professional advisors at no charge. To be considered, send an e-mail to makeover @latimes.com. Include a brief description of your financial goals and a daytime phone number. Information you send us will be shared with others.

–

This month’s money makeover

Who: Briana Biddle, 28, and Summer Brown, 27

Income: $45,000 for Brown and $34,000 for Biddle, both with benefits

Goals: Pay for their wedding. Pay down debt. Buy a house. Pay for a master’s degree for Biddle and a doctorate for Brown.

Assets: $2,200 in Brown’s retirement account, $57 in their joint savings account and a 2006 Mini Cooper that Biddle owns outright

Debts: $56,850 in debt, including: Brown’s $17,000 student loan, Brown’s $21,000 car loan, Biddle’s $11,800 in credit card and checking account overdraft debt and Brown’s $1,450 in credit card debt. The couple jointly owe $3,000 in credit card debt and $2,600 in a line of credit for an engagement ring. Percentage rates on the debt are as high as 45.2%. Payments are delinquent on a $20,000 time share that Biddle bought last year.

Recommendations: Consolidate debt to a much lower single rate with the help of an organization such as Consumer Credit Counseling Service.

* Biddle should research, understand and address her time share investment liability.

* Earn extra money, Brown by selling products from home and Biddle by freelancing as an interpreter for the deaf. Use only this extra income to pay for their wedding. Lower the total wedding budget to $5,000.

* Stop using credit cards. Carry only one card for emergencies.

* Brown should stop paying more than the minimum on her student loans and should continue to pursue a program that could pay off $15,000 of those loans.

* Meet weekly to discuss finances: First talk about progress, then discuss ongoing challenges and, finally, set next week’s financial goals. Discuss which should take precedence, a master’s in education for Biddle or a family home.

* Over time, pay off all debts. Review this financial plan regularly.

About the planner: Alfred McIntosh is a fee-only financial planner and founder of McIntosh Capital Advisors in Los Angeles.

Bronwen Aker is forced to move out because of the threat of flooding and may have to sell the house, which has been in her family for decades.

Fire and the resultant threat of flooding and mudslides forced Bronwen Aker from her family’s longtime home in the Big Tujunga Wash — and devastated her finances.

FOR THE RECORD:
Forest fees: A Money Makeover profile of Bronwen Aker in Sunday’s Business section said Aker pays $350 a month to lease U.S. Forest Service property on which her family has a home. Aker pays $350 a year for a permit to use the land.

Single after two divorces, she was living in the forest home she inherited from her grandmother when the Station fire rushed through last summer. The house survived, but the fire denuded the ground and severely increased the risk of flooding, compelling her to move out.

Now, the 45-year-old Web developer is paying rent on a house in Canoga Park while also shelling out for taxes and other expenses on the home in Big Tujunga. She’s got $23,000 in credit card debt — some of it accumulated while she was nursing her grandmother through a long illness and decline — along with other bills.

Her first task is likely to be the hardest, emotionally at least, according to financial planner Alfred McIntosh, who analyzed Aker’s finances for The Times: Give up the family home.

“You can’t move forward,” McIntosh said. “Not with that house.”

Aker has a new job managing Web developers for the company Final Draft, which makes script-writing software. She earns $80,000 a year, a good salary but not one that is large enough to cover her expenses.

Aker spent 11 years nursing her grandmother — the last two full time.

Along with the credit card debt, she accumulated $11,700 in student loans, and she owes about $10,000 in probate fees on her grandmother’s estate. Aker pays $1,750 a month for the house in Canoga Park.

The Big Tujunga house is paid off, but the land is leased from the federal government, which costs $350 a month. Property taxes are $50 a month and flood insurance is an additional $123. Her grandmother’s antiques and other items that had been in the house are in a storage facility, which costs $100 a month.

After income taxes are deducted from her paycheck, she brings in $4,833 a month.

McIntosh estimates that Aker’s expenses exceed her monthly income by $500 to $1,000.

“You have a negative cash flow that is unsustainable,” he told her.

The best way to get out from under the burden of expenses that exceed her income, McIntosh said, is to sell the house. It’s a heartbreaking prospect for Aker. The home has been in her family for more than three decades, and she loved living in the forest.

“It’s paradise. I would dearly love to return to it,” Aker said. “And yet at the same time I can see the value in making a clean break.”

Even if Aker wanted to move back to her home, she believes she could not safely do so for at least three years based on U.S. Geological Survey estimates that it would take that long for sufficient vegetation to grow back and reduce the flood risk.

She can’t afford the $63,000 in her current rent that it would cost her to wait that long, McIntosh said.

That leaves Aker praying for rain. A total loss of the property from a flood could bring her as much as $250,000 in insurance money. But, assuming that’s not going to happen, the planner urged her to sell soon so she can buy elsewhere.

“It’s a historic time,” McIntosh said. “You’ve got historically low interest rates. Real estate is at its lowest point in years. And you have a president who is pressuring banks to lend.”

It’s not clear, however, whether the Big Tujunga house can be sold. A buyer would have to carry the same risk that drove Aker out of the home.

Aker’s house wasn’t burned in the Station fire, but it does sit in a flood plain. If it is damaged by high water or mudslides, the Forest Service might not allow the new owners to rebuild, said Michael McIntyre, district ranger for the Los Angeles River Ranger District. Two real estate agents interviewed by The Times said they would not take listings on federal land.

If Aker is unable to sell, McIntosh urged her to move to a smaller place for at least $500 less than she is paying now for rent. This may mean giving up a yard for her three dogs.

“She will have to adjust to having less until her finances allow her to have more,” McIntosh said.

If Aker can sell the house, her first order of business would be to buy a new home away from the forest, the planner said. If she paid $300,000 and put down $60,000, her monthly mortgage would be $1,400, he said. She would also pay less in income taxes, though her property taxes on a new home would be about equal to the money she formerly paid to the Forest Service. The balance of any proceeds from the home sale should be used to pay off her credit card debt and to fund a retirement savings account.

Aker could save a significant amount on rent each month if she brought a roommate into the Canoga Park house, McIntosh said.

The planner also urged Aker to sell her grandmother’s antiques that she has in storage, both for the proceeds and to eliminate the storage bill. And he suggested that she contact the Internal Revenue Service to see if she can write off the loss of her refrigerator, microwave and coffee maker, which were damaged in a power surge after the fire.

Aker said she thought she could reduce her monthly food bill by $100. But she did not believe that she could reduce any of the $1,200 a year she spends on food, medicine and veterinary bills for her dogs, a shepherd mix and two Chihuahuas.

Aker’s main source of entertainment outside of her home is monthly wine tasting with a friend in Santa Clarita for $30 to $50.

Other than that, Aker said, she could cut out her $109 premium cable bill and switch to Netflix. She also said she could reduce her trips to see movies in theaters from two or three times a month to one.

She’s also planning to go back to teaching computer skills at Glendale Community College on weekends. At $270 for a day in the classroom, that can bring in $10,000 to $12,000 in additional income every year.

She has been in her job at Final Draft for just a few months, ever since a junior high school friend read a posting Aker wrote about the Station fire and its aftermath online. She had said in the posting that she needed work.

Aker also hopes to promote three e-books she has written on Web topics and build a speaking career around her computer expertise.

“I want to capitalize on my ability to translate techno-babble,” she said.

At McIntosh’s urging, Aker appears to have worked up the resolve to sell the Big Tujunga house, though it’s not clear whether there’s really a market for it.

Aker said she might choose to move back into the house temporarily during the dry summer season to save enough money to pay the probate fees on her grandmother’s estate.

She had always calculated that living in the home would help her conserve money, but now she says the risks of remaining there are too great.

“The house has been in my family for 32 years, but it’s time to move on and stand on my own two feet.”

A financial planner pleads with Carole and Dave Lutness to stop working and do the things they love while they still can.

Carole and Dave Lutness prepared for retirement the old-fashioned way.

They paid off their house and cars, accumulated no credit card debt, lived frugally and saved with a religious fervor. Carole, 68, is a psychiatric social worker for Los Angeles County and Dave, 64, is an information technology specialist with Guitar Center. Both still work full time.

“They’re a classic example of how previous generations prepared for retirement,” said certified financial planner Alfred McIntosh, who met with the Santa Clarita couple.

But after all those years of careful financial living, the Lutnesses were not sure they were secure enough to take the next step in life.

McIntosh told them that with some adjustments to their finances they would be more than ready to retire. In fact, he pleaded with them to stop working as soon as possible. If they don’t, they risk squandering their healthy years.

“They need to let go and start living,” the financial planner said. “It’s extremely important for them to do the things they love while they still can.”

The Lutnesses have a combined annual income of $118,000. In addition to having paid off debts and the note on their six-bedroom home, they’ve accumulated a total of about $560,000 in savings and mutual fund investments. Including their home, they have a net worth of a little more than $1 million.

Still, Carole, a lifelong saver and reluctant spender, fretted about financial security.

“I’m scared to touch anything,” she said.

She was also worried that leaving work would mean having to give up her financial support of political, environmental and social matters — the couple routinely donate about 10% of their combined income to causes.

To call Carole a political junkie would be an understatement. Twenty bumper stickers supporting candidates and causes cover her decade-old Toyota. Two years ago, she ran for the California Assembly as a Democrat, but lost. She nonetheless spends most of her weekends and evenings on various political activities.

“I’ve dedicated my life to this,” Carole said.

McIntosh, though, expressed concern that Carole’s political passions had a stranglehold on her that threaten to overshadow what could otherwise be a carefree retirement. Dave, too, has worried that Carole’s politicking has become too intense.

“I’m concerned about her level of activity,” Dave said.

There were also possible medical issues. A breast cancer survivor, Carole had to forgo some political activities during the winter because she was run down and had an inner- ear infection. Both Carole and Dave have family histories of health maladies, including dementia and glaucoma.

For those reasons and because of their solid finances, McIntosh wanted to get the Lutnesses on their retirement journey. He recommended that Carole retire at the end of the year, giving her several months to adjust to the idea. This would also put more money into her retirement account at work and a Roth IRA.

McIntosh wanted Dave to retire four months thereafter when he qualified for Medicare benefits.

In addition to their savings, the Lutnesses’ retirement is secured by two pensions that Carole has coming from the county and a previous employer. McIntosh said the pensions, along with the couple’s Social Security payments, would give them $58,000 in annual income, adjusted for inflation over their lifetimes.

“Why are they delaying their retirement?” the financial planner asked. “They get so much unearned income.”

The Lutnesses have lived frugally, in part from necessity. In the 1990s, Dave was laid off four times within a five-year period from different jobs. Each time, the couple pared back, nixing cable, gardeners and housekeeping help.

Also, their commitment to the environment steered them toward a less consumptive lifestyle. To reduce their carbon footprint, they rarely used air conditioning at the house despite 100-degree Santa Clarita summers. The heat came in handy in another way because they line-dried their clothes.

When Carole’s job was closer to her home, she took the bus and walked to work to save gas. And Dave hasn’t bought a new car in a decade, even though his Toyota Corolla has more than 300,000 miles.

Their lifestyle helped give them the freedom to stop working and relax — most of their living expenses in retirement would be covered by pension and Social Security income. McIntosh said they could dip into savings as need be to fund hobbies and travel.

For their retirement, McIntosh budgeted as much as $20,000 a year for travel for the couple and boosted their entertainment budget to $2,400 from $500 annually. He’s also set aside $5,000 annually for Dave to fulfill a long-held ambition to go back to school and study history.

Although McIntosh would like to see Carole drop politics altogether, he recommended that she combine her sense of social justice with travel by taking trips organized by groups such as the Global Volunteer Corps that allow travelers to lend their talents to those in need overseas.

Meanwhile, McIntosh said the couple should reduce their annual political contributions to $2,000 so they could spend more on hobbies and travel.

The Lutnesses should make some adjustments to their investments, the financial planner said. Although they profess to be risk-adverse, most of their investments are in stocks, either directly or through mutual funds. That’s risky for people near retirement.

“There’s been no comprehensive approach to investing,” McIntosh said.

He recommended that the couple reallocate their savings into a more diversified and conservative mixture, putting 60% of their assets into bonds and money market accounts and the rest into stocks.

The Lutnesses have one grown daughter who is living on her own. She is divorced, but her former husband and her 13-year-old daughter live with her parents.

McIntosh recommended that the Lutnesses consider downsizing by selling their house. The couple said they probably wouldn’t do that until their granddaughter graduated from high school.

The financial planner said that when they sell the home, they could take about $380,000 of the proceeds and buy a smaller place. The rest of the money from the sale could be put aside to offset medical or long-term-care costs, if needed.

The Lutnesses were relieved and even shocked to learn that they could retire.

“To not retire now seems almost criminal,” Dave said.

Carole struggled to accept that their finances were so strong.

“It’s a come-to-Jesus moment,” she said. “I just don’t believe it.”

Carole still had qualms about switching to a more laid-back lifestyle. But as the couple talked in McIntosh’s office, visions of another way of living began to form. Dave said he’d love to travel, go to church again, read books and listen to poetry. Carole said she’d love to spend more time with her granddaughter, write and pursue her hobby of making documentary videos.

The couple penciled in a vacation in August during which they’d discuss how to spend their retirement years.

“I feel that whatever I do has to have purpose and meaning,” Carole said. “I’m not the country club type.”

Do you need a money makeover? Each month the Sunday Business section gives readers a chance to have their financial situations sized up by a professional advisor at no charge. To be considered, send an e-mail to makeover@latimes.com. You also can send a letter to: Makeover, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012. Include a brief description of your financial goals and a daytime phone number. Information you send us will be shared with others

In this month’s money makeover, a family with dreams but living beyond its means is confronted with the financial abyss it could be facing.

Michael Abedor and Maria Magallanes are a couple reaching for a bright, secure future.

He recently started a business in a field he described as “almost recession-proof.” Meanwhile, she’s planning to quit work to get a master’s degree. The West Los Angeles couple are thinking about buying a bigger home and aspire to save enough money to eventually send their two children — now 4 and 11/2 — to college.

When the economy was booming, their hopes may not have seemed unreasonable, even as they racked up thousands of dollars in credit card debt to get Michael’s new business off the ground.

But in a sluggish economy, dreams without careful financial planning can end in disaster.

Alfred McIntosh, a certified financial planner in West Los Angeles who reviewed the couple’s finances, feared it could all go wrong.

“This ship is going down unless they do something,” McIntosh said.

Michael, 40, a former media supervisor in the entertainment business, has been laid off twice. He started his home-based venture as an independent sports ticket broker several months ago.

The couple rely on Maria’s salary as an instructional consultant.

There is the mortgage to pay, household expenses and preschool tuition. And then there is the elephant in the room — credit card debt that has reached $50,000 with no clear plan to pay it off.

“We are making ends meet,” said Maria, 39, sitting in the family’s living room where a Thomas the Train table and toys are stowed behind the sofa. “But there is no wiggle room.”

Maria makes about $78,000 a year. The couple have amassed $128,000 in retirement accounts and $40,000 in a savings account and have an additional $30,000 saved for their children’s college expenses.

Aside from the credit card debt, the couple have a $313,000 mortgage with a 30-year fixed interest rate of 4.875%. The value of the home is about $715,000, giving them about $402,000 in equity.

Michael, who comes from a family of entrepreneurs and furniture salesmen, brims with confidence about his ticket-selling business.

“I really love what I’m doing,” said Michael, who is constantly texting responses to customers contacting him to buy tickets to see local teams such as the Dodgers and the Kings, as well as other teams around the country.

But it’s risky. The business, which entails buying season tickets and then reselling them piecemeal, takes a lot of upfront capital — thus the credit card debt.

What makes it more perilous is that Michael doesn’t have a clear idea of his venture’s finances.

“I’m in the transition of separating the business finances from our personal finances,” he said.

“I haven’t kept track of quarterly figures let alone monthly. Sadly, I’m just juggling too many things and I haven’t done the best job.”

McIntosh said Michael can’t put together a realistic plan for the business until he has a clear idea of its cash inflow and outflow.

The planner suggested he take several steps:

Hire a bookkeeper to help organize the financials and predict expenses; set up the business as an S corporation, a single-member limited liability company or just a plain LLC; look into refinancing the business’ existing debt under the corporate structure; and try to get a business loan for operating cash, instead of using credit cards.

Michael should also consult with a ticket broker to make sure he understands the business to the point where he can make realistic revenue projections.

Maria’s belief that the couple were making ends meet turned out to be optimistic, at best. Examining the family’s spending patterns, McIntosh determined that their monthly expenses amount to $6,350. That’s about $1,840 more than Maria’s after-tax income.

And if Michael keeps accumulating debt things will only get worse, McIntosh said.

“They might be able to get by two or three years pulling from savings and living in debt, but pretty soon it will all blow up,” he said.

McIntosh also worries that starting the business has derailed the couple’s saving for retirement. Currently, Maria puts just $130 a month into her 401(k) account.

McIntosh estimates that for the family to send Maria back to school full time — a move she feels is necessary to increase her earning power — and to pay off their debt, Michael’s business will have to earn at least $115,000 annually.

The planner also said the venture’s income should grow by about 4% each year to fund the couple’s retirement and pay for healthcare and disability insurance if Maria isn’t working.

“I don’t want to rain on anyone’s dreams because I believe all things are possible,” McIntosh said. “But, boy, does he need to deliver.”

In the meantime, the family must trim expenses. McIntosh said the couple should slash grocery bills, which now run high at $800 a month. He said they also should put off vacations and other substantial expenditures.

To save for retirement, Maria should contribute at least the maximum amount to her 401(k) that her company will match, which is 6% of her income.