S.C.estate and Financial Planning

Sustainable Civilization: From the Grass Roots Up
Contemplating Estate and Financial Planning Concepts Appendix
Many of the financial paradigms we live under Most nations have public debt, on and off the
amount to smoke and mirrors. The predominant books, that significantly exceeds the ability of
political, corporate, and personal perceptions are the economy to pay in any real terms, and the
a short-lived child of extreme abuse of finite finances of most citizens tends to not be better.
resources. You can indeed make millions on
Wall Street, or any other speculative market. The peak oil, essentially the overpopulation
But compare the long-term general rise in hurricane, is going to include not only physical
securities with the long term general real cost of problems, but financial, and it will be a
living increases. (NOT necessarily the figures in transitional not temporary situation.
the official federal COLA basket.)
Why do costs rise? Some claim cost increases
INTRODUCTION are part of a normal, healthy and growing
economy; as the demand for materials,
In physical terms the key to relegating a major employees, and goods & services rises. Large
disaster to the status of a (hopefully) mild deficits (public and private) breed inflation.
inconvenience is preparation. Assume and Public bailout of bad private debt, such as the
estimate the worst, plan and act ahead of the 2007 proposed sub-prime mortgage bailout, drag
disaster. Preparations for a short-term situation down anyone making personal effort, and make
generally focus on gathering a stockpile of the bigger picture worse.
essential items while the weather is good, so
you’re not stuck racing to the store for bottles of Consider essentially two aspects to increasing
water, food, and batteries at the same moment prices. Government debasing the currency is a
every one else is making the same panic run. stealth tax and a source of overall price
Long term mitigation efforts eliminate some increases. Increased demand (per person, or in
effect of a disaster, such as raising you home the number of people expressing demand) or a
above expected flood water levels. falling supply (fruit shortages) may cause
isolated or overall price increases. At this writing
Whether preparation or mitigation steps, you (2007) oil is the largest single component of
must first be aware early of what is coming, and supply side inflation trends, with the enhancing
pay attention to key indicators. The conditions challenges of continuing global population
for a hurricane build over a long period of time, increase and expanding industrialization on the
and with modern information systems we can demand side.
easily see the warning signs. There are those
who heed the warnings and secure their home, or PROBLEMS VISIBILE AND NOT
if it is going to become life threatening then “get
out of Dodge.” There are always those who David M. Walker, appointed by President
ignore every sign, and want someone else to Clinton as the Comptroller General of the United
“bail them out” after the fact. Consider though States, has repeatedly documented evidence that
that the larger the disaster, the less likely there we face a dangerous financial future. Reports at
will be help. the Comptroller website estimate the “off the
books” debt to be around $40 trillion. In SEP 07
In the coming decades the mix of physical and Congress acted jointly to raise the "debt limit"
financial crisis may be a socio-economic (RECOGNIZED DEBT) by around $850 billion
hurricane. Our fossil fuel dependent (9.5% - from $8.965 to $9.815 trillion),
infrastructure and the population dependent on it apparently in recognition that they would make
has taken a long time to build up, but once it no effort to stop increasing the debt, interest on
crosses some critical point and becomes a storm which consumes perhaps 1/3 of every tax dollar.
it is likely to rise to violent destruction quickly.
SUSTAINABLE CIVILIZATION: From the Grass Roots Up Page 1 of 65

Estate and Financial Planning: Introduction to Concepts Appendix Last printed 10/29/2010 13:07 a10/p10
In the same month a headline indicated 2007 the currency is worthless. IN THAT
Medicare spending is expected to reach $330 SCENARIO, communities that have in place, or
billion. The U.S. official population is around rapidly develop a localized "life support"
300 million. Therefore BEFORE the baby infrastructure and economy, may avoid the worst
boomer generation becomes Medicare eligible, of the collapse…
the cost BEFORE the baby-boomer generation
retires therefore represents a cost per-person of A pro-active, or quickly self-rescuing
$1,100 per year. community is likely to face though increased
attention from the government, demanding
The "real" situation is of course worse. In 2008 expansion of "share the wealth" programs.
the leading edge of the post WWII "baby boom"
generation is eligible for retirement under Social Look at your estate, what you earn, what you do
Security, potentially removing some of the with what you earn, what you teach your
highest paid (and highest tax paying) workers children, what legacy you are going to leave to
from the market, at the same time as SS your children. Just as the right physical steps
expenditures rise sharply. This same wavefront can avoid physical disaster, the right estate and
becomes eligible for Medicare in 2011. Debt financial planning efforts can avoid disaster in
such as Social Security, government pensions, this realm.
etc. are NOT included in the on the books debt.
GETTING STARTED ON YOUR ESTATE
As taxpayers leave the rolls, the per taxpayer AND FINANCIAL PLAN
portion rises. One would therefore think that the
LAST THING anyone in Congress or the Once you are aware of essential micro and macro
President would be planning would be another economic factors, and decide to take definitive
new federal expense, or expanding any current steps, note it's never too soon, and (almost) never
expense. We need to be cutting federal spending too late to develop your personal estate and
like crazy, unless of course, there is no intent to financial plan.
ever actually pay the debt.
Professional Assistance - There are times when
In an interview with the Financial Times, Mr. you just need professional assistance. But be
Walker said he that “…THE FEDERAL aware of who you hire. Depending upon their
GOVERNMENT’S FINANCIAL CONDITION primary business, and personal paradigms, your
AND FISCAL OUTLOOK ARE WORSE advisor or assistant may have concepts that differ
THAN MANY MAY UNDERSTAND.” greatly from yours. Ensure you are understood,
and that the assistance you receive is in line with
If you are a taxpayer, expect Uncle Sam to YOUR paradigms.
reach deeper into your pocket.
If Uncle can't get enough money, expect Estate Planning - If you expect to have more
NEW and creative taxes, potentially developing than some token estate, you do not want to allow
into forfeitures (direct theft of property). your estate to pass by intestacy. In the United
If you are dependent on the government, States, if you do not write a will, each state will
for your own health and safety find some other have a law which determines who gets what.
means of support.
In another interview, drawing parallels with Once you are in a coma, mentally incompetent,
the end of the Roman Empire, Mr. Walker or physically incapable of handling your affairs
warned there were “striking similarities” or communicating your intentions, it's too late to
between America’s current situation and “the act. If all of your affairs are truly simple, you
factors that brought down Rome,” including may get by with completing a set of standardized
“declining moral values and political civility at forms. But if you make an error, once the
home, an over-confident and over-extended document is needed, it's too late to fix it.
military in foreign lands, and fiscal
irresponsibility by the central government.” Please be aware, even in the area of estate
Perhaps the best we can hope for is the planning when dealing with licensed legal
printing press, where all of the debt is "paid", but counsel, in general you get what you pay for.

There are for example frequently free seminars certified, you may find planners working in a
on estate planning, that in the final analysis can variety of manners.
be seen as "commercials" for living trusts.
Trusts are discussed elsewhere in this legal Fee Based Plan - In general, for a fee this type of
assistance information series. While these can be planner will review with you your present status,
valuable tools for your estate, not everyone what you goals are, and provide advice as to a
needs such. If you attend a "free" seminar, be timeline and types of investments to achieve
aware and expect a sales pitch. your goals. They usually do not work for or
have a commission arrangement with the
Financial Planning - If your finances are such insurance or investment firms they may
that you are ready to move beyond the basics, recommend. In many cases, you may find such a
you may want to contact a professional financial planner will make broad suggestions, and decline
planner. to make specific recommendations for purchases.
(see Investment Advisors)
Ideally, your financial planner is someone who is
familiar with a wide range of financial products, Commission Based - There are frequently
and will be able to translate your goals into a advertisements for free estate or financial
recommended plan of action. In selecting planning sessions, and you may obtain valuable
someone to help guide your investments, it's information from these sessions. Please keep in
important for you to understand the "business" mind though, that if the free training and
that the person is actually in. If your "planner" is planning session is being presented by an
an insurance agent, or mutual fund salesperson, insurance agent, or agent for an investment sales
you should not be surprised if the proposed plan firm, they have an obvious incentive to sell the
has a focus in the area of the product they sell on product of their firm.
commission.
Investment Advisors - Investment advisors can
While the government does regulate individuals also generally be divided into fee only, and
in certain professions, such as attorneys, commission based. Investment advisors appear
insurance agents, and those engaged in the to be required to either be state or federally
recommendation or sale of securities, I do not registered. Registration does not mean they are
find that Arizona licenses or regulates financial recommended, it simply means they are
planners, so check the qualifications of your regulated.
planner.
Fee for Advice Services - There are investment
There appear to be three nationwide advisory books, newsletter, email, live phone
certifications for planners. notice, etc., that approach investment from
probably any aspect you might consider, such as
Certified Financial Planner - see if you're into ecology, there are "green"
specialists. Some may be able to show you they
http://www.cfp.net/learn/ have a good track record, some may not. But of
course, the fact that they did well in the past does
Chartered Financial Consultant (ChFC) - see not guarantee they will make the right decisions
for the future. Many of these services will allow
http://www.theamericancollege.edu/ you the opportunity to "test drive" their program,
with some time period during which you can
Certified Public Accountant - Personal Financial cancel and receive a refund of the cost.
Specialist - see
Commission Based - This includes the
http://pfp.aicpa.org/ stockbroker who calls with the hot tip, the agent
for a mutual fund based investment entity,
Outside of certification from one of these insurance agents, etc. While no such business
organizations, the title financial planner is used should automatically be suspect, you must
by many in the finance industry. Whether or not nevertheless keep in mind the conflict of interest
the employee has in their natural bias toward the

products of their own firm. Virtually every The timeline part of your planning notes can be a
security that may be on the market via any simple series of important anticipated events and
particular specialty firm, is also available on the ages of your family members, or it can be a
market for purchase by use of an account with a detailed spreadsheet including present and/or
discount broker. future value formulas that provide insight as to
prospective rates of return and monthly amounts
Getting Started - But before you schedule a needed to reach your goals.
session with your selected planning professional, Planning Factors - Ongoing events "in the news"
you need to take stock of your situation, so that make it clear that you cannot make long term
you can properly inform your respective personal financial planning decisions "in a
advisors. vacuum". You must keep up with news events,
and be prepared to make changes in your
The U. S. Department of Labor has a guidebook investment allocations, and other plans.
available free online at:
Lifespan - Information I find in financial
http://www.dol.gov/ebsa/pdf/nearretirement.pdf planning websites indicates that someone who is
65 today has a 50% probability of living to age
There is always the possibility that once the 85 or longer, therefore most couples should
mystery is removed from estate and financial incorporate in their plan at least one spouse
planning terms and concepts that you will feel living to around age 90. Obviously, your
empowered to draft your own personal plan. individual estimate must include your health,
your lifestyle, your family history, etc., but a
Where Are You Now - Organize information on great deal can happen in 25 years of retirement.
where you stand at the moment. Gather
information relevant to your benefits, such as Inflation and Price Increases - Look at inflation
from Social Security, and your employment as an overall decrease in the value of currency,
benefits while working and in retirement. and price increases as changes in the price of
some good or service that make is consume a
Where Do You Go From Here - Where is it you greater percentage of your spending. Inflation
want your plan to take you? If you are planning can be somewhat neutralized by investing in a
to leave a legacy for your children, you will commodity that holds value. Price changes must
probably find you plan will differ significantly be addressed by reduction in your demand or
from one where you plan to retire and spend relative reduction in some other spending.
your remaining healthy years driving the country
in a motor home. Taxation - Tax law keeps evolving, as
does macro and micro economic news. You
Timeline - Regularly advertised are home must keep abreast of the news and determine
mortgages for 360 months, and finance for a new how changes will affect your plans. For
car for 72 months. How many months do you example, if Congress were to pass a bill making
have to invest for college for your child, or to ROTH distributions taxable, you would probably
prepare for your retirement? Not to be morbid, want to withdraw your money before the
but what do you believe is your prospective effective date of such a new law.
lifespan? If you have term life insurance, when
does the coverage cost increase, or when does Medicare Drug Option - The prescription drug
coverage end? How do the time periods relate to benefit took effect in 2006. See the introductory
each other? information online at:
If you start college savings when your child is http://www.medicare.gov/MPDPF/Shared/Static/

born, you have 216 months to prepare for a large Resources.asp
expense that is typically going to be paid out
over a 48 months period. Do you have enough Under the plan, you must select an insurance
being set aside each month to meet your goal of provider. If you don’t have an income that
providing this assistance? 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 In it, you can indicate, "... everything else that
BASIC CONCEPTS. I've not made specific arrangements for, should
be taken care of by..."
Be realistic; when a person dies, disappears, or
becomes incapable of handling their own affairs, Durable Power of Attorney (POA). Short of
certain matters have to be taken care of by your death, if you become incapable of handling
somebody - lawyer or not - whether there's a your own affairs, you can designate in advance
Will, Trust, Power of Attorney or none. who should handle things for you by a Durable
Power of Attorney (POA). In this document
If you have been proactive and made decisions you, the "principal" give authority to your agent,
about how you what you affairs to be conducted, your "attorney in fact" (who need not be a
who will act, and most importantly, actually lawyer) to act on your behalf. The scope of the
prepared and signed the documents, your wishes power can be specific - e.g., the purchase of a
should essentially be followed. single real estate investment - or almost
unlimited. You may want to split your
Why do you need an estate plan? designations, i.e.
Death. First, in death there is the funeral. Then, Child Care Power. If you are temporarily
bills have to be paid; personal business and incapacitated, the person whom you want to take
insurance matters must be concluded. Final care of your children on a temporary basis may
personal income tax and inheritance tax returns not necessarily be the one who they would live
must be filed, as well as a federal estate tax with if you were to die.
return, if necessary. The dwelling might have to
be vacated. Health Care Power. If you're not capable of
making your own medical decisions, you can
All sorts of property must be accounted for, select someone to make them for your.
secured, divided appropriately and formally
transferred as required. None of these chores can Living Wills and Advance Medical Directives
be avoided. A certain amount of time -free or (AMDs). These provide general guidance to
paid - is inevitably involved. Obviously, leaving medical professionals, and are typically used
all these details to an attorney can be expensive. where you have been diagnosed with a terminal
Significant money can be saved if the Executor condition, and you wish to avoid a protracted
and heirs help. death. Whether you have signed an AMD or not
- as long as you retain the capacity to make and
Incapacity. Even if you're not in a terminal express decisions for yourself, your consent must
condition, you may be so ill or injured that you be obtained for your medical treatment. You
may no longer physically, or mentally, be able to remain solely and totally in control. If you have
interact with those around you, or even be aware an AMD, it can be revoked or modified at any
of your surroundings. In that situation, a Judge time, if you are still capable of doing so.
would need to appoint a "guardian" or
"conservator", who would be someone selected
by the Judge. Insurance. In the case of automobile (liability)
insurance, it is required by law in most states.
The person appointed by the court may NOT be Otherwise insurance, which is essentially a
someone you would have wanted. It may be complex gambling contract between you and the
someone completely unaware of your wishes, insurance company, has as a primary purpose
who acts completely contrary to what you would financial protection.
want.
For those without extensive physical assets, life
Elements of the Estate Plan insurance is a way to purchase an immediate
estate of substance. Health insurance can
provide for coverage of delineated medical costs.
Will. Your will is the foundation of your estate Liability insurance provides coverage of
plan. It is your final opportunity to tell the world damages you cause up to the agreed limits.
what you want to have happen once you're gone.

Personal property insurance can pay for repair or You CAN give or will away, or transfer in trust,
replacement of your property if damaged or your community property interest.
stolen. You need to examine your risks,
determine the type and amount of coverage you Defined Beneficiaries. If you have a qualified
need, and comparison shop for the best blend of retirement plan, Individual Retirement Account,
rate, coverage details, and provider. Thrift Savings Plan, life insurance, etc. type of
investment, where you are required to designate
Trusts. A trust is a means to separate and define in writing a "beneficiary", this money goes
ownership, control, and receipt of benefits from directly to the beneficiary you specify. Direction
an asset. It can allow you or another to manage to the contrary in a will, trust, etc. will be
an asset, yet not have ownership such that it is ignored.
part of your estate.
Gather Information. You will have a better
Determine your present status. grasp of your assets, obligations, etc. if you
gather information on all of your property,
Manner of Title. The manner in which property accounts, etc. into one location, and prepare a
is owned effects how title is transferred on death. summary. This could be an invaluable tool for
someone seeking to keep up your bills while you
Sole ownership. If you own something, in your were hospitalized, or in probating your estate.
name only, with no one else who has a
"community property" interest, lien against it, Estimate Estate Needs. If no one is or is likely to
etc., you can dispose of such property by a become dependent on you, if you're convinced
lifetime gift, transfer to a trust, or by your will. you won't become incapacitated (or don't care if
you do), and don't care what happens when you
Joint tenancies with right of survivorship die, you don't need estate planning. Otherwise
(JTWROS). If you die, "owning" property held you should determine your obligations, likely
in this legal format, you CANNOT leave your risks, and the plan aspects touched on above that
property to anyone by will. In JTWROS, when you would like in place.
you die, your interest in the property "dies" with
you, and it automatically becomes the sole Summary. Planning your estate is an ongoing
property of the survivor. This type of ownership evolving process, requiring changes as you life
PRECLUDES estate tax planning with regard to changes. In separate articles we will provide
that asset. (You can't fool the IRS...) You CAN further details on the aspects touched on above.
sell you interest, or transfer it into a trust, which Please though do not make any tax or estate
effectively changes it to Tenant in Common. planning decisions based solely on the brief
outlines presented.
Tenants in Common. Each person "owns" an
equal share in the property, which can be sold, Estate planning is but one step in the overall
transferred in trust, or left in a will. This is a process of "financial planning." This should
"default" position, which sneaks up on some include risk management and insurance, as well
people. For example, if you got divorced, even a as tax, investment, and retirement planning. You
long time ago, and an item of property was not should visit your legal assistance office, or other
covered by the divorce, then the law typically attorney, accountant, and other trusted
considers you to still be a tenant in common with professionals.
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.

ESTATE PLANNING - WILLS. For example, if you die without a Will while you
are:
Your "Estate" is all you own or control. A will
is one tool in the larger process of "estate 1. Married with children: Most states award
planning." There are specific requirements for one-third to one-half of the decedent's property
preparing and signing wills, established by state to the surviving spouse, and the remainder to the
law. children, regardless of age.
Basic terms. 2. Married with no children: Most states one-

third to one-half of the estate to the surviving
Will. - In simple terms, this is the written spouse. The remainder generally goes to the
document which provides direction as to how decedent's parent(s), if alive. If both parents are
you want the property you own at death to be dead, many states split the remainder among the
managed. Most states have statutes which will decedent's brothers and sisters.
be used to "fill in the gaps" in an area where the
will is not clear. 3. Single person with children: When a single
person with children dies without a Will, state
Testator / Testatrix. The person (male/female) laws uniformly provide that the entire estate goes
who is signing the will expressing their property to the children.
distribution and other desires.
4. Single person with no children: In this
Executor / Executrix. The person (male/female) situation, again, most state laws favor the
who is designated in the will as the one decedent's parent(s) in the distribution of his/her
responsible for taking the steps necessary to property. If both parents are deceased, many
implement the terms of the will, also often states divide the property among the brothers and
referred to as the "personal representative" of the sisters.
estate. Please note, if you are designated as the
executor of an estate, you may decline to serve. What cannot a will control? Your will
CANNOT control every aspect of your property.
Guardian. If you are responsible for a minor
(child) or an incompetent person, the guardian is Community Property. The term "community
the person you select to take over your care property" often comes up in discussions about
duties. estate planning (and divorce). It is recognized in
Arizona, California, Idaho, Louisiana, Nevada,
Trustee. If you are creating a trust by your will, New Mexico, Texas, Washington and
or have already created one, you may designate Wisconsin. The general concept is that
in your will a change of manager for your trust. everything earned and purchased with earnings
during a marriage is jointly owned by the
Probate. Refers to the court proceeding for an spouses. While it is possible to will-away your
estate, debts are settled, and legal title to share of community property, if the surviving
property is formally passed from the decedent to spouse objects it may be that a transfer is
his/her heirs. The "probate estate" simply refers effectively stopped.
to any property subject to the authority of the
probate court. Assets disposed of outside the Consider: During a long-term marriage where
probate process are part of the "non-probate both spouses worked and there are joint
estate." investments and investments in just separate
names. That fact that only the name of one
Who needs a will? If you die without a will, or spouse is on title to property DOES NOT
other arrangements for your property, care of necessarily mean that it is separate property of
your children, etc., a Judge will make all such that spouse, such that it can be given freely in a
decisions for you, based on applicable local law. 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 process. A general phrase in a will can serve as
nephew, could he? Even though the wife's name legal justification for the transfer of any
is not on the property, due to community property, anywhere. New wills can be written at
property she is still legally the owner of a 1/2 the discretion of the testator. A will does not
interest in the land. If she does not receive a generally pose any barrier to the testator's
large enough share of other community property, handling of property after execution of the will,
she could object, and potentially become a joint including that the testator may freely dispose of
owner with the nephew, or be awarded the property. The burden of actually changing legal
husbands share of other community property. title to property falls on the executor, not the
testator. If the estate is under certain limits, the
Joint Tenants with Rights of Survivorship. probate process can be a few simple documents.
(JTWROS) If property is held with the title in
this legal format, it is not possible to pass the Will Disadvantages vs. a Trust. If real estate is
property by a will. Legally, if you die owning owned in more than one state, it may be
property in a JTWROS title with someone else, necessary to probate the will in every jurisdiction
at the moment of your death your interest in the where there is real property. Depending on the
property also dies. size of the estate and the probate rules, probate
can take significant time, and impose a trying
Predesignated Beneficiaries. Your accounts at burden on the executor at what may already be a
financial institutions, life insurance, etc. have stressful period. The probate process creates
probably required you to fill out and sign a form public court documents of the property and its
designating a beneficiary for purposes of your disposition, and even if done without paid legal
account with that institution. If your life counsel, involves at the least court fees.
insurance policy still shows your parents as
beneficiary, and you try to change it by a clause Summary. A will is the foundation of the estate
in your will, it will not work. planning process, with the capability of legally
transferring every aspect of an estate that is not
How long is a will valid. In general, if a will handled in some other manner. But it is just one
was properly prepared and executed for the law of many such legal tools. Please do not make
of the time and place where executed, it remains any tax or estate planning decisions based solely
valid indefinitely unless revoked. on the brief outlines presented.
Altered by law. In many jurisdictions, including Keep in mind, too, that estate planning itself
Arizona, the birth of a child, marriage, or must be seen as but one step in the overall
divorce, serves to revoke that Will, at least as process of "financial planning." This should
regards that person. include risk management and insurance, as well
as tax, investment, and retirement planning. You
Codicil. This is a separate document that should visit your legal assistance office, or other
modifies one or more terms of an earlier attorney, accountant, and other trusted
executed will, without the necessity of professionals.
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

ESTATE PLANNING What can a Power of Attorney Do?
POWERS OF ATTORNEY. Special and Limited. If you can't be present
when household goods are being picked up or
Your estate is all you own and control. While delivered, can't take weekday time off to go to
you are alive and healthy you should expect to motor vehicles, a closing on a house, etc., you
handle your affairs yourself. But short of death, can have a power of attorney drafted that
you may still reach a point from accident, illness authorizes someone else to go in your place and
or unavoidable absence where you are physically to sign all documents required for just that one
or mentally incapable of acting for yourself. transaction. The power would not be valid for
any other purpose.
In these instances, a durable power of attorney
can give someone else authority to make Health Care. You can select in advance
decisions and sign documents on your behalf. someone to make medical decisions for you. In
the absence of you making this designation, it
Basic Terms. may be necessary to have a Court Order before
someone could act for you. The Court may put
Power of Attorney. This is a document, which restrictions on your agent (or grant powers) that
you sign, granting to someone else the authority you would not want, and of course, the Court
to make decisions for you, and to sign your may PICK someone you would not want.
name, fully binding you to the contract signed
just as though you signed it personally. When you are proactive, you select who makes
decisions for you, and you can be as detailed in
Principal. The person who signs a document your instructions as you like, or as broad in
granting the power and authority to someone else granting power as you like.
to act in their place.
Child Care. If you have children, and you
Attorney in Fact. The person (Ignore the word become incapable of taking them to school, the
attorney, you DON'T need to be a lawyer) who doctor, or caring for them at home, who fills in
receives authority to act and sign on behalf of for you? In an extreme example, if you're
another. suddenly hospitalized and unconscious, your
children may be subjected to being picked up by
Incapacity. The event which causes you to no the state "child protective" office, and placed in a
longer be capable of taking care of your own "foster home", even over their objection and the
affairs. In general statutes would set this as a objections of your family and best friends.
physical or mental state in which you are not
capable of communicating. (i.e. unconscious or You should work out in advance with family or
in such a diminished mental state that you clearly friends who will take care of your children if you
appear to those around you to not be aware and are suddenly and temporarily "out of the
responding to normal communications) In your picture", and most importantly, PUT IT IN
document though, you can refine the definition. WRITING.
Durable. By law in most states, a power of General. At the far opposite from special or
attorney is valid for only so long as you, the limited, you can grant a power of attorney that
person who granted it, remain mentally capable. lets someone else do (almost) anything you
In those jurisdictions if you want the power to could. This is a very dangerous document if you
continue in force during incapacity, you must do not clearly trust your "attorney in fact", as
clearly indicate this. they COULD give your property away, put you
significantly in debt, etc., and all of the
Springing. This refers to setting out terms or documents WOULD be binding on you.
preconditions in your power of attorney such that
it is NOT valid until your attorney in fact can If you grant someone a general power, the limits
prove to third parties that the conditions have by state law imposed on what they do that is
been met. binding on you would be minimal, typically they

could not change your will, change or take out should visit your legal assistance office, or other
life insurance. attorney, accountant, and other trusted
professionals.
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

ESTATE PLANNING - TRUSTS Provide for your children. Anyone with young
children should consider a testamentary trust.
Your "Estate" is all you own or control. A trust This can require that your property (which can
is one tool in the larger process of "estate include your life insurance, if paid to your estate
planning." There are several widespread or your trust) be held for your children's future
misconceptions regarding trusts. Use of a trust needs, rather than being immediately available to
is NOT a subject of interest only to the wealthy. the children, or to whomever receives
In fact there are many situations where a trust is guardianship of your minor children.
appropriate. Despite the "infomercials"
presented on TV, and in live seminars, trusts are Absent an age restriction set by you, Arizona law
not a cure-all for estate planning, and they are would require distribution of each child's share
not necessarily appropriate for everyone. to them at age 18. You can though select
essentially any age you want, and set reasonable
Basic terms. conditions.
Trust - In simple terms, this is the written For example, you could require everything be
document which provides direction to the trustee held in trust until your child reaches the age of
as to how the property held by the trust is to be 65, unless they complete a college education,
managed. Most states have statutes which will after which they may receive the remainder
be used to "fill in the gaps" in an area where the immediately, thus prompting the child to at least
trust is not clear. get an education before they embark on a party
with their inheritance.
Trustee - The person selected to manage the
trust. Families today may be second, third, etc.
marriages for at least one of the spouses. There
Grantor - The person who creates the trust. 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
Beneficiary - The person for whose benefit trust "first thought" will, spouses leave everything to
assets may be used. each other. But if the surviving spouse re-
marries, or in their will the surviving spouse
General types of trusts. Within these types, there simply ignores the children of the deceased
are many more options in the management of spouse, the children receive nothing. The
assets. children can be protected by leaving property to
a spouse in trust, with the property eventually
Living Trust - Created by your voluntary action passing to the children.
during your lifetime. (Revocable or Irrevocable)
Long Term Care. If you believe you might need
Testamentary Trust - Created by a requirement nursing home care, and don't have adequate
set out in your will. (Revocable or Irrevocable) insurance, under current law the government will
not pay for your care while you own certain
Revocable Trust - One where you can change combinations of assets and values. Further, even
your mind, and withdraw property which you if a government program does pay, there may be
had transferred to the trust. a lien imposed against your property. Trust
planning for this possibility is often referred to as
a Medicaid Trust.
Irrevocable Trust - One where you CANNOT
change your mind. Once property is owned by
an irrevocable trust, you and the beneficiary are Disability planning. Whether by illness or
in most cases firmly bound by the terms set out. 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
Why use a trust?
prepare for this in advance, the Court may find

you incompetent. In that event, the Judge will so "simple," or it is a scam. The assets of any
appoint a guardian to handle your affairs for you. Trust you control are subject to estate taxes, as if
This person may not necessarily be the no trust existed. Period.
individual you would have selected, had you
acted earlier. Unfunded Trusts. Although an empty Trust can
exist, in order to function at all, a Trust must
Your guardian will have access and control of have assets formally transferred to the Trustee.
your assets, and may use them in a manner If you want your car, home, bank account, etc.,
contrary to what would otherwise have been to be held, managed, and passed on by a trust,
your intentions. If however, you had placed your you must first transfer all titles and ownership to
assets into a trust, the guardian would be bound the trust.
by the terms of the trust.
Trust advantages vs. a Will.
When disability planning is appropriate, the
Trust can be a useful tool. Assets in a living If you own real estate in multiple states, a Trust
Trust are already under the control of a Trustee, would allow for immediate distribution of the
who can make financial decisions. If you property after death, and avoid the potential need
initially serve as your own trustee, it is to probate your Will in each state in which
imperative that a back-up Trustee be named. property is owned.
Asset Protection in a Lawsuit. People will sue, Probate of a Will takes time - at least several
at times over what may appear to be insignificant months.
issues. Juries will at times make decisions and
grant damage awards that are difficult to Probate records are open, but a Trust document
comprehend. If you are on the losing side of a is private unless challenged in court.
lawsuit, you may see your lifetime savings and
investment disappear to satisfy a judgment
against you. Trust DISADVANTAGES vs. a Will.
Enter the "Living Irrevocable Trust". If, prior to You can make arrangements to transfer your
the event upon which a lawsuit is based, you property by will with a statement as simple as, "I
have transferred ownership of your assets to an leave all my property to my favorite niece, Jane
irrevocable trust, you will probably be found to Doe". To transfer property by a trust, you must
not be the owner, and the assets held in trust will actually transfer title of the property to the name
be exempt from consideration. Depending on of the trust. If you fail to transfer title to an
the facts, merely having your assets held in the asset, you STILL need a will to cover the
name of the trust may discourage a lawsuit "forgotten" property. The burden is on YOU to
against you. keep your transfer's up to date.
Estate Tax Planning. Whatever you own or If you are paying for your legal services, you
control on your death may be subject to federal will probably find that the cost is higher for a
and/or state "death taxes". As currently written, trust than for a will.
the law on federal estate taxes provides that
amounts exempt from the tax increases each year The trust is a separate legal "person". If the trust
until 2010. The general discussion in the news is earns income, you may need to file an income
that the federal estate tax "disappears" in 2010. tax return for the trust.
However, despite the news, as worded what
disappears in 2010 is any EXEMPTION to the Examples of Specialized Trusts.
tax.
Marital Deduction and Bypass Trust (the "A/B
BEWARE OF INFOMERCIALS! If a "living Trust"). This is the tax-planning cornerstone for
Trust" ad or proposal claims to save death taxes - many combined marital estates (i.e., all property
as opposed to probate "costs" - either it is NOT owned by the husband, the wife, and jointly)

worth over the federal estate tax exemption annual gifts, made in a way that discourages the
amount. It allows the surviving spouse to use the beneficiaries from spending the gifts
entire estate while they live, yet preserves the immediately.
maximum amount of exemptions. If you own a
home, have some investments, and life The simple way to do that is to make outright
insurance, you might be surprised to find you gifts, and just tell the recipients of your wish that
ARE approaching the level where the estate tax the money be saved for college, for example. If
would apply. (Although life insurance payouts however, you don't think you teenager will spend
are not taxed as INCOME tax, unless properly the money wisely, the trust adds a layer of
set up, they ARE part of your estate.) control. This Trust was "invented" by
Crummey's attorney so that his client could make
Medicaid Trust. This is an IRREVOCABLE gifts in Trust, but still take advantage of the
trust, which removes the assets you place in it annual gift tax exclusion from federal gift and
from your direct ownership and control. These estate tax. That is the important feature of the
assets are therefore unavailable for lien by the Crummey Trust because gifts to many other
government, nursing home, other creditors, etc. kinds of Trusts do not qualify for the $10,000
annual exclusion.
This type of trust must meet certain other
requirements set out in Medicaid regulations, Annual gifts are a great way to slowly reduce the
such as a waiting period. This waiting period taxable estate, while passing along wealth to the
requires that 60 months pass (five years) from next generation. As long as the gifts are made in
the date that assets are transferred into the trust, amounts under the annual limit none of the estate
before the government will agree that they are owner's overall estate tax shelter is used by the
truly beyond your control. If you must enter gifts. Yes, the federal government imposes a
nursing home care during the 60-month period, pile of paperwork if you give any one individual
the government may refuse to pay until the "too much" in any given year.
waiting period has passed.
One faces special problems when making gifts in
The Life Insurance Trust. Why use a Trust to Trust, however. The annual tax exclusion
own insurance policies? First, remember that pertains only to gifts of a present interest in
proceeds from policies you own will be included property (e. g., cash, free and clear) - not a future
in your estate, even though paid to a third party. interest. It means that a gift to many Trusts
If an irrevocable Trust owns the policy, however, would NOT qualify for the tax exclusion: Since
death proceeds can be received by the family the terms of many Trusts would not allow the
income tax-free (as usual), yet not be included in beneficiaries to have unrestricted, immediate
your taxable estate. access to that gift, it would be a non-qualifying
gift of a future interest.
But a Trust is not necessary to get this result. For
example, if a child owns, pays for and is The Crummey Trust is intended to get around
beneficiary of a policy on the life of a parent, this problem. Gifts are made to the Trust, which
he/she can receive the policy proceeds with no is irrevocable. The Crummey Trust beneficiaries
tax consequences to anyone. are given only a short period of time each year
(e.g., 30 days) in which they are permitted by the
The real value of using a Trust to hold insurance Trust document to withdraw the gift money from
is to provide for the use and management of the the Trust, free and clear, for completely
policy proceeds according to your wishes. (For unrestricted use.
example, held to pay for college for your child,
or for the old age of your spouse.) The Grantor hopes they will not do that - and is
free to say so - but there can be no formal
The Crummey Trust. (Please no jokes about the agreement that the gift money will not be
name) This Trust takes its name from the court withdrawn.
decision in the case of Mr. Crummey versus the
IRS. The purpose is to create an estate through

The Charitable Remainder Trust (CRT). Here, death. The GRAT is also a good way for the
the Grantor has a charitable motive and wants a owner of a growing, closely held business to
big current income tax deduction, too. Often, retain an income for himself, while passing the
however, the Grantor does not want to give up business along to his heirs before any more
all benefit of the property to be donated. If the (taxable) growth occurs.
Grantor needs lifetime income, a CRT, which is
irrevocable, can be an extremely useful tool. The Qualified Personal Residence Trust (QPRT).
This is an irrevocable Trust, similar in concept to
This is a very complex topic, with many a GRAT, with a confusing name. It is a good
variations on a common theme. Great flexibility method of shifting the value of the family home
is possible, but very competent advice is out of your estate, for the purpose of lowering
required. Tax laws and rulings pertaining to the ultimate estate tax.
CRTs will always be subject to changes that
could drastically affect what was a well- The house is placed into Trust for the future
conceived arrangement when drafted. benefit of the children. The value today of this
remainder interest is a taxable gift. As with a
The Qualified Terminable Interest in Property GRAT, the Grantor accepts some federal gift tax
(QTIP) Trust. This is often used for those liability now, to save more on federal estate tax
entering second marriages with substantial later.
estates already. It provides lifetime income for
the surviving current spouse, while leaving the What the Grantor retains here is not income, but
remainder of Trust property to the children of a the right to live in the house for a term of years.
previous marriage (or others). A bequest to a If the Grantor outlives that term, the value of the
QTIP Trust, by law, "qualifies" for the unlimited house - plus any property appreciation since it
marital deduction for estate tax purposes, even was transferred to the Trust - passes to the
though the surviving spouse's rights to Trust children with no additional federal estate tax. As
assets are less than total. Note that all Trust with a GRAT, if the Grantor does not survive the
assets are included in valuing the survivor's term of the Trust, it has no tax effect. Two
estate for tax purposes, just as they would be if significant drawbacks: First, the children will
left outright to the survivor. have received the house by lifetime gift, not
inheritance, so there is no step-up in the tax basis
The Grantor Retained Annuity Trust (GRAT). of the property. Secondly, if the Grantor does
This is an irrevocable Trust, good for shifting survive, he/she must start paying the children fair
some of the value of an asset out of the estate. market rent, or the IRS might look at this as a
The Grantor places assets in Trust for the sham transaction.
ultimate benefit of the children (i.e., they have a
remainder interest), but retains the right to an Summary. Many complex issues are involved in
annual pay out for a period of years. estate planning. As mentioned above, a trust
may be an appropriate tool to use in your estate,
Example: Grantor creates a GRAT and transfers but it is just one of many such legal tools. Please
$300,000 in mutual fund shares into it. The Trust do not make any tax or estate planning decisions
provides that the Grantor will get a $6,000 based solely on the brief outlines presented.
annual pay out for 15 years, after which the
Trustee will make a complete and final Keep in mind, too, that estate planning itself
distribution of the shares to the Grantor's must be seen as but one step in the overall
children. At this point, there has been a taxable process of "financial planning." This should
gift - but not of the full $300,000, because there include risk management and insurance, as well
are "strings" attached. After all, the money is not as tax, investment, and retirement planning. You
available to the children for 15 years. This is should visit your legal assistance office, or other
how tax savings are possible. At the end of 15 attorney, accountant, and other trusted
years - IF the Grantor is still alive - the value of professionals.
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

FINANCIAL PLANNING completely earn a Bachelor's Degree by simply
GETTING STARTED taking tests.
Whether active duty, civil service, or employed
Do you have questions or concerns about your in the civilian sector, take a pro-active interest in
financial future? Have you planned for your advancement: examine your position, your
continued education? Have you considered the capabilities, and the requirements for
responsibilities and costs of marriage (or advancement. If there's a different job you think
divorce), raising children, college education for would be perfect for you, work toward getting
your children, and your retirement years? Or, yourself qualified for it.
perhaps, are you too far in debt?
Step Four - Protect your present assets, and your
Step One - Gather information. Perhaps a first future goals. Do you have the right types of
logical step is to gather together into one insurance coverage? Do you ENOUGH
document all of your basic information (names, insurance coverage? Are you getting a "good
accounts, contact points, etc.). For those deal" on your insurance? (i.e. for life insurance,
interested, we have posted at the YPG intranet there are websites when you can make your
site an organizing outline document (18 pages initial inquiries about policy costs, which when
PDF format - entitled PEACE OF MIND contracted for directly with the insurance
PLAN), prepared by the JAG school. company, SAVES you the fees which would
otherwise go to the local insurance agent.)
Step Two - Set up a budget. It is obvious that to
invest for your future, you can't spend your Liability insurance, not only on your vehicle, but
entire income on consumer goods and services. some type of "umbrella" policy that covers your
If you need help setting up a family budget, the personal liability for events other than a car
ACS office here at YPG offers this service, or if accident. (i.e. what if you trip someone while
your situation is more complicated, call for legal you're at the mall, and they sue you?) These
assistance review. It is important to arrange you policies are often a rider to homeowners or
budget such that you can begin some type of renters insurance.
investment program as early as possible. Due to
the effects that compounded interest will have on Homeowners / Renters insurance. Provides for
the final value of your investments, a delay of replacement of your personal property for
even a few years in STARTING your investment covered events (i.e. theft, fire, or other
program, and have LARGE effects on the total destruction), as well as liability protection for
amount you have in the future. accidents that take place on your property. For
example, if you live in quarters, and your child
Step Three - Envision your future. Where do accidentally starts a fire that destroys all of your
you want to go? What do you want in your personal items, as well as the government owned
retirement years? Are you prepared for the home, could you afford to pay "out of pocket"
burdens of caring for a family member (or they for all of the damage?
for you) during a period of long term disability?
Do you plan on providing a college education for Life insurance. SGLI is offered for military
your children? Can you family continue to live members in up to $250,000 coverage. SGLI
with the same lifestyle in the event of your terminates though 120 days after you retire or
death? Do you have your debts under control? leave the service. In addition, have you
considered, is this sufficient to truly provide for
In general, the higher your formal education, the your family in the absence of your income?
higher your lifetime income. Active duty Many couples with children, where for example
members have a variety of tuition assistance the non military spouse does not work outside
options. Regardless of your status though, you the home, ignore coverage on the non military or
still have many options to pursue an education. non working spouse, thinking there is no income
In additional to traditional classroom attendance, to be replaced. There is however a significant
there are legitimate correspondence programs, impact on the surviving family when they must
"online" programs, and it is even possible to pay someone else for services such as child care,
that were otherwise being provided "free".

the interest on the bonds builds up "tax-
While there are variations, the two basic forms deferred", meaning you do not pay tax on the
of life insurance. interest until you turn the bond in for cash. They
First, is "whole life", where the policy can be redeemed at any bank, at any time later
accumulates over time some manner of "cash than six months after purchase. These bonds
value" which can be "borrowed" or considered as carry the additional benefit that at the maturity
a form of investment. AS the name implies, it is date of the bond you can exchange it for a class
generally a type of life insurance where the H bond. A class H bond pays you interest you
coverage can be maintained for your entire can put in your pocket and spend. While the
lifetime. The documents presented to you as part interest actually paid out to you from an H bond
of the "sales pitch" often includes projections of is taxable, there was no tax on the E bond
significant profits within the policy. Read the interest while it accrued, and there was no tax
details carefully, and look for the amounts that when you exchanged the E for the H. This
the company guarantees, rather than mere combination give the E - H combination
estimates. (The fact that any particular class of advantages over commercial savings accounts.
investment advanced significantly in the PAST,
does not necessarily mean it will do so in the Step Six - Investments. These are purchases you
future.) make with the intent and hope that the item
purchased increases in value significantly faster
Second, is "term insurance", which is what the than the general inflation rate, or bank interest.
SGLI program is. Term insurance provides a
much higher amount of coverage, for much less Real estate. For most people, a home is the
cost, because it has no "investment" aspect. largest purchase they make. If you are not living
When the policy ends, nothing remains. The in your home, it can be rented, which may have
"term" aspect generally refers to the period of significant income tax advantages for you.
time during which the company has agreed to While unimproved land (without a building) can
provide insurance coverage and the costs for that be an investment, it typically does not have the
period. More often than with whole life policies, tax advantages of "depreciation".
you will find that term policies have costs that
increase as you age. If your first priority is to TSP. Federal military and civilian employees
provide a "safety net" for your family, your first have the option to defer a portion of their income
priority is sufficient term insurance to meet those into a "Thrift Savings Plan". The money sent
needs. After the safety net is met, whole life can there from you salary is not considered taxable
then be considered as one of they many means income during your current tax year, and should
(including also the world of "TSP", "Individual not be subject to withholding for taxes. In
Retirement Accounts", mutual funds, money addition "Uncle Sam" makes some type of
market accounts, real estate, etc.) available for matching contribution. All of the money in your
investing for your future. TSP accumulates profits, yet is not subject to
income tax so long as it remains in the account.
Long term care. If the need for nursing home These factors combine to make the TSP account
care has "run in your family", or some aspect of far more attractive than making similar
your personal life indicates to you a likelihood investments with after-tax money.
that you may need nursing home care, you
should note that the earlier you take out such a IRA. Depending on your income tax bracket,
policy, the lower the payments, often even when you may also be able to make tax deferred
the payments are aggregated over time. investments in an "Individual Retirement
Account". A comparison of tax deductible
Step Five - Savings. This refers to short-term IRA/TSP and the same investment after taxes
financial goals, such as saving for a vacation, for (using a 25% tax bracket as an example, and 5%
that Christmas shopping spree, a car, etc. These annual interest) is below. Both columns below
funds are typically kept in bank or credit union indicate an investment that amounts to $1500
deposits, money market funds, etc. An approach "out of pocket". The first advantage of a pre-tax
to savings is payroll deductions for federal investment here is that to have $2000 each year
"Savings Bonds", which have the advantage that deposited, it only "costs" you $1500 of the

money that would otherwise be in your pocket. $11573.82 $8387.13
The other $500.00 going into your investment is
money that you would have otherwise paid as ROTH IRA. Even if your tax bracket means you
income tax. As you can see, just over a five year cannot deduct the deposits to a "traditional" IRA,
period, the difference is substantial. you should consider the ROTH IRA. While you
cannot deduct the deposits from this year's
IRA/TSP Brokerage income tax, all of the profits still accumulate tax
deferred, and if you comply with the other
Open account applicable rules, the money is also NOT taxed
$2000.00 $1500.00 when you withdraw it. A significant additional
aspect of a ROTH IRA is the ability (as of 2006
Interest during year 1 law) to withdraw at any time your contributions
$100.00 $75.00 WITHOUT any tax or penalty. This allows a
-$18.75(income tax) ROTH to function as an "Emergency" savings
Deposit year 2 account to hold your "cash". While you must in
$2000.00 $1500.00 general leave all interest/profits in the account,
there are exemptions for the profits also.
subtotal
$4100.00 $3056.25 - The account must have been in existence 5
years.
Interest during year 2 - If you are not 59 1/2 or older, then the
$205.00 $152.81 withdrawal of profits must:
-$38.20 (income tax) - Be used to buy or rebuild a "first home" as
Deposit year 3 defined in PUB 590; or
$2000.00 $1500.00 - You must be disabled as defined in PUB 590
subtotal In either type of IRA, you have a wide selection

$6305.00 $4670.86 of custodians (places where you make your
deposit) and investments. Your IRA can be
Interest during year 3 invested in stocks, bonds, mutual funds, bond
$315.25 $233.54 funds, some option contracts, gold coins, and
-$58.39 (income tax) even real estate.
Deposit year 4 $2000.00 Purchasing a Pension. Yet you may not realize
$1500.00 it, but even if you are not making cash deposits,
in some manner you are “buying” your
Subtotal retirement plan.
$8620.25 $6346.01
Active duty must invest at least 20 years of
Interest during year 4 service, and then become eligible for a lifetime
$431.01 $317.30 pension. Your pension is determined by the rank
-$79.33 (income tax) you achieve, therefore it is in your best interest
during your career to progress as high as possible
Deposit year 5 in the ranks. Although you do not actually make
$2000.00 $1500.00 any cash deposit to purchase your pension, I'd
like to put it's value in perspective.
subtotal
$11051.26 $8083.98 Assume an 18 year old enters the military, does a
20 year career, and retires at 38 at an E-7. Your
Interest during year 5 pension will be around $1600 per month for life.
$552.56 $404.20 Assume living at least 40 more years until age
-$101.05 (income tax) 78.
Total at end of year 5

If interest rates when you retire are around 5%, Make retirement a priority! Even if you're going
at age 38 the economic value to you of the to have a secure lifetime income check coming
upcoming 40 years of checks is as if you had to you, how well you can live on that income is
around $330,000 in the bank. greatly effected by the other preparations you
make. If you don't believe your pension will be
Assuming the same 5% interest rate, over the 20 enough to pay your day to day expenses, as well
years you served, if you had wanted to invest and as a mortgage or rent, you should either invest to
have $330,000 in the bank you would have had purchase a home later, or buy one while you are
to start saving $815 per month in a tax deferred working. It doesn't have to be your retirement
account, and put $815 in every month you home, but it's a resource that can be "exchanged"
served, to simulate the value of your active duty when you reach retirement. Remember that in
pension. retirement (in particular if you've not taken up
another job) you will find it more difficult to
Whole Life Insurance. Although discussed above borrow money.
in insurance, it is really at this level in your
financial plan that "whole life" type policies Think ahead, yet be flexible. If you single, you
become a practical investment. They are a tool may dream of buying a sailboat and traveling the
to use "after tax" earnings to invest further in world when you retire. If you've been saving for
tax-deferred, or potentially tax free investment that dream, get married and have a child, it's not
programs. There are many insurance companies, difficult to adjust your focus and now dedicate
among which you may find essentially identical the sailboat account to your child's education.
investment options, but with widely differing
costs to you. Be sure to check out the safety There’s one simple trick for saving for any
rating of the company. Remember, the company goal:
is in business to make money, as is the company
agent. Read your contracts carefully. Spend less than you earn.
Educational IRA's. While often improperly Step Eight - Other considerations.

referred to as IRA's, there are available
investment accounts, which if properly set up, Your health. What's the point of working hard,
the investment can grow tax deferred, and and investing for the future, if you die
withdrawn tax free if used to pay for the prematurely from an avoidable illness, or spend
education of your child. your retirement years in misery. In general, to
reach your maximum life expectancy with the
Step Seven - Specific Goals. Achieving a goal greatest health, medical science recommends a
starts with a dream, and determining the clear diet containing proper nutrients, including vital
steps required to reach it. Along with achieving minerals that may only be necessary in "trace"
goals, "life happens". Besides daily living amounts, limited calorie intake, moderate
expenses, you may need to buy a car, pay off exercise, avoiding toxins, etc. See your
debts, save for your children’s education, take a physician for individual advice, and most
vacation, or buy a home. You may have aging importantly, FOLLOW the advice.
parents to support. You may be going through a
major event in your life such as starting a new Your activities. As touched on in insurance
job, getting married or divorced, raising children, above, a lawsuit can destroy the best financial
or experiencing a death in the family. plan, resulting in your investments being ordered
delivered to someone you injure. The best
recommendation is to avoid activities which are
The point is to not lose sight of your long term likely to lead to problems. If you're prone to
goals. Start by writing down each of your goals violent conduct and fighting, seek anger
so you can organize them easily. This is your management training. If you speed, slow down.
“wish list.” Sort it by the date to be If you tend to "drink and drive", STOP.
accomplished, because you save for short-term
and long-term goals differently. Social Security. You probably notice the
deduction every pay on your LES for social

security, also referred to as the "payroll" tax, The baby boom generation begins to be eligible
FICA, or OASDI. Regardless of the name, it's a for Social Security in 2008. At this time there
tax imposed on all income earned from labor, up are no clear plans as to how the government will
to a federally determined limit. (The tax is NOT deal with the shortfall between decreased tax
applied to income from investments, such as revenue and greatly increased payments.
interest, rental property income, capital gains,
etc.) The Social Security program is a topic The Supreme Court has already determined that
which you may have noticed causes "heated" Social Security payments are not a "right", or
coverage in the media when discussed in even a contracted for entitlement. These
Washington. payments are in essence simply a welfare
There are a few simple facts however about the payment, subject to change by the government at
system. From the beginning, and as of the date any time. Until it is clear how the government
this is written, the Social Security tax has taken intends to deal with the shortfall, you should
in more money annually than has been paid out. plan your personal retirement as though you will
The advertised theory is that the difference has not be eligible for Social Security.
been saved in a "trust account", and that should
the time come when Social Security taxes not be "Big picture" factors. In making long-term
sufficient to make Social Security payments, that investments, and plans for your future, the recent
money will be withdrawn from the "trust news as emphasized that world political stability
account" to make the payments. This theory cannot be ignored. The suicide attacks of
fails to mention though that every cent which 9/11/01 not only resulted in the tragic loss of
was "deposited" into the "trust account", was many innocent lives, and significantly impacted
then exchanged for an "IOU" from the treasury the airline and travel industries, but sent
department, and the money spent. Given this repercussions throughout our economy. In the
financial fact, for every additional dollar paid out current global infrastructure, distant events can
by the Social Security Administration, there have great local impact. Food for thought
MUST be: a reduction in some other federal includes:
spending, an increase in a federal tax (Social
Security, income tax, etc.), or an increase in the International tensions. Not merely the big
federal debt. issues, such as nuclear, chemical, and biological
weapons, but a growing number of nations face
In the past, whenever the government saw a the simple inability to feed populations which
Social Security "shortfall", the general cure was have grown beyond the local resource
to increase the Social Security tax rate, or to capabilities.
increase the amount of salary which would be
taxed, either way increasing the amount of tax Fresh water. In recent news was southern
collected. However, in that the (current) means California cities being ordered to cut back on
of calculating how much each retiree is to be how much water they took from the Colorado
paid is based, at least in part, on how much tax River. Large areas of Arizona have had so much
they paid, every time a shortfall was cured by underground water pumped out that the surface
this method, it meant that a larger future shortfall land is subsiding as much as twenty feet. The
was created. Oglala Aquifer in the central portion of the USA,
which waters millions of acres of crops, is being
In the aftermath of World War II, there was a pumped down far faster than rainfall can refill it.
significant surge in births in this country, often
referred to as the "baby boom". It is generally Energy. California continues to experience
recognized that this baby boom generation energy concerns, after long refusal to allow new
comprises a significant percentage of the generators to be built, is now building in earnest.
population, that they have among the highest The greatest energy source used in the world is
earnings in the country, and pay a significant oil. The greatest concentration of remaining,
portion of the Social Security tax, and therefore readily accessible oil is in the middle east.
under the current system are estimated to be Estimates of the remaining useable supply
"entitled" to significant payments. 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 2. Small differences in return matter a lot!
COMPOUND INTEREST
Albert Einstein once referred to compound Over long periods of time, the difference
interest as "the greatest mathematical discovery between investing at, say, 5% and 8% is
of all time". Well, it's not really a scientific enormous. In the above compound example, if
discovery, in fact it is a quite simple concept. your interest rate was 8% instead of 5%, here's
how the numbers would change.
When you deposit money (capital) in an interest
paying account you earn interest on your capital. Starting Age / Age End Deposits / Est. Value
The next year you earn interest on both your at Age 62
original capital and the interest from the first
year. In the third year you earn interest on your 20 62 $412,000.
capital and the first two years' interest. You get
the picture. The concept of earning interest on 20 40 $340,000
your interest is the miracle of compounding.
The same idea applies to buying an asset that
appreciates in value. You stop saving when you're 40, and leave
the account alone.
1. Start Early!
30 62 $177,000
The earlier you start investing, the more time
you leave for compound interest to take effect. You didn't start to save until you were 30 and put
In the following examples, you save $100 per money in until you're 62.
month, and deposit your savings into into a 5%
interest account. 30 40 $18,000
Starting Age / Age End Deposits / Est. Value You didn't start to save until you were 30 and
at Age 62 only put in money until you're 40.
20 62 $170,000. 3. Don't squander your capita on parties, booze,

and fast cars.
20 40 $125,000
Investing, like most things in life is a balance
between enjoying yourself now and providing
You stop saving when you're 40, and leave for your future. Not only though do these take a
the account alone. toll on your investment program, but they also
endanger your financial future by increasing
30 62 $80,000 your risk of serious liability.
You didn't start to save until you were 30 and put It only takes a careless moment for you to cause
money in until you're 62. serious injury to someone else, potentially
destroying their life, and ruining your future as
30 40 $49,000 well.
You didn't start to save until you were 30 and An arrest record can be a significant "roadblock"
only put in money until you're 40. to your career.
Waiting to start saving is a mistake. Taking Even without causing an injury to someone else,
money out of savings early on is a mistake. or an arrest, too much "partying", or even a
single incident of experimenting with the wrong

"substance", can lead to significant enduring unlimited range of choices for investment, when
health problems for you, forcing you to expend used in conjunction with a comprehensive plan
your life savings in medical care rather than that includes a more limited choice such as the
enjoying a healthy carefree retirement. TSP, perhaps you should consider an IRA as
money used more for seeking capital gains
4. Tax free / Tax deferred. Over time, regular (profit on the increased value of an investment,
saving of quite small amounts can build up an rather than a guaranteed interest rate).
astonishing sum of money.
Taxable accounts.
The miracle of compound interest works best for
you if your savings earn interest without the need Bank Checking and Savings. (Includes credit
to pay income tax each year on the interest. union accounts)
Otherwise, that small bite that "Uncle Sam" and
your state taxes takes each year can make a Certificates of Deposit. Provide a guaranteed
significant difference in your "bottom line". rate of interest, for a fixed period of time, with a
guarantee that the original amount will be repaid
Accounts that avoid, or delay taxes include: at the end of the term.
Tax free money market account. Available from Bonds. (NOT U.S. Savings Bonds)
many sources, this type of account typically Corporations, cities, States, etc. will often issue
provides you with a "checkbook" from which "bonds" as a means of financing projects. The
you can write checks to access your money. interest rate is fixed for the entire period of the
(Good for short-term savings.) bond, which is sometimes as long as 30 years.
There can though be serious risk of LOSS when
Series E savings bonds. Defers taxes on the you invest in this type of bond.
interest until the bonds are cashed. (Good for
short-term savings, as well as money that is for 5. Persistence and patience are required.
"emergencies", in that if the emergency does not
strike further deferred is possible when the bond Saving for 40 years is obviously something you
matures.) can't do overnight. You must consistently
exercise restraint and avoid the temptation to
Thrift Savings Plan (TSP). Provides deposits withdraw your long term savings for the latest
from your salary that are pre-tax, which is a commercial "toy".
bonus to you even before interest starts to
accrue. "Uncle Sam" also has a matching The Rule of 72
program where money is deposited on your
behalf that is in addition to that which is Although a spreadsheet can help you work out
withdrawn from your salary. All of these exact estimates of the effects of compound
deposits grow tax-deferred, but with limitations interest there is also a handy shortcut known as
on withdrawals. The investment options within a the Rule of 72. It states that you can find out how
TSP account are limited to the choices the many years it will take for your investment to
government offers. While TSP contributions double by dividing 72 by the percentage rate of
(i.e. due to employer matching) should take growth. So it will take 9 years for your
priority over an IRA, when used as part of a investments to double if they grow at 8% a year
comprehensive investment plan, perhaps you (72/8=9). But it will only take 6 years if your
should consider your TSP as your cash / interest investments grow at 12% and so on.
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

FINANCIAL PLANNING
INFLATION, PRICE INCREASES AND Something similar happened in the United States
CAUSES in 1964, the last year that our dimes, quarters,
half and dollar coins were made of a silver alloy,
In planning for your family to go on without you and in 1982 when we ceased to have our penny
should you die, or for a future expense such as made of copper. In early 2006, the U.S. mint
college for your child, or your retirement, history estimates that by the end of the fiscal year the
shows that failure to include the concept of value of the metal in a penny, and in a nickel,
inflation in your plans could be devastating. will exceed 1 and 5 cents respectively, so further
changes are likely, perhaps soon.
Inflation - Inflation is not necessarily the same
thing as a price increase. While it appears as a What if you, like the Roman who held "old"
general increase in prices, is in other terms a coins out of circulation, had set aside these U. S.
decrease in the value of currency. coins. Completely ignoring coin-collector
values, we get a scenario something like the
Modern inflation is often exampled by Germany following.
in the 20's, when the government, lacking tax
revenues to cover expenditures, and lacking the 1964 and earlier silver coins sell today in "junk"
ability to sufficiently borrow, started printing bags. This doesn't mean there is anything wrong
money without any backing to the currency. with the coins, it's just that they are not sorted
into coin type or conditions, and you just buy a
Eventually, they printed a billion Mark note on bag of some set face value that contains a mix of
only one side, to save ink. dimes, quarters, and half-dollars. When
originally minted, $1,000 of these coins would
The German inflation includes a classic story of have contained 723.4 ounces of silver. Today
a man who took a wheelbarrow of money to the due to wear the weight averages 715 ounces.
store to buy bread. When he couldn't get the
wheelbarrow thru the door, he left it outside, For every dollar of these silver coins you had set
certain no one would steal the worthless money. aside, it would be worth around $7.90 today. If
He was right, someone dumped the money and you had invested a dollar back in 1964 and,
stole the wheelbarrow. ignoring taxes on your annual profits, it had
earnings that matched the inflation rate, each
We've lived with inflation for so long, that it dollar invested would be worth around $6.30.
almost sounds irrational to consider an economy
without it. But nothing in economic theory for a The silver content of a dollar in face value of
stable community requires inflation. coins is approximately:
History - Inflation dates back to the earliest Coin Type Ounce fraction
currencies. The government of Rome and other Dollar .773437
early civilizations which used precious metal Half-Dollar .72337
coins inflated their currency by mixing other Quarter .72337
metals, clipping the coins, or making coins Dime .72337
smaller or thinner.
Averaged out over the years, the old silver coins
Coin Debasement - To most who were involved held their purchasing power, while the paper
in financial transactions, it would be fairly money dwindled in what it could buy.
obvious that something was happening to the
currency. It would not be unusual for "old" In 1981, you could have easily "lost" two rolls of
currency to continue to be able to purchase the pennies in your desk. 100 pennies weigh about .
same goods, while a greater quantity of the 68 pound. Spot price for copper this year has
"new" currency would be required for the same been between $3.21 and $4.08 per pound. Your
goods. Therefore it was still possible to hold on two rolls of old pennies have a value somewhere
to purchasing power simply by keeping "old" between $2.18 and $2.77. Perhaps coincidence,
currency.

but this also tracks the changes in the consumer Unfunded Obligations - An additional category
price index (see below) since 1981. of debt worth noting are unfunded obligations.
For example, while the government has various
Paper Currency - Inflation of paper money does recognized debts with specific interest rates and
not require physical alteration of the currency to other terms, there are also many programs which
shrink its valuea, and unless the paper money has have created debts that are far less clear in terms,
a guarantee that it can be exchanged at a fixed but nevertheless in existence and effecting the
rate for some commodity that retains value, economy. Government pensions and retirement
holding the "older" paper currency is not a valid benefits, including prospective Social Security
strategy. payments fall into this category. For example,
although we as military and civilian employees
Most early paper currency was officially of the government are able to calculate the
"backed" by a supply of precious metal; where pension benefit we accrue with each year of
essentially the paper money was a receipt for service, the government is not setting-aside any
some quantity of gold or silver. In theory, amount to create a fund to pay such a pension.
everyone could return to the storage vault and
trade in their paper for gold. In reality though Counterfeiting - It is difficult to "fake" gold or
it's not hard to imagine though that a few "extra" silver. "Paper" receipt or fiat currency is
receipts get issued, or the gold makes it way out inherently subject to counterfeiting, which
of the vault, making it impossible for everyone dumps "extra" money into the economy.
to get "their" gold, and making the paper
currency worth less. Documenting Inflation - Online the Bureau of
Labor Statistics has consumer price index (CPI)
"Fiat Currency" - "Fiat" currency, currently in annual changes dating back to 1914. Using their
use by essentially every government, does not information, the same purchases that cost a
have any tie to any physical commodity. It has dollar today would have cost only three cents if
value based on the government directing its use purchased in 1913. An example perhaps more
in commerce and in payments to/from the on point, for someone who retired 25 years ago
government. Currency value is free to fluctuate in 1980 on essentially a fixed income, each fixed
in response to a variety of factors. income dollar from 1980 is only worth thirty
seven cents today. Fixed income retirees during
Weakness of Fiat Currency - Debasement of this sample time period have lost essentially 2/3
coins is an easy to understand aspect of the of their purchasing power.
concept of currency losing value. In a fiat
currency situation, there are further aspects that Losers to Inflation - In general in an inflating
can readily erode the purchasing power of economy depositing money in fixed percentage
currency. income investments (bank accounts, bonds, etc.)
can be a guaranteed LOSS for you, if the rate of
Printing Press - The government has the ability return after all applicable taxes does not clearly
to simply print more money and use it to pay exceed the rate of inflation. This guaranteed loss
government obligations, or otherwise put it in also applies to anyone who is living on a fixed
circulation. income, whether from investments or a pension.
Government Debt - Government borrowing Break Even in Inflation - As shown above,

allows a government to spend more than it durable commodities that have ongoing demand,
collects in tax revenues. You as an individual such as silver coins or even the metal copper, are
can borrow, and temporarily increase your a means to hold on to value vs holding
money supply, but usually you must repay within "shrinking" paper money.
some fixed period, with every debt finally due at
your death. Governments have a much greater Winners in Inflation - In a continually inflating
capability to roll over old debts, and add new economy, in general those who borrow at fixed
ones, effectively permanently increasing the rates, and use the money in carefully selected
money supply (and inflation). investments, will be able to pay off their loans
with cheap dollars, and build fortunes thru

leverage. This plan of course requires market wide, as the increase in population
appropriate selection of investments. increases demand for virtually every product or
service. If demand for a fixed supply product
A simplified example using the 1964 silver coins rises, or the quantity of a product falls while
mentioned above. In 1965 the prime lending demand remains fixed, prices rise. If there is no
interest rate was around 5%. Imagine a huge ready substitute and people are not willing or
loan (for the time period) of $10,000 at 5% for able to do without, the price is bid higher. This
40 years, using the loan to walk right back into type of price increase is generally not
the back and leave with $10,000 face value of represented by the across the board increase in
silver coins. Your payments would have been prices and wages that is typical of inflation, but
around $48.50 per month. You would have paid rather it is an increase that requires reduction in
off the loan in 2004, having taken $23,280 out of some other spending.
your pocket over the 40 years. Those silver
coins would today be worth around $79,000. Rising Electrical Prices - Just in time for the
summer cooling season, in June electrical
Speculation Caused Price Increases - Real estate customers of Arizona Public Service (APS) got a
is often presented as an appropriate inflation 7.6% increase in the charge per kwh, the third
protection investment. But in any deal, there increase approved by the Arizona Corporation
needs to be a willing buyer and seller. There are Commission since January. APS reported to the
locations where the real estate market can serve Commission, it lost $5.5 million during the first
as an example of prices driven up by speculators. three months of 2006, primarily attributed to its
(The term flipping has been recently used to mounting tab for fuel to operate its plants, and
indicate a purchase with intent to quickly make leading months later to increased electric rates.
some change and resell.) If any particular
market is seen as "hot", speculators who buy for For example then, do you believe that electrical
the purpose of re-selling (flipping) at a higher rates are likely to remain at this level, or rise? If
price, can flood the market such that the price of you own your home it may now, or soon, make
homes clearly exceeds the ability to pay of the financial sense to install additional insulation, a
"typical" family that would ordinarily be new more efficient HVAC system, or even
expected to purchase a home in the area. photovoltaic panels in a grid connected system.
All of these have the potential to eliminate some
When this happens with stocks, once the portion of your present demand without a
speculators move on and the artificial demand "sacrifice" in quality of living. Provided of
abates, the stock typically falls in value. There course you act before the price of p/v panels and
may be those who decline to sell, hoping for equipment also rises.
prices to rise again, but all shares of the same
stock being fungible, overall prices fall. For APS customers who install a p/v solar power
system, at this writing APS will even reimburse
When this happens in a real estate market, even you for part of the cost of a p/v system. In
after the speculators have moved on, the high Arizona, as in many states now, the power
prices tend to linger. Real estate, typically companies are required to allow private power
purchased with a mortgage, locks more owners generation to be grid connected. This means that
into retaining their purchase even if they wanted at such times as your home generation exceeds
to sell at a lower price. the use of your house, the meter "spins
backwards". If for example you are on the APS
Demand Based Price Increases - Short of plan where you pay more for power during the
speculators who move into a market with the day than the evening, you could receive a higher
intent of deliberately driving up prices, the value for each kwh you put into the grid during
economic "law" of supply and demand effects the day, than the power company charges you for
prices. Demand increase can take the form of what you use in the evening.
greater use per person, or an increase in the
population. Of these two increases, it is of Rising Fuel Prices - Also, as we enter the
course the increase in population which summer vacation season, according to Energy
rationally has the broadest effect on prices Department statistics the average retail price of

gasoline is $2.93 a gallon, or 36% higher than a you must select a plan that you believe meets
year ago, which is reported as appearing to have your needs. If you fail to select a plan, and try to
some impact on fuel consumption. As we saw add it later, there appears to be a permanent
with APS, the costs of fuel are embedded in "surcharge" added to your costs of 1% for each
many goods and services. year you delayed. Before making a decision to
not enact this coverage, perhaps you should
Even putting food on the shelves of stores spend the money for a thorough physical exam to
represents significant amounts of fuel for determine your actual condition, and take into
farming, processing, and shipping. For example, account medical history of your family, and
the higher cost of fuel for the operation of exposures during your life. You need to
tractors is not yet reflected in the price of the investigate your other coverage options and
already processed food on the shelves. Then the weigh the costs and benefits. This plan benefits
higher prices are added to the new crops, we some who would otherwise not have been able to
should expect that prices will be higher in some afford drugs, or who would have had to use
relationship as to the amount of fuel used in personal funds. It also represents an increase in
growing and processing the crops. federal spending and in effective personal
spending on drugs, and therefore may contribute
Price Change Planning - to overall inflation and depending on the
marketplace potentially to an increase in drug
prices.
Taxation - The consensus of traditional wisdom
is to expect your income tax rate to be lower in Employment Based Benefits - For military and
retirement than while you are employed, and civilian federal employees our cost of living
defer income until after you have retired. To the adjustments (COLA) are subject to funding in
converse, for estate tax purposes long-term the federal budget. Be aware there are already
guidance has been to get as much property out of existing programs where the COLA is set at
your estate as early as possible. A change in something LESS than the annual CPI changes.
applicable taxes clearly changes the effective You need to be prepared to deal with these in
value of the spendable funds you have available. your planning.
This is one of those areas though where you Social Security - Social Security (SS) is a tax
must "keep up" with the news, as tax law keeps funded benefit which can be changed, means
evolving. For example, at this time after tested, or eliminated. The amount collected in the
retirement it appears to make sense to roll your Social Security tax exceeds the current costs of
TSP into a traditional IRA, for the greatly the program. The deliberate excess is then spent,
enhanced investment opportunities. In the year with a bookkeeping entry made in the SS trust
following retirement, if you are in a lower account. However, before any amount in this
income and tax bracket and still investing for the trust fund can be used, the money needed must
long term, it may then make sense to convert the be taken from the taxpayers a second time. As
"traditional" IRA into a ROTH. Under present discussed in greater detail in a separate article, if
law you will incur a one-time taxes on the all promised payments to the soon to retire "baby
amount converted, but can then later withdraw boomer" generation are actually made, the
all further accumulation of profits tax-free. impact on the federal budget, taxes, and
inflation, may be quite significant.
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

FINANCIAL PLANNING - SECURITIES that the market price of a bond, or the entire
INVESTMENT FOR CAPITAL GAINS. fund, may fluctuate as interest rates fluctuate. To
explain this aspect, let me example a simple one
What are securities? company bond.
Beyond "cash" savings in interest bearing In 2001, ABC Company, seeking to expand its
accounts, you can invest in securities. Think of "widget" manufacturing facilities, marketed
them as a document that you purchase from a $1000 bonds, paying annual interest of 10%,
firm, which can represent a share of ownership with a maturity date 10 years in the future. You
in the firm, that the firm owes you money, or that purchased one of these bonds, and at the end of
the firm and you have entered into some type of 2001, ABC Co. paid you $100.00 interest.
financial agreement.
In 2002, the interest rates in general went down,
Securities investment can be in the form of a and the reputation of ABC Co. gained.
"mutual fund", in which your money, and those Together, in 2002 ABC Co. found it could
of numerous other investors are combined to further expand its facilities, and it issued more
purchase not an investment in an individual firm, bonds. In 2002 though, it found it only needed
but in a selected spectrum of firms. to promise to pay 5% interest annually, for a ten
year bond.
Low risk of loss of stated dollar amount, but high
risk of actual value loss are accounts where the What does this mean to you? In 2002, everyone
interest rate fluctuates, as with a back demand who bought the 2002 bonds receives only $50
deposit. These though have little “market risk”. for each $1000 they invested, while YOU are
still being paid $100. If you wanted to sell your
Market risk is the risk of fluctuations in the value 2001 bond, how much should you ask for it? If
of securities which result from changes in overall we ignore the slight value difference between the
market rates of interest. (See the discussion 9 years left on your bond, and 10 years on the
below on the changes in value of bonds and new bonds, we directly compare the interest
bond funds.) rates.
A Fixed Income Index Investment Fund is a If the 2002 bonds only pay $50 per $1000
commingled bond index fund which holds a invested, and yours pays $100 per $1000
representative sample of a wide range of bonds invested, your bond is now worth $2000 if you
in which the assets of many plans are combined decide to sell it.
and invested together. Fixed-income securities
represent obligations of issuers (who "borrow" In general, when interest rates are DROPPING,
your money) to repay the amount borrowed (the you can expect a "capital gain" on a bond or
principal) to holders of the securities when the bond fund.
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. In general, when interest rates are RISING, you
These securities usually pay interest can expect a "CAPITAL LOSS" on a bond or
semiannually until maturity. bond fund.
Bonds and their funds carry the inherent risk that The market price fluctuation due to interest rate
the issuer of the bond will go bankrupt, or changes works against you as follows. If you
otherwise simply be unable to pay as agreed. bought the 2002 5% bond, and ABC Co. finds in
You, as the purchaser of a bond / bond fund, take 2003 that it must return to offering a 10%
this risk. In such a fund, you money is NOT interest rate, your 2002 bond is only paying $50
guaranteed. 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
In addition to the risk of non-payment, bond be $500, so that the interest they received from
funds also carry market risk. This is the risk 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. Your officers gain from the new pool and
recreation area, the investment in solar panels,
There are other "risks" to bonds, such as a "call". insulation, geothermal heat storage, etc. Do
The example would be when ABC Co. finds, in you?
2002 that the interest rate is needs to pay has
dropped to 1/2 of the previous year. ABC Co. Your investment has no actual cash-flow value.
may "call" some of its old bonds, pay you your Your investment brings no right to any physical
$1000 principle early, and eliminate a high 10% possession or facility use. The numbers look
debt from its books. good on paper, but you only make any profit if
you can convince someone else to buy your
Stock funds. The price of individual stocks or shares at a later inflated value. It appears this is
mutual funds comprised of such can vary sharply a “speculation” (perhaps something short of a
with changes in economic conditions, an gamble) where the only way you physically gain
industry, or even an individual company. is to run a successful campaign for corporate
Depending on the size of a decline, the total officer, and get a free apartment (worth $6,000
return on the stocks held by a stock fund could per year).
be negative, resulting in a loss to the fund
holder. This is true whether the stocks held by a In a self-directed IRA, set up for example with a
stock fund are tracking an index, or otherwise. brokerage firm, you typically have the greatest
There is no assurance that any investment in a freedom to select investments. You not only
stock funds will provide any given rate of return, have access to stock and bond FUNDS, but to
or even that you will receive your original select stocks and bonds from individual firms, as
investment back. well as in some cases gold coins, option
contracts, and real estate holdings.
Under the current laws for corporations, you as a
stockholder (directly or thru a mutual fund) Stock. One share of stock in theory represents
essentially have no right to access the company one "piece" of ownership of the company. There
your “own”, or contact / control your may be different "classes" of shares, with
“employees”. different rights and benefits, such as the ability
to vote on company management or major
To digress, and example a corporation. Envision decisions, or the receipt of dividends (annual
a 100 unit apartment building, held by a payments to you from profits).
corporation that only owns only the facility. The
three corporate officers live in the building, As was demonstrated in the news in the ENRON
getting a free apartment but no salary as a incident, there is no guarantee that an investment
requirement of their management of the in a stock will produce any promised outcome.
operation and maintenance of the building. The You can lose your entire investment. Individual
overall averaged net unit monthly rental income stock selection therefore carries a greater
is $500 per unit. There are 10,000 shares of inherent risk than investing in a stock fund, but if
stock outstanding, 1% owned by each officer. you select well (i.e. if you had bought Microsoft
The stock does not pay dividends, but instead re- in the early 1980's) you can enjoy
invests all profits in improvements in the facility. SIGNIFICANT profits.
Total annual profit for the facility is $600,000, or
$60 per share. If you were looking for 5% Bonds carry the opportunity for profit or loss,
annual earnings, in theory you might be willing not only from the general business climate, and
to pay $1,200 per share, at a facility estimated the specific aspects of the company you select,
value of $12 million. but from the general interest rates of the
marketplace. To restate the general guidelines
As inflation raises the dollar “value” of the regarding interest rates and bonds:
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?

In general, when interest rates are DROPPING, So, how do you make money? If you're right
you can expect a "capital gain" on a bond or and the price of gold goes high enough, you can
bond fund. make a profit. If the price of gold goes up to
$410 per ounce, then (ignoring fees) you could
In general, when interest rates are RISING, you sell your contract for the $1000 it cost you. For
can expect a "CAPITAL LOSS" on a bond every $1.00 that the price goes up beyond $410,
or bond fund. because you "control" 100 ounces, you stand to
profit $100. When the market price of the
Gold. Herein, I bring up gold as an example of underlying commodity (in this case, gold) is
investing in physical personal possessions. Gold making large changes, it is possible to make
has the "unique" aspect in that gold, silver, and large profits, in a short period of time. But the
platinum in the form of American Eagles price must move in your favor, within the
(special bullion coins produced by the U.S. timeframe of the contract, AND you must time
Mint) are perhaps the ONLY such items that can your sale. If you hesitate, and the price drops
be purchased within your IRA. (There are back down, you have missed your opportunity.
probably better uses for your IRA money.)
Real Estate. A relatively recent addition to the
Option Contract. Within an IRA, a limited IRA investment choices offered by account
number of custodians will, in a set of limited providers is real estate. There are a limited
circumstances, allow the purchase of an option number of custodians willing to handle this type
contract. So, what is that? Consider an option of investment, but despite claims of some
contract to be like putting a NON- custodians, you are not limited to the purchase of
REFUNDABLE earnest money deposit on a real estate within the United States. There are
house. Your contract fee (earnest money) additional restrictions, such as your IRA cannot
purchases for you the "right" to the contract, or purchase land that was previously owned by you,
the house, for the agreed period. In the option, or a member of your immediate family.
you're hoping that the price of the item in the
contract moves in your favor, so that you can Accepting the restrictions, it does provide you
"sell" your contract for a profit. For example: the opportunity to, for example, make a long-
term "capital gains" investment in that piece of
In January 2003, you pay a broker $1000 for the wilderness property that you'd love to have at
right to purchase 100 ounces of gold, at a price retirement, or purchase a rental home for a mix
of $400 per ounce, anytime up to 01 JULY 2003. of capital gains and rental income to your IRA.
On the day you bought it, gold was selling at An investment such as a rental home has the
only $375 per ounce. YOUR hope is that potential to provide a source of retirement
between the date of your purchase, and 01 JUL income that exceeds the annuity options (both
03, the price of gold goes up enough for you to the TSP and most private sector annuities), as
make a profit. well as providing a solid asset that you can leave
to your heirs.
If you had wanted to actually purchase the 100
ounces in January, it would cost you $37,500. Beyond the tax deferred account. For most
The option contract gives you the ability to investors, it is probably in your best interest to
"control" 100 ounces of gold, for a six month make the maximum possible use of tax free or
period, for "only" the $1,000. tax deferred investment accounts, prior to other
investments. All of the mutual funds, stocks,
bonds, options, etc. available inside a tax
If 01 JUL 03 passes, and the price of gold has deferred account are also available in the open
never exceeded $400 per ounce, you're probably marketplace. A security that is not available
NOT going to "exercise" your option (actually inside tax deferred accounts is commodities
buy the gold), you probably won't find someone trading.
else to buy the option from you, and at the end of
June your option will "expire" (become
worthless). 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 couple with $100,000 or more of earnings), to
INDIVIDUAL RETIREMENT ACCOUNT convert their "Traditional" IRA into a Roth IRA.
"OPTIMIZED" The bad news: The law as written does not make
this program available for "high income"
The U.S. Internal Revenue Code provides two taxpayers until 2010. Starting in 2010, this law
versions of what may be a significant means will suspend the current $100,000 income limit
available to help you prepare for retirement. I for Roth conversions for two years. In addition,
am referring to "Individual Retirement included in the new tax-cut bill is a provision
Accounts" (IRA's). The IRS refers to the two that if taxpayers convert their Traditional IRA to
versions as Traditional, and ROTH. Each has a Roth in 2010, they won't have to pay any taxes
annual limits on deposits, withdrawal on the conversion that year. Taxpayers will be
requirements, etc. If you want to read the allowed to pay half their tax bill in 2011, the
complete details regarding either version, I'll other half in 2012.
refer you to IRS Publication 590. In this update,
I just want to briefly touch on the taxable In both types of IRA, profits earned inside the
difference of the accounts, and then set out a IRA are not taxed. The advantage of a ROTH is
concept for investing your IRA that provides the that it also allows tax-free withdrawals. The
greatest possible opportunities. concept behind the conversion program is that it
allows you the option to convert, and pay tax at
Traditional IRA - Depending on your income, the conversion, for the long term benefit of not
you may be able to deduct some or all of your paying a greater tax later. This aspect is
annual deposit from your regular income, significant if you anticipate "hot" returns on your
lowering you tax bill for the year. This has the account.
effect of reducing the amount of money you need
to take "out of pocket" to make your IRA General Rules - Either of the IRA account types
deposit. Within a Traditional IRA, the earnings can hold any of the investments allowed for an
can accrue tax-deferred, until you start IRA. The limits you encounter at any particular
withdrawal. At that time, all withdrawals based IRA custodian, for your TSP, 401(k), etc. of a
on a deductible deposit, or profits inside the IRA, fixed list of "funds" is typically imposed by your
will be taxed at the tax rate applicable to you at custodian, not the IRS. For example, at the time
the time you make the withdrawals. of this writing, TSP accounts are held with
Barclays Global Investors, and are limited to 5
ROTH IRA - Deposits to a ROTH are not tax mutual funds. Short of the limits imposed by the
deductible when made. Their advantage firm holding your account, for an IRA there is a
however is that under present law you may be short list of investments, types of transactions,
able to withdraw all of the money, including and prohibited parties. Everything that is not
earned profits, without incurring ANY tax. prohibited is allowed.
While there are further details on such tax-free
withdrawal, in general if you are 59 1/2 or older, Your IRA cannot purchase: Collectibles -
and 5 years have passed since your last deposit, Works of art, rugs or antiques, stamps or coins,
there should be no tax on withdrawals. If you alcoholic beverages, metals or gems.
have taken risks with your ROTH account, and
made particularly profitable investments, it can Your IRA cannot purchase or sell goods or
make a BIG difference at withdrawal time. services:
Traditional to ROTH Conversion - If "you"
(single or married) earn less then $100k per year, To/from you, your spouse, your ancestor or
you can shift your traditional IRA to a ROTH, descendant.
and while you will be required to pay income tax
on the amount coming out of the "traditional" To/from anyone who makes decisions for the
account, you can avoid penalties. On 17 APR plan.
2006 President Bush signed a change in the tax
law which allows even high-income taxpayers To/from an officer director or shareholder (10%
(for the conversion rules, "high income" is a or greater) of the plan.

To/from a partner of any of the above. owe income tax on the payments as received,
and your withdrawals after age 59 1/2 are tax
To/from a business owned 50% or more by any exempt.
of the above. Transaction Waivers / Letter Rulings - If you
want to seek an advance letter ruling to approve
The above list is not as long as you might have a transaction that "might" violate the rules, you
expected. All of the other restrictions you may be, as I, surprised to note that it is NOT the
typically see restricting your IRA investments IRS that you contact. It is the Department of
are the policies of your IRA custodian, not the Labor that holds the responsibility for these.
IRS.
IRA Out of the Box - I admit the above is an
IRA Outer Limit - If your custodian limits your extreme example, which is intended simply to
investment to a money market, stock, and bond spark interest in what an IRA can do for you.
funds, it's usually because their business is to sell This article provides only a very simplistic
those funds. Consider the following, which in a introduction to the steps necessary to create such
very simplistic manner sets out a scenario where an IRA investment tool, and you should
you have probably the greatest possible personally consult with legal counsel and your
discretion in management of your IRA: IRA custodian if you are considering any of the
actions indicated above. There are numerous
1. You shift your IRA funds to a custodian websites which describe this process, and for the
who is willing to make and hold IRA appropriate fee will do the legal work for you.
investments in not only publicly traded Please note, the fees vary widely.
securities, but also private securities, such as
shares of a privately held Limited Liability Without the complication of the above
Company (LLC). investment in a private LLC, there is still much
that can be done with an IRA account, provided
2. After appropriate legal consultation, you have a cooperative custodian. As touched
you create a new LLC, ensuring you are not an on in other articles, an IRA can purchase and
owner. (Anyone can create an LLC, not hold as an investment in the IRA real property,
necessarily the "owner".) whether vacant land, or rental property.
3. You direct your IRA custodian to obtain As indicated above in the restrictions, you and
ownership of the LLC. certain other individuals/entities cannot enter
into transactions between you and your IRA.
4. You direct the IRA custodian to appoint This would of course include lending money to
you as the "General Manager" of the LLC. As your IRA, or the LLC, or you borrowing from
the general manager of the LLC, you open an such. It also means you cannot personally sign
appropriate business checking account for the as guarantor for a loan to your IRA from another
LLC. entity. It does NOT however mean that your IRA
cannot make loans. The IRA rules DO permit
5. You direct the IRA custodian to transfer your IRA to loan money. When your purchase a
funds to the LLC account for use by the LLC in bond, you are making a loan. Your IRA can
its business operations. legally loan money to your friend, niece, cousin,
brother, sister, etc. You IRA can also borrow
6. You now have in your possession a money.
checkbook for an account where you are the only
authorized signer, which potentially contains all There are financial institutions which will make
of the money in your IRA. non-recourse loans to an IRA, depending of
course on the intended investment of the loan,
Extreme Example - Taking examples to the with the understanding that if it turns out the
extreme, consider: You use the checkbook for IRA cannot repay the loan, that the lender has no
your ROTH IRA to purchase a $300 million legal recourse against you, or anyone else, or any
"Powerball" lottery ticket, and win. Under other asset, other than the particular IRA account
present apparent tax law, your ROTH does not 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 At five percent inflation per year, the estimated
FINANCING YOUR CHILD'S COLLEGE cost of a four year degree in Yuma 18 years from
EDUCATION now would be around $24,000 (10 years from
now the cost would be approximately $16,000).
If your child is newborn or still young, it's NOT
too early to start planning for your child's college Once you have estimated how much your future
education. The sooner you start investing for cost is going to be, the amount of money you
your child's education, the longer "compound need to invest each year depends in significant
interest" works for you. Start early, and time can part on what you estimate the annual increase of
be your ally. your investment will be.
The good news is, as your child grows, you'll For the mathematically inclined, the formula is:
gain greater insight into their abilities, interests,
and capabilities. The bad news is that if you F = A ((1+r)n -1)/r)
wait until your child is in high school to
contemplate their college education, you may F = future amount
find their abilities outreach your financial A = amount you put away per time period (i.e.
resources. each year)
r = interest rate during the time period
Approaches to college costs: n = number of years, used as an exponent in the
formula
Long Term Investing
Student Loans and Grants For the computer inclined, you'll want to use the
Scholarships (sports and academic) "Future Value" function in your spreadsheet.
Military Academy
Military Service Assuming you consistently earn 5%, a quick
Distance Education estimate of what you would need to save
annually:
http://www.cosc.edu/
College in Yuma Harvard
http://www.tesc.edu/
Goal $24,000 $226,000
Long Term Investing. The first step in making a For your newborn.
plan is to estimate what the total cost of your
child's education is likely to be. $900.00/year $8,100.00/year
In January, 2003, at the community college in For your 4 yr old.

Yuma, the first 60 credits of a degree (essentially $1,300.00/year $11,500.00/year
an Associates Degree) cost $30.00 per credit.
The 60 upper level credits needed for a For your 6 yr old.
Bachelors Degree cost $133.00 per credit. $1,550.00/year $14,500.00/year
Therefore, in tuition alone (remember fees,
books, pizza...) a Bachelors Degree from our To reach these goals, you probably want your
local institute will cost at least $9780. (Round money growing tax deferred. The readily
up to $10,000) This cost is well below the available approaches include:
national average, which is about $40,000.
Educational IRA
Premier colleges can cost much more. (i.e. the 529 Plans
tuition at Harvard in 2002 was $23,457 per year) Regular IRA
I would suggest you consider the "purpose"
behind obtaining an undergraduate degree, Educational IRA. These accounts have been
before selecting the institution. improperly referred to as an "IRA", but the name

now appears stuck. They are accounts, which child's education, yet fall short of being able to
are available at almost any financial institution pay in full, you may be dismayed if you or your
(banks, brokerage firms, insurance companies, child seek a guaranteed student loan or grant for
etc.) into which you make annual deposits, up to the remainder. In this regard, your savings will
the present limit of $2,000 per year, provide a "work against you".
wide choice of investment options. Prospectuses
on individual plan investment details are Grants, are great. If you qualify, it's "free"
available directly from the issuing companies. money.
The investments grow tax-deferred, and if the
money is withdrawn to pay the types of Loans, are, well, loans, that MUST eventually be
educational expenses authorized, there will be no repaid. If you get a federally backed student
tax even on withdrawal. The accounts are loan, payments can be put "on hold" for a variety
limited to clearly defined family relationships. of reasons. If for example after finishing school,
Note though, DEPOSITS to the account are not your student enters into active duty in the U.S.
tax deductible, and withdrawals that are not used military, payments on a guaranteed student loan
for proper education purposes may not only be can be put on hold, and "Uncle Sam" will make
taxed but have an additional 10% penalty the interest payments. This provides an
imposed. opportunity to either make payments directly on
the principle of the loan, or invest money with
529 Plans. These college savings programs are the aim of paying the loan in full at the end of
created by state law, and will vary in their the loan deferment period. Note for these loans,
details. The plan created in Arizona is called the since bankruptcy law comes from the
Arizona Family College Savings Program at the government, the government protects itself. If
College Savings Bank (CSB), and is limited to you find yourself bankrupt, you should expect
the investment options set out in the state law. that you will NOT be able to get rid of these
Deposits are not tax deductible. Deposits grow loans in bankruptcy proceedings.
tax deferred, and when withdrawn for authorized
education purposes, are tax free for federal and Scholarships (sports and academic). These are
Arizona State income taxes. Arizona has no programs specific to the institutions.
annual limit on deposits, but does have a total
deposit limit of $187,000. Please note, that Military Academy. Perhaps the most
deposits in any year which reach or exceed challenging means of obtaining an undergraduate
$10,000 for any one person may require you to education is one of the military service
file a federal "Gift Tax" form. (Yes, there are academies. It is four years of intensive effort,
laws which impose a tax on money you give to followed by some minimum required period of
someone else.) You CAN make contributions to active duty service.
BOTH an Education IRA and a 529 Plan. With
the 529 plan, "anyone" can open the account, on Military Service. Even if you have saved,
behalf of anyone else.... Therefore, if you could consider the benefits of a term of enlistment.
convince grandparents, or that rich aunt or uncle
to help... Credits for service. In certain college programs
(i.e. distance education) you may receive college
Regular IRA. If you have set up a "Traditional", credit for "boot camp", other military schools, or
or "ROTH" IRA for yourself (or retired and even for your MOS/Rank.
rolled your TSP into an IRA), you can withdraw
your money for qualified education expenses, Tuition Assistance. All of the services have
and avoid the 10% penalty. (You'll still have to some program where the government pays some
pay income tax on what you withdraw though.) portion of your tuition to attend classroom,
If you don't have the "extra" money to set up a correspondence, or other distance learning
dedicated education account for your children, programs.
this may be a practical option.
Credit by Exam. There are a wide variety of
Student Loans and Grants. If you've been examinations available thru the Defense Activity
dedicated and conscientious in saving for your 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/cle
p/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.1488
512ecfd5b8849a77b13bc3921509/?
vgnextoid=efc42d3631df4010VgnVCM1000002
2f95190RCRD&vgnextchannel=cfd946f1674f40
10VgnVCM10000022f95190RCRD
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. Registering a Motor Vehicle here
Obtaining an Arizona driver's license
Why are tuition costs different for non-residents? Employment history, including assured future
In most states, there is a significant difference in permanent employment in Arizona
college tuition rates for bonafide residents of the Transfer of major banking services to Arizona
state, and those from outside the state. The Applications for loans, scholarships, grants-in-
general reasoning is that institutions of higher aid, or other such assistance
education are funded or subsidized by state Date and state in which registered to vote
taxpayers. Since non-resident students (and their Place of prior attendance in educational
families) generally have not contributed to the institutions, including high schools, and any
source of this funding, they are required to pay information held by such schools affecting
fees which more closely represent the actual cost domicile
of the education. Marital status and work record of registrant and
spouse
Beyond residency status consideration, in an era Change in permanent address on all pertinent
of tightening budgets if states reduce educational records
subsidies, you can expect tuition to rise for State in which registered with Selective Service
everyone. For the present, qualifying for in state Military records
tuition makes a significant difference in what Ownership of real property
college will cost. For example, tuition costs at All other material of whatever kind or source,
the University of Arizona are: which may have a bearing on determining
domicile or resident status
Undergraduate
Tuition Note: any act considered inconsistent with
becoming an Arizona resident (such as voting,
Resident $3,593.00 securing or maintaining a driver's license or
Nonresident $12,113.00 automobile registration in another state) will
result in a non-resident decision.
Who determines college residency rules? In
Arizona, the rules and regulations for Exemptions to 12 months residency. There are
establishing residency for tuition purposes are some specific exceptions to the twelve months
defined by the Arizona Board of Regents, which rule, which may entitle a person to resident
is authorized by Arizona law to set different rates classification if all conditions have been met by
for resident and non-resident students. The the last day of regular registration.
requirements to establish residency for tuition
purposes are independent from those of other Dependent - You will be classified as a resident
types of residency, such as voting or holding student if you can establish that on or before the
public office. last day of registration you are domiciled in this
state AND the domicile of one of your parents is
Who qualifies for Arizona resident tuition? in this state, and the parent is entitled to claim
Under current law, a resident for tuition purposes you as an exemption for federal and state tax
is: purposes. Please note, living in Arizona with a
relative other than parents or legally appointed
Adults. An adult (18 years or older) must guardians will have no influence on residency
physically reside in the state for the twelve status.
consecutive months immediately preceding the
term for which resident classification is Transferred Employee - You will be classified as
requested, who has demonstrated an intent to a resident student if you can establish that on or
"Establish a Domicile" here. Intent to be a before the last day of registration you are an
resident of Arizona is demonstrated by the employee of an employer, which transferred you
absence of ties to the former state of residence to this state for employment purposes, or you are
for twelve consecutive months, evidenced by the spouse of such an employee.
such as:

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 debts are covered, who can file, and what
Changed in Late 2005 property you can and cannot keep.
ONE OMINOUS WORD Chapter 7 bankruptcy is the liquidation variety --

property is sold (liquidated) to pay off as much
Bankruptcy - a word that previously evoked of your debt as possible, while leaving you with
shame, but which has grown in acceptability, and enough property to make a fresh start. A court
in generated necessity, such that over 1.6 million appointed trustee will negotiate with your
Americans filed for bankruptcy last year creditors, handle the selling of all nonexempt
(American Bankruptcy Institute). property, and split the proceeds amongst the
creditors. Normally, exempted property can
The dramatic rise in bankruptcy filings in recent include a portion of your residence or property
years prompted Congress enacted the allowance, immediate personal possessions,
Bankruptcy Reform Act (BFA), in October 2005. household utensils, tools (if related to your
While the BFA is viewed by some as harsh or occupation), and provisions to support a family
unfair treatment of debtors, others view it as for six months. Oftentimes, however, creditors
leveling the playing field for creditors by making are not paid in full and the remaining debt,
bankruptcy filing more difficult and expensive, including most credit card debt, is canceled.
especially for unscrupulous borrowers to simply Under normal circumstances, a person can only
walk away from incurred debts. file for Chapter 7 bankruptcy every six years.
During the past 40 years, there has been a Chapter 13 is the most common type of
dramatic increase in pressure for the average "reorganization" bankruptcy for consumers --
American consumer to obtain and maintain good you repay your debts over three to five years.
credit. Gone are the days when the only items Under this program, the court appointed trustee
financed were houses and automobiles and only creates a repayment plan to the creditors which is
a small portion of society had credit cards. submitted to, and must be approved by the court.
Today, everyone is expected to have at least one If approved, all disposable income is paid to the
credit card and one can purchase most anything, trustee, who in turn makes all distributions to the
large or small, on credit. In a perfect world, creditors. Although this plan is designed to have
people would only borrow what they could the debtor to live a “bare bones” lifestyle, it is
afford to pay back. This is not the reality in the not totally rigid. The court may modify the
world today, which heavily promotes a “have required payments given good cause.
now – pay later” way of life.
THREE KEY CHANGES
In basic terms, bankruptcy is a court process
which provides a mechanism for debts to be The new 2005 changes place a greater burden on
modified or eliminated when it is impossible for the debtor to prove their debts cannot be paid,
the debtor to fulfill their financial obligations. and to ensure that bankruptcy is used as a “last
According to the U.S. Supreme Court, this would resort”:
allow the debtor, “a new opportunity in life and a
clear field for future effort unhampered by the 1. Debtors must first complete a court-approved
pressure and discouragement of pre-existing credit counseling course, at their own expense,
debt.” within 180 days of filing.
TWO DIFFERENT METHODS 2. Debtors must undergo an extensive and

complicated “means test” administered by the
Before going over the changes, note that court to determine bankruptcy eligibility.
bankruptcies can generally be described as
"liquidations" or "reorganizations." Both kinds 3. Significant changes to the “homestead
of bankruptcy have numerous rules -- and exemption” rule. Under the previous rules, the
exceptions to those rules -- about what kinds of home could, depending on state law, be made
safe from being affected by bankruptcy. The

federal law requires a “home history check”, 7. Where can I go to seek help if I have a debt
which only allows for homestead exemptions of problem? Most military installations, to include
up to $125,000, for any property bought or Yuma Proving Ground, have both a financial /
acquired within 40 months of the bankruptcy budget advisor at the Army Community Service,
filing. This prevents people from trying to hide and the installation Legal Assistance attorney
their assets by buying expensive properties at the who can provide assistance to authorized
last moment and incurring further debt. customers. Additionally, there is a bevy of other
alternatives one should try prior to filing for
MOST ASKED QUESTIONS: bankruptcy, such as negotiation with creditors,
debt consolidation loans, or challenging a
1. Are there other financial assets that I can disputed debt in court.
protect, or will I have to forfeit most all of my
accounts to pay off my debt? Under the new Remember, bankruptcy should be the last stop in
law, certain types of assets, such as IRA’s and attempting to overcome a severe debt problem,
401(k) plans may be exempt. Additionally, not an easy fix to become debt free.
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.

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

Once you have obtained your state non-profit public, don't do it with your 501(c)(3) entity.
corporation, you've got to file for federal tax- Don't use your charity to assist in any way
exemption with the Internal Revenue Service. candidates for elected office or to political
There must be a meeting of directors and parties.
members, by-laws written and approved, and
membership certificates issued. The IRS will Limits are covered in IRS Publications 557 and
want your by-laws submitted. 578
While the IRS requires you be a non-profit entity http://www.irs.gov/pub/irs-pdf/p557.pdf

to apply for tax exempt status, the state non- http://www.irs.gov/pub/irs-pdf/p578.pdf
profit status DOES NOT mean you have reached
tax-exempt status until you receive your IRS What qualifies as a charity?
designation. You will not even be considered for
state tax exemption until you have been Section 501(c)(3) organizations are nonprofit
approved by the IRS. corporations which are formed exclusively to
accomplish one or more of the following
Why go thru the hassle of qualifying as a purposes:
"Charity"?
1.Religious purposes,
If you would like to solicit for donations to your 2. Charitable purposes,
organization, and be able to provide your 3. Scientific purposes,
benefactors the ability to deduct their donations 4. Literary purposes, or
from their individual income taxes, you must file 5. Educational purposes.
an application with the IRS for 501(c)(3) status.
Until and unless you receive a 501(c)(3) "Charitable purpose" is broadly defined as
exemption letter from the IRS, you are NOT yet anything that aids the public. Examples of
a charity. charitable purposes have been:
IRS Publication 557 discusses what 1. Protecting the environment.

organizations qualify, and application 2. Providing food to the elderly.
procedures, and is available online at: 3. Providing education.
4. Providing medical services to the indigent.
http://www.irs.gov/pub/irs-pdf/p557.pdf 5. Operating a museum.
6. Operating a library.
The related application package is online at: 7. Operating a park.
8. Operating a hospital.
http://www.irs.gov/pub/irs-pdf/k1023.pdf
A charity is permitted to make money from its
The major benefit of 501(c)(3) status is the activities. It is permitted to pay employees. It is
ability to solicit tax-deductible donations. Within just not permitted to distribute the money earned
Arizona, it also provides other benefits, such as to any shareholder or member. The profits of the
the ability to legally operate fundraisers such as charity must be used to achieve or further the
"bingo" games and raffles, which would be charitable purpose for which the nonprofit
criminal under Arizona law without the corporation was formed.
charitable designation.
There are two types of 501(c)(3) tax-exempt
There may be other benefits of qualifying as organizations: the public charity and the private
charitable under 501(c)(3), such as qualifying foundation. The main difference between a
under U.S. Postal regulations for special bulk public charity and a private foundation is who
mail rates 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
Charitable Disadvantages If you want to lobby agencies. In addition, public charities must have
legislators, or advocate for legislation to the boards which are open to the public. By

comparison, private foundations do not have Organization Annual Report Form, and the right
fixed minimums for public or government date for your entity to file, as it does not
support. In addition, the boards for private generally match the individual filing date.
foundations are often closed to input from the
public. Even though an organization holds federal tax-
exempt status, an income tax may still be
Non-profit but not a charity applicable. The "unrelated business" income tax
applies to otherwise tax-exempt organizations
If you don't need to accept deductible charitable when they engage in activities regularly that are
donations or can't qualify as a charity, you may like those of commercial entities. Again, see
consider 501(c)(4) status, which provides that your accountant.
organizations which exist exclusively to
"promote social welfare" or employee Annual State Returns
associations which are composed of employees
from one employer for "charitable, educational Also check with you accountant for the specifics
or recreational purposes can be tax exempt. of filing a non-profit state income tax return.
Examples: volunteer fire companies, search and Should you go thru the process?
rescue companies, homeowners associations,
etc.. Form 1024 is used to get the tax exemption. Incorporating, obtaining, and maintaining legal
Contributions to the nonprofit corporation are status as a non-profit requires more effort and
usually not deductible to the donor. Such attention to detail than an informal organization.
contributions can be deductible only when they But the protections and other benefits should
are to be used exclusively for public purposes clearly outweigh the costs and time involved.
rather than to benefit the members of the Unfortunately, while I can provide a
organization. "preventative law" brief on the risks inherent on
club membership, management, and
State Tax-Exemption Both 501(c)(3) and organization, actually providing one-on-one
501(c)(4) provide exemption from federal personal assistance on creating or operating such
corporate income tax. Arizona policy is that your an entity appears beyond the scope of services
charity will also be exempt from Arizona income authorized by regulations.
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

FINANCIAL PLANNING
LIFE INSURANCE John's base pay is around $2130/month. He
expects he will retire as an E-7, and then move
Overview - Life insurance is a means of on to a private sector job earning about the same
providing financial security for your family as he was on active duty when he reached
should you die prematurely. In general retirement. He plans to work until he is 62, and
therefore, the purpose of life insurance is to then retire. He wants to be able to fund college
provide for a sum of money, payable should you for his two children, and ensure that Jane does
die, that will replace your prospective earnings not have to work, at least while the children are
and retirement income. still in school.
So how much life insurance do you need? It's Aspects to consider:

really a personalized calculation, based on a
combination of factors, such as: Interest rates are around 4%.
How old are you now? Replacing 13 years of John's military salary (I’m
Based on your health, and information such as using just base pay).
your family history, what is your expected Replacing 24 years of John's private sector
lifespan? earnings.
Do you smoke? Even if you never smoked Replacing 42 years of John's military pension
before, and you just lite "one"cigar before a life (assume a lifespan to 80)
insurance physical, don't be surprised if your Provide for Jack's 4 years of college starting 14
rates are the higher "smoker", for at least five years from now.
years. Provide for Jill's 4 years of college starting 16
How much are you earning now, and how much years from now.
do you expect your real earnings to rise during
your anticipated career? If John expects to make E-7 early enough for his
What expenses do you have that you want to retirement "high three" to count it, he needs to
ensure are covered? (Do you want to leave your make it by 17 years. Projecting his promotions
family a fully paid for home, money for college as more or less evenly, the present cash value of
for the kids, etc.?) his base pay thru to retirement is:
Based on your understanding of the economy,
what do you believe is going to happen to prices $352,000
of goods and services in the relevant future?
Into what type of investments do you expect If John retires at age 38 as an E-7, 50% of high
your heirs will place the life insurance payment? three, and expects to live an additional 42 years,
What other benefits are available for your the present cash value of his active duty
survivors, such as the Survivor Benefit Plan and retirement checks are:
Social Security.
In particular for service members thinking of life $270,000
insurance from a commercial company,
specifically ask if the policy has a "war clause." If John expects to work from age 38 to 62 at the
Such clauses typically allow insurance same pay as he retired at, the present cash value
companies to avoid payment on a contract of of his private sector wages is:
insurance if the service member is killed in war
or by a "military service hazard." $408,000
An example to demonstrate determining the Therefore the minimum insurance needed to

amount of insurance needed: replace John's wages and pension, if all done by
insurance, is $1,030,000.
John is 25 years old, active duty, married to Jane.
They have two children Jack (age 4) and Jill (age Today, a Bachelors Degree from a local institute
2). John is E-5 with 7 years of service. Jane will cost around $10,000 in tuition, well below
does not work. the national average, which is about $40,000.

Add room, board, books, etc. and the present whole life can then be considered as one of they
cost ranges from $30,000 to $120,000. If John many means (including also the world of "TSP",
wants to have college for both children covered, "Individual Retirement Accounts", mutual funds,
and not effect the other monthly income of the money market accounts, real estate, etc.)
family, he needs an additional $250,000 of available for investing for your future.
insurance, for a total of $1,280,000.
A "whole life" investment type policy is one
Even though Jane is not working, that doesn't where the policy accumulates some "cash value"
mean the family does not need insurance on her which can be "borrowed" or considered as a
life. As the primary caregiver for the children, form of investment. It is generally a type of life
Jane is raising the children, watching out for insurance where the coverage can be maintained
them, teaching them motor skills, play, basic for your entire lifetime. The documents
language, etc. If Jane were to die, John could presented to you as part of the "sales pitch" often
not simply go off to work every day and leave include projections of significant profits within
the children alone. The minimum to consider the policy. Read the details carefully, and look
would be daycare, projected here as around $180 for the amounts that the company guarantees,
per week, per child, until the child is say twelve. rather than mere estimates. (The fact that any
(Without Jane, the kids are probably going to be particular class of investment advanced
in some sort of pre or after school program, at significantly in the PAST, does not necessarily
least until they are teens.) mean it will do so in the future.)
Merely to provide the limited daycare for the In general, after establishing your safety net my
children set out above requires present cash recommendation is that considering "whole life"
value of life insurance on Jane of around insurance as an investment should be at or near
$141,000. the bottom of your investment priorities.
(The formulas to calculate "Present Cash Value" Financial Planning - Warning on Misleading Life
or "Future Cash Value" are generally available in Insurance Programs
spreadsheets.)
We have received a 26 page report from the
You have the right to name any person(s) you Congressional General Accountability Office,
choose as the beneficiary(ies) of your life entitled ACTIONS NEEDED TO PROTECT
insurance policy(ies). If you specifically want a MILITARY MEMBERS, on "flawed" financial
portion to be used to provide for your child's products sold to military consumers and the
education, you may not want to leave the money questionable techniques being used to sell them.
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 At a Senate Banking Committee hearing, in his
someone as Trustee for your child. opening remarks, Senator Richard C. Shelby,
Republican of Alabama and the committee's
For a family of modest earnings to purchase chairman, alerted the Pentagon representative at
insurance in the above amounts probably the hearing that he would be in for tough
requires the purchase of "term insurance", which questioning about why the Defense Department
is what the SGLI program is. Term insurance "has not moved more aggressively in this area
provides a much higher amount of coverage, for heretofore." It appears that last year a New
much less cost, because it has no "investment" York Times article documented a decades long
aspect. As with SGLI, when the policy ends, series of the sale of insurance and other
nothing remains. The "term" aspect generally "financial products" on some military facilities,
refers to the period of time during which the sanctioned by military leaders, that were clearly
company has agreed to provide insurance contrary to the best interests of the members
coverage and the costs for that period. convinced to make the purchases.
Your first priority must be the above "safety net" The report appears to particularly disdain a
for your family. After the safety net is met, 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 Nursing Home Care: This is for people with
LONG TERM CARE INSURANCE chronic or disabling illnesses who cannot care
for themselves but who do not need hospital
Health problems can greatly change your life, care. Nursing homes offer up to three levels of
and if you're not prepared to deal with the costs care—skilled nursing care, personal care, and
they can devastate the rest of your financial and professional care.
retirement planning. Because you cannot predict
the future, it is a good idea to think about long- The key question for your financial plan is, How
term care as part of your estate plan. do I pay for long-term care?
What is long-term care? It is assistance to help Costs for long-term care vary depending on the
you if you have a disabling or chronic illness and amount of care provided, type of care provided,
cannot care for yourself. It is not necessarily and location where the care is provided. You
traditional medical care in that it may not be may use one or more of these ways to pay for
intended to improve or correct a medical long-term care.
problem, but rather to help you cope with your
condition. Personal Funds: Your own personal resources,
such as personal current income, savings, or
Consider, people are living longer, medicine investments. However as medical procedures
allows us to continue on with conditions which have become more complex and expensive, and
only a few decades ago would have clearly expansive, the "middle class" is caught in a bind.
meant death. After paying tax throughout their life to support
the Medicaid program, which was originally
intended for the poorest segment of the
Some examples of long-term care are: population, in their old age the "middle class"
find if they've saved and invested, they're not
Home Health Care: Trained personnel come to eligible for assistance until their lifetime assets
your home on an ongoing basis to help with are expended.
activities of daily living, such as bathing,
dressing, or eating. They may also help prepare Contributions from Family Members: If you do
meals, run errands, and do light housekeeping. not plan ahead for long-term care, do not have
sufficient personal resources, and do not qualify
Respite Care: This provides a break for family for such government assistance as may be
members when they are the primary caregivers available, you may have to rely on your family
for the disabled person at home. A respite members to pay for or to deliver care. This can
caregiver usually comes to the home and may be be burdensome on your family if family
a volunteer. members do not have the financial resources to
pay for care or the necessary skills or time to
Adult Day Care: Typically at a center that provide the proper care. In addition, family
provides both health care and social services for members, who in the past would have been
people who cannot be left alone during the day. relied on for assistance, often live great distances
apart.
Assisted Living Care: This is a combination of
Medicare: Medicare1 covers very little of the
housing, personalized support services, and
long-term costs that most people need. Medicare
health care designed to meet the individual needs
will pay for up to 100 days of care in a skilled
of people who require some help with daily
nursing facility after you have been hospitalized
activities but not the skilled care of a nursing
for at least three days. Medicare covers the first
home. This care is ideal for someone who is too
twenty days entirely. The patient pays a daily
frail to live alone but does not need to be in a
coinsurance after the twentieth day until day 100.
nursing home. Assisted living facilities may be
independent facilities, combined with skilled 1
Medicare, Medicaid, etc. as government
nursing facilities, or part of a continuing care programs are dependent on sufficient tax
retirement community. Most costs are paid by revenues (money stolen from taxpayer pockets,
the resident and family members. or created from thin air).

After day 100, Medicare covers none of the the younger you are when you initiate such a
costs. Medicare does not pay for custodial care. policy, the lower the payments.
Medicaid: Medicaid is a joint federal and state Do I need long-term care insurance?
program intended to pay for health care for
people with limited income and resources. It Maybe, depending on your health, age, and
does pay for custodial nursing home care. Each financial situation, among other factors. It is a
state sets its own standards for Medicaid personal decision similar to whether you need
eligibility, determines the type of services life insurance. If you think you may need long-
provided, and administers the program under term care and believe you have adequate other
federal guidelines. funding sources then you may not need long-
term care insurance.
These rules are complex, vary from state to state,
and are of course subject to change by the What should I look for in a long-term care
legislatures. If you expect to have significant insurance policy?
assests and retirement income, yet want to
qualify for Medicaid, there are legal steps you There are several issues to consider when
can take, such as transferring assets to carefully evaluating a long-term care insurance policy:
and specifically worded trusts.
Some brief information for coverage in Arizona Services Covered: Many policies cover only
is: long-term nursing home care. You should make
sure your policy also covers other types of care
Income not over $1656/month. desired (e.g., home care, adult day care).
Resources (cash, bank accounts, stocks, bonds, Amount of Benefit: A typical policy allows a
etc.) not more than fixed dollar amount for each type of service,
$2,000 value for an individual. For a married regardless of the actual cost of the service.
couple, the non-applicant spouse may keep up to Paying a higher premium may buy a policy that
1/2 of such resources, or a total value of $90,660, will pay more for the service. Find out if the
whichever is less. policy pays a different amount depending on the
type of care provided. For example, is the
If you believe you may need long term care, and payment for a day of nursing home care different
your plan is to rely on Medicaid, you must from the payment for a day of home care? You
realize you will probably need to make specific may have more flexibility in planning later on if
and significant changes in your assets and the policy makes the same payment for the
financial plans, lest you essentially lose on a different services.
lifetime of earnings. The asset rules have lead
many senior citizen couples to the decision that a Deductibles, Co-payments, and Waiting Periods:
divorce is necessary for them to protect their life Generally the higher the deductible, the lower
savings. the premium. Also, most policies have a waiting
period of 30 to 90 days during which time you
Veterans Administration (VA) Health Benefits: have to pay for services from your own funds.
Many larger VA hospitals offer extensive long- Also, many policies only pay benefits for a fixed
term care services. You should contact the period of time rather than indefinitely. After the
nearest VA hospital to determine your eligibility time period runs, you will have to rely on your
for the services the hospital offers. own funds or other sources to pay for the
services.
Long-term Care Insurance: This is private
insurance for which you pay designed to cover Payment of Benefits: Find out the requirements
long-term costs. Depending on the policy, long- to start coverage under the policy. Some
term care insurance may cover nursing home insurance companies accept a covered person's
stays, home health care, adult day care, assisted- doctor's statements while others require
living facility care, and respite care. In general, certification from the company's medical staff.

Find out if there are restrictions on illnesses for care is then denied for the time that your
covered or transfers to a nursing home not assets COULD have paid for care.
following a hospital stay.
Economically, the projections for the cost of
Forfeiture Provisions: Find out if the policy has nursing home services, and the portions paid by
any forfeiture provisions, which may permit you the government, are not good. The post World
to recover some of the accrued value of the War II "baby boomer" generation will in 2008
policy if you can no longer afford to pay the start to reach retirement age. At that point and
premiums. This could mean you might be able to for the following several years, this group which
keep the policy with reduced benefits, convert it is among the highest earning, highest tax paying
into term life insurance, or borrow against or portion of the population, will cease paying
receive the cash value of the policy if it has any taxes, and become eligible for government
cash value. benefits such as Medicaid nursing home
coverage.
Inflation Protection: Expect the cost of long-
term care to rise over time, and see which policy Statistics would indicate that the demand for
offers inflation protection. nursing home services should jump, while tax
revenues fall unless taxes are raised
How can I compare long-term care insurance dramatically. What, if anything, this will prompt
policies? lawmakers to do will be up to the representatives
in position at that time.
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

FINANCIAL PLANNING security tax were promised higher benefits when
SOCIAL SECURITY they retired.
A significant portion of the anticipated old age The latest information at the Social Security
income for soldiers (and FERS civil serve Administration website shows that in 2003 they
employees) is Social Security2. You need to collected $468.6 Billion SS taxes on payroll and
understand the aspects of this potential benefit. benefits. The program paid out $406 Billion in
benefits, and cost the taxpayers $600 Million in
Social Security and Your Paycheck. administrative costs.
The social security tax which shows on your By law, the remaining $62 billion of Social
earnings statement is 7.65% of your gross wages. Security taxes collected was transferred to the
This is however only half of the tax, the other treasury in exchange for a special class of federal
half is required to be paid by your employer. security. The Social Security Administration
Since the other half of this tax is based on your lists as an "asset" $1.3553 Trillion in such
status as an employee, your earnings, and with securities, which is the Social Security "trust
your prospective social security benefit based on fund". All money deposited in exchange for
both portions of the tax, in economic terms it is these securities is then spent on other
part of your wages which you would otherwise government programs.
be paid were it not for existence of the tax.
Therefore in effect you pay the entire 15.3% tax. Your Social Security Benefits:
The income tax allows deductions for certain 62 is considered as the minimum age for "early
medical insurance expenses, 401K, TSP, IRA retirement" and beginning to collect a payment
deposits, etc. No such deduction applies to your from social security. Initially, 65 was considered
social security tax. Likewise, your social the age for "full retirement", but there is now a
security tax is NOT deducted before the regular sliding scale where your birthdate determines
income tax is calculated. your full retirement age. If you opt for early
retirement, your social security payment is
The Social Security tax rate for 2004 is 15.3 PERMANENTLY reduced, based on a scale of
percent on all wages up to $87,900. In terms of how much before your personal "full retirement"
days worked, the tax represents about 9 weeks you started your request for benefits.
out of each of your working years. You must
have 10 years of taxed wages in order to qualify Your projected social security old age benefit
for an old age benefit. payment is based on the total tax collected on
your wages. If you have not recently received a
Background of the program. benefit projection from social security, you can
request one online at:
The initial social security tax back in 1935 was
2% of the first $2,000 of wages earned. In the http://www.ssa.gov/mystatement/
past, as increases in social security distributions
reduced the amount of money being transferred Note though, there no legal basis on which any
to the general treasury, Congress increased the of us have an "entitlement" to receive social
tax rate, and the level of income subject to the security. The laws relating to the program
tax. This allowed the increased payments, while clearly indicate it is a benefit which can be
keeping the subsidy of other government changed, or eliminated. A Supreme Court
spending. But with the system as written, it also decision in 1960 upholds this position.
meant that those paying the increased social
Challenges for the Program:
2
WARNING – Social Security is a welfare
program, not an investment or entitlement. I can Beginning in 2008, the first of the "baby boom"
disappear or be made means-tested, and you generation will reach retirement age. This spike
have no effective ability to complain.

in age distribution in our population represents a Make the promised payments by dramatic
sudden increase in births in the post World War increases in some combination of the social
II period. This group is a significant percentage security, general income, or other taxes, or
of the population. nflating the currency.
The financial challenge facing the social security Come up with a program where payments are
system is that this group of people, who are made from within the actual and reasonable
paying the highest social security taxes will taxes collected. This would be some
cease paying, and suddenly be eligible for large combination of payments smaller than promised,
payments. Reports at the social security website or a means to determine retirees who will be
clearly show that when the baby-boomers retire, denied the promised payment (i.e. by a "Means
annual income from the present social security Test" such as with welfare, where if you have
tax is well below the amount that is scheduled to another source of income, or assets, the payment
be paid out. is denied.)
Simple math on data available from the social Were the Social Security program a failing
security website shows that the payments private sector pension or annuity plan, in
promised to the baby-boomers can't be paid Bankrupcty, the court would apportion the
without tapping the trust fund. Therein lays the benefits from the program in the same
concern for your retirement planning, as Social percentage as those who contributed. That is,
Security starts to make "withdrawals" from the those who have paid the most into the program
trust. would receive the greatest payout.
The economic reality of Social Security is there The "fail safe" approach is to plan for your
is no pool of money. retirement as though social security will not be
available to you.
Every penny of social security tax collected has
either been paid out to a recipient already, or has What to do?
been spent.
There have been discussions in D.C. that a
Every new penny of social security that is paid partial remedy to the Social Security situation
out to a new recipient, or as cost of living could be to allow you to divert a portion of your
payments to existing recipients, means that less tax to an account that could be invested in stocks
of the "excess" is transferred to the general and bonds, but no such legislation has been
treasury for spending. That means that the successful. You could consider though creating
government must cut other spending, increase your own program.
the general income tax, or increase the deficit.
Maximize your other retirement investments.
Every penny that social security "withdraws" TSP, IRA's, money market, stocks, bonds,
from the "trust fund" means that the government mutual funds, real estate, etc., all of which are
must cut other spending, increase the general explained in further detail in other financial
income tax, or increase the deficit. planning articles.
What does it mean for your retirement? Examples of Personal Savings vs Social
Security.
You must draw your own conclusions as to how
the government, and you, will deal with the Look at what happens if YOU could take the
financial discrepancies of the social security 15.35% of your gross wages and invest it:
program. It appears the major options for the
government are: 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 Making no further contribution, at age 62 the
demonstration, the worker is able to divert the TSP could have over $1,200,000 in it. Not a
15.35% being paid to Social Security into a bad "nest egg" for a career E-1.
private sector investment at 5% .
The examples demonstrate the benefit of
Social Security payment on the amount if taken consistent savings and compound interest. A
as taxes would be around $484 per month vital aspect is starting early, and letting the
starting at retirement. compounding work for you.
If you die, your spouse or minor child may be For specific advice on selecting individual
eligible for a one time death benefit payment of investments, you should review appropriate
$255, and may be eligible for some publications, private counsel, your accountant, or
portion of your monthly payment. other trained and qualified financial planning
professionals.
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.

FINANCIAL PLANNING prices tend to track the overall national
SPECIFIC GOAL, A HOME inflation rate, providing some protection against
value loss for your money. Improvements you
For the average working American, the purchase make to the property may result in increases in
of a home is the largest investment of their value beyond your "out of pocket" costs.
lifetime. Looking at home ownership as an
investment, you want the best "deal" and features In recent years, the annual inflation rate has been
in your investment. 3% to 4%, meaning your $105,000 home
increases in value each year by $3,000 to $4,000,
Pursuit of an active duty career in the military while your payments reduce the principle you
does not preclude you from investing in a home. owe.
Quite the opposite, I would argue that a soldier's
ability to visit, live, and work in a variety of Your property taxes, and the interest you pay to
areas, while maintaining a single career, provides your finance company, are deductible from your
you greater insight into where is a "good place to income for income tax calculation purposes,
live". which may lower the income tax you are
required to pay.
Why put money into a home? Purchase vs.
Renting (or living in government quarters). The Rental Income. Owning real property which you
really short answer is, at the end of renting for 30 rent out provides you the opportunity to earn a
years, what do you own? Flippancy aside, let's return on your investment which probably
examine an example: exceeds the interest rate of any deposit account,
"profit" from inflationary as well as real
E-5, in Yuma, monthly BAH around $838. increases in real estate value, while also
providing some extra income tax deductions.
$105,000 home, purchased with VA "nothing
down", 30 year mortgage, monthly payment of Tax Benefits. Under present tax law, when you
$605. Insurance and real estate taxes, averaged rent out real property, you can deduct your
monthly, will probably bring your total monthly operating expenses, property taxes, finance
payment up to your BAH. charges, insurance, even pencils, paper, postage,
etc. related to the property. A significant
Inflation protection. In economic terms, consideration is "depreciation" of the structure
inflation is not the increase in the value of things, and other non-land aspects of the rented
rather it is the DECREASE in the value of property. Depreciation involves an assumption
currency. Absent inflation, the dollar you found that such items wear out, and allows you to
in the crack of the sofa would, today, purchase subtract this wear allowance, even if the items
the same amount and type of goods that it would have not actually worn out.
when it was lost. Such is not however the case.
In general, any amount held as cash, without If the expenses for your property total to more
being on deposit or invested in some manner, than your rental income, you get to subtract your
will consistently be useable to purchase less and "loss" from your other earnings, before you
less. calculate how much income tax you owe.
Historically the greatest significant cause of Over the years, it may be possible for you
inflation is when the entity that issues the depreciate the value of the structure to "zero",
currency progressively puts more currency into even thought the true value of the property has
circulation. The two primary methods are to increased significantly. If you then sold the
PRINT more currency, without any asset or property, the IRS would consider everything
financial activity to back it, or for the above your depreciated "basis" in the property as
government to progressively fall into debt, profit, which would be taxed… Unless you took
spending money it does not have. some additional steps.
Absent factors which effect its true value (i.e; a If your intent in selling a rental property is to
growing, or declining, community), real estate obtain another rental property, you can postpone

taxes on the increased (real or inflationary) ahead to protect your assets, that you are also
by a procedure referred to as a "1031" exchange. looking ahead to avoid problems in the first
While the legal fees for this process may cost place, and to obtain sufficient insurance. But
several thousands of dollars, they will often be also, if someone is considering a lawsuit against
far less than the taxes otherwise due. you, and a preliminary investigation finds
you have no assets which can be taken, perhaps
You may also avoid taxes on the profits if you they won't bother even starting a nuisance
convert your rental property to your personal lawsuit. (One of the initial guidelines for a
residence. (There are restrictions if you just personal damage lawsuit is to find someone with
did a 1031 exchange) "deep pockets", in otherwise lots of money.)
Once the property is your personal residence, As written, the statute restricts a married couple
and you have lived there for an accumulated who own real estate to a $150,000
period of two of the preceding five years, current exemption as a couple. Yet, if an unmarried pair
tax law allows you to exclude from income taxes of individuals was to co-own the same piece of
all profit on the sale, even what would otherwise property, and be living there in the same manner
be recovered depreciation. (This is a great deal as a married couple, the statute would allow each
to save taxes if you have the two years to live of them to exempt $150,000, for a total of
there.) The exclusion from income is $250,000 $300,000 of protected equity.
per person, $500,000 for a married filing jointly
couple. Why NOT buy a home? When you live in a
private sector rental, or government quarters,
The Military Family Tax Relief Act of 2004 many times utilities service and maintenance are
(MFTRA) added new rules. A taxpayer or included in the rental payment. When you're the
spouse of such, serving on qualified official owner, the costs are your responsibility.
extended duty as a member of the uniformed
services my suspend the running of the five year You pay your own electricity, other heating if
period of ownership and use during active duty applicable, water, sewage, trash, etc. You also
for up to 10 years. pay for your own repairs.
Lawsuit Protection - Homestead Exemption If you buy in a "bad marketplace", for example
in a town where a major employer goes out of
Arizona law provides that anyone who resides business, the value of the home may fall.
within the state, who is 18 years or older,
married or single, may as an automatic action of If you are transferred, you will need to rent the
law hold exempt from a judgment creditor, other home, sell it, or make payments on a vacant
than your voluntary mortgagee, a homestead of house.
up to $150,000 value in equity.
So, how do you get a home?
The homestead may be your interest in "…one
compact body [of land] upon which exists a Inherit It. From an economic standpoint, it
dwelling… a condo… or a mobile home… " should seem strange that you need to make a
large cash outlay to acquire a home. What
In less legalese, if you live in Arizona and own a happened to the home of your parents, your
home, if you are sued and lose, you get to keep grandparents, great grandparents, etc.? In ideal
the first $150,000 value of your home. If you economic theory, the family home, or at least the
have just $150,000 or less, in equity, you keep it economic value of one, should continue to be
all. You need to cross-check this though with passed on within the family, with each
the 2005 bankruptcy law changes. generation not only maintaining the home, but
providing enhancements. Theory fails however
Planning and implementing an estate which is as in the "real world" for various reasons.
"judgment proof" as is allowed, can be a
significant factor in avoiding lawsuits. First, I Liens against the property (involuntary and
like to think that if you're looking far enough voluntary).

The property was not maintained, or is located in can be greatly reduced below that which is the
a declining community. present "standard", and the home can remain a
The heirs "squander" the inheritance. valuable asset for generations to follow.
There are too many heirs. In theory, a family of
two children can pass on to each child the Repossessions / Seizures. There are various
averaged inheritance of the parents. ways whereby homes are sold at below "market"
A family with one child accumulates assets. rate.
A family with more than two children dilutes
assets. Bank Repossession. When a financial institution
(i.e. a bank) forecloses on a mortgage, many
Buy it. The typical "first thought" to purchasing times the company seeks to sell the property as
a home is the local real estate agent. If you quickly as possible. The same typically holds
contact the firm that is the "listing agent" for a true for those who "guarantee" a loan (Veterans
particular piece of property, keep in mind that Administration, FHA, etc.), as well as law
the listing agent is required to represent the enforcement agencies (federal, state, and local)
interests OF THE SELLER. In general, the same who seize property which was used to commit a
rules apply to all sellers' agents. crime. You will probably need to contact each
such agency individually to determine what is
While selling agents are prohibited from available.
knowingly providing false information, they
cannot represent your best interests. Even if they Delinquent Property Tax. In Arizona real estate
know that a property is not, per the market, on which property taxes are delinquent are NOT
worth the asking price, they won't tell you. sold outright. Rather, you must bid on the right
to collect the tax lien. Once you have completed
Employ a "Buyers Agent". Typically, you make all of the legal prerequisites you may pursue a
an agreement to pay this agent some type of flat court case against the title holder to transfer
fee for finding a property and helping to actual ownership to you.
negotiate the best price for you.
Individual Retirement Account (IRA)
Employ a licensed "home inspector". You're Investment. If you've noted that the ability for
looking for someone who can recognize the an IRA to purchase real estate "pops up"
difference between faded paint, and a hidden throughout my financial planning articles, it's
leak. A comprehensive inspection report gives because I consider this one of the most
you a much improved "picture" of the home's significant opportunities available. Just as your
condition, and the risks you take if your purchase TSP can be invested in a stock fund, or an IRA
it. invested thru a brokerage can hold individual
stocks, with the right IRA custodian your IRA
Build it. If your day to day living needs are can hold real estate as in investment in your
already being met, consider building your account.
retirement home. When you buy an existing
home, you purchase whatever mistakes and Inflation protection. As described above, as a
shortcomings the builder and previous owner physical asset property provides a means to
made. If you build, you get to make all of your avoid loss of value of your money. It also offers
own new mistakes... or possibly, end up with a real "upside" opportunity, with far less of
home that suits you perfectly, that can serve you "crashing". A stock, bond, mutual fund, etc. can
and your heirs for a long time. readily plummet in value and essentially become
worthless. It typically though takes a dramatic
Most current design and construction is focused set of physical events for a given parcel of real
on quick and easy methods, with superficial estate to completely lose its value.
attention to quality and durability of materials,
energy efficiency or orientation on the site. Annuitization. I've made "side by side"
comparisons of investing IRA funds in various
With appropriate design and construction, the annuity opportunities, vs rental real estate. Not
operating and maintenance costs of your home 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. In our Arizona climate, if mechanically and
aesthetically practical the outer "roof" should be
Lawsuit Protection. Almost every state provides a well vented shade structure with an open air
some level of protection for the real estate which flow between it and the waterproof insulated
is your home, typically referred to as ceiling of the living area.
"homestead". In Arizona $100,000 of the equity
in your homestead is protected from being taken In the winter the sun will rise South of true East,
and sold in a lawsuit. But homestead protections and set South of true West. It will also rise to a
typically do NOT apply to a property you are maximum angle above the horizon which is
renting out. Your rental investment need much lower than it does in the summer.
different protection. For real estate, ANY real Therefore in the winter the south wall will be
estate, held as an asset within your IRA, it has exposed to the sun the entire day. If the south
federal protection as a retirement account. wall is masonry, brick, adobe, etc. it will slowly
Therefore even if you had $100,000 of equity in warm during the day and release the heat thru the
the home you're living in, if you had another night.
$100,000 (or more) of equity in rental property,
held within your IRA, it would also be exempt This storage of solar heat for slow release can
from being reached by someone who sues you. also be accomplished by something like sliding
glass doors on the south wall, with a concrete,
Factors to consider in a home. brick, tile over concrete, etc. floor mass on
which the wintertime sun can shine thru the
Energy Efficiency. You can pay now, or you glass.
can pay later, over, and over, and over... A
poorly designed and constructed home probably Solar Utilization. There are a great deal of
requires heat in the evenings and winter, and published materials available, and a growing
cooling in the day and summer. A properly number of inventions for the use of the suns
designed, oriented, and protected home can energy to heat, light, generate electricity, and
maintain comfortable internal temperatures even cool your home.
without the need for large amounts of external
energy input. Photovoltaic (p/v). In an area such as Arizona,
where the largest demand for electrical power is
Solar Orientation. Very modest differences can when the sun is shining the most, p/v panels can
make a HUGE difference in the livability of a make economic sense, even in an in-town, grid
home, the size of HVAC unit required, and of connected system, if the "return" on the money
course your utility bill. A large factor which invested in the panels meets or exceeds the cost
must be taken into account is the change of present and future electrical utility rates.
throughout the year in the path of the sun across
the sky. Example: A 120 watt p/v panel costs $489, and
is warranted for 30 years. A reasonable average
While you can calculate the exact position for in our area is 6 hours of sun for 360 days per
the sun at any time of the year, in general year. On the average, the panel can produce 21.6
remember that in the summer the sun rises North kilowatt hour (kwh) per month. The present
of true East, and sets North of true West. Yuma utility daytime charge is $.12 per kwh.
Therefore East, North, and West walls and Investing in the solar panel provides you an
especially windows need vertical shade to economic "return" on your investment essentially
protect them, and significant insulation. equal to a 5% tax-free account. If the utility rate
increases during the next 30 years then your
In the summer path thru the sky, the sun will electrical power savings, and the effective return
shine directly on the south walls of a structure on your p/v investment also increases.
only during the noon hours, and from an angle
high enough that modest overhangs can shade Skylights. Beyond the primitive big hole in the
the south wall from the heat. 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" burning, therefore to the extent possible all
to allow the light to be routed to a selectively flames should be kept outside of the weather-
placed diffusion dome which can be mounted in tight portion of the home.
the ceiling or in some cases the wall. The
natural light brought in can easily save the Mold. Relatively new to be recognized as a
"wear" on and power for an electrical bulb. danger are certain varieties of mold, which can
be toxic. While personal inspection, or the
Energy Cost Savings. An initial investment in smell, may "give away" the presence of mold,
energy conservation, or cost avoidance, can be proper testing can reveal the presence, and type,
the economic equivalent of a significant tax-free of mold when it is far below the threshold of
account. detection by non-scientific means.
Example: At age 40, you've finished an active Homeowners Associations. Whether buying a
duty career and settled into your "retirement" condo, or remote desert acreage, if there is a
home. You're sure that adding insulation in the homeowners association, read the rules carefully
attic would save $30 a month in utility bills, but before you buy. These associations MAY leave
the contractor wants $600 to do the job. Should you alone. You may also find though that new
you have it done? "leadership" results in votes where you
essentially lose control of "your" property.
Certainly! The quick calculation "payback"
period is only 20 months, after which that Zoning. City and County governments typically
insulation goes on saving you money every impose zoning ordinances, which control land
month for as long as you live there. Think of it use in the jurisdiction. If you're buying, do not
as putting $600 into an account that then pays rely solely on statements from the agent as to the
you $30 per month for life. The value of such an status of the property. Maybe the agent does not
upgrade is far greater than its cost. know of changes, or forgot. Check the details.
For example, if you buy to build yet find the
Materials Quality. You can buy, build, or property is just a bit too small for the current
remodel with quality durable materials and zoning to allow you to build, your options are to
fixtures, or accept you will encounter the need seek a variance (agreement by neighbors and the
for repeat repairs. zoning board to change the rules just for you), or
to sue the seller (But read your contract. I'll bet
Beware of Toxic Materials. There are various "due diligence' puts the burden on you to ensure
laws which require you be advised of certain you can do what you want BEFORE you close.)
hazards, such as whether the home has lead-
based paint, asbestos, underground heating oil Permits. Related in spirit to zoning is the permit
storage tanks, etc. There are though many system. Imagine your surprise, after your
dangers which are not required to be listed. You purchase, to find the structures, or the sewage
may want to run specific tests for hazards such system, was put in without the right permits, and
as: since it's out of compliance, you can't use it until
you get a permit and fix it. Check that all that
Most particle board, adhesives, plastics, formed you believe to be part of the deal is legitimately
fiberglass items, foamed materials, etc. used in there. Yuma in particular has areas where
typical construction today releases dangerous existing septic systems are for "new" owners
gases, such as formaldehyde. suddenly found to have groundwater too close to
the surface for the system to be used, requiring
Radon is a radioactive gas which seeps naturally costly changes.
from the ground in many areas. In some homes
it enters thru foundation cracks and accumulates Insurance. From the moment the home becomes
in the indoor air, reaching levels that can pose a "your's", you should ensure that it is properly
danger, primarily to your lungs. insured. If your home burns to the ground, and
you did not have insurance, this will NOT
Carbon monoxide is an odorless, colorless gas, excuse you from making the mortgage payment!
which can kill. It is a natural product of any Typically, earthquake and flood insurance are

not part of a "normal" homeowner's insurance earthquake, tornado, hurricane, and even volcano
policy. They must be added as separate activity. To be covered, most of these require a
additional charges. Yuma IS considered to be specific insurance policy. For example, if you're
subject to earthquakes, and there are areas in a "flood plain", the federal government sells
susceptible to flooding as well. flood insurance policies, thru normal insurance
agents. But why not look before you buy and
Location. As I mention earlier, I would argue avoid areas with recurring threats?
that a military career exposes you to a wide
variety of communities, climates, and lifestyles, Human Generated Risks. You certainly don't
and provides you insight into where is a "good want to buy a home on top of another "Love
place to live". Beyond finding a community that Canal" site. (In New York, toxic waste was
has the right "feel" for you, consider: buried and then a housing development put on
top of it.) You may also be concerned if there is
Cost of Living. Even if you manage to pay off a particularly noxious chemical plant, nuclear
your home prior to retirement, if you can't afford reaction location, etc. "upwind" from your
to live in the community after you retire, it may contemplated home. Even major highways and
not be a good choice. Property taxes, income tax railroad lines can be associated with risks,
rates, and just simply the cost of day to day depending on what is being transported there and
necessities are likely to continue to increase, the likelihood of an accident causing a spill.
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,

FINANCIAL PLANNING
YOUR CREDIT Information about criminal convictions may be
reported without any time limitation.
In our present economy, it's difficult to function
without a good credit record. A bad credit Bankruptcy information may be reported for 10
history can prevent you from getting a loan for a years.
car, a home, etc. Landlords may decline to rent
to you if you are a credit "risk". Many federal Information reported in response to an
positions, active duty or civilian require a application for a job with a salary of more than
security clearance. Credit problems can affect $75,000 has no time limit.
your clearance, and therefore your job.
Information reported because of an application
To find your present credit status, the three for more than $150,000 worth of credit or life
major national credit bureaus are: insurance has no time limit.
Equifax, P.O. Box 740241, Atlanta, GA 30374- Information about a lawsuit or an unpaid
0241; (800) 685-1111. judgment against you can be reported for seven
years or until the statute of limitations runs out,
Experian (formerly TRW), P.O. Box 949, Allen, whichever is longer.
TX 75013; (888) EXPERIAN (397-3742).
What if my credit report is wrong?
Trans Union, P.O. Box 1000, Chester, PA
19022; (800) 916-8800. You are protected by the Fair Credit Reporting
Act (FCRA), 15 U.S.C. 1681, et seq., which
Federal Trade Commission (FTC) rules now allows access to credit reports and an
clearly require credit reporting agencies to opportunity to correct errors, and the Fair Debt
provide you a free report once per year. Collection Practices Act (FDCPA), 15 U.S.C.
1692, et seq., which limits the methods creditors
Online at http://www.equifax.com/ this particular can use to collect debts.
credit reporting agency has a link listed as,
"FACT Act and obtaining a FREE Credit How to "fix" an error on my credit report?
Report". It requires you enter your personal
information, after which you can view or print First, don't bother with the "Credit Repair"
your credit report. advertisements. At best, they're charging you a
fee for something you can easily do for yourself.
FTC rules also require that these agencies must At worst, they're a fraud. No one can legally
provide to you a free copy of your credit report, make accurate, but "damaging", entries be
if you are: removed from your record.
• Are unemployed and intend to apply for Start by writing to the credit bureau(s) and to the
employment in the next 60 days firm that provided the erroneous entry. Tell
• Are on public welfare assistance them what you believe is wrong, why, and how
the incorrect entry is causing you harm (i.e.
• Believe your file contains inaccurate
you've been denied credit for a car or home,
information due to fraud
employment, rental opportunity, etc.) Send ALL
• You are also entitled to a free report if
communications via certified/return receipt mail.
you have received notice of an adverse
The bureau must reinvestigate you complaint,
decision (such as denial of credit,
usually within 30 days, as must the information
insurance, or employment) within the
provider. If the information provider finds it
past 60 days
made a mistake, it must notify all nationwide
credit bureaus so that they can correct this
How long is "bad" information going to remain information in your file.
in my report?
Seven years, with some exceptions:

If they don't respond by 30 days, write again If you are solicited to make contact in any
sending a copy of the first letter, demanding to manner other than calling the number on your
know why you're being ignored, with, at your card, please, first call the official number on your
discretion, copies to the FTC and the state card to see if the request is legitimate.
attorney general.
The computer fraud types apparently never
If the investigation does not resolve the dispute sleep. Email requests, and the webpages at links
in your favor, you should insist the bureau(s) in them may look authentic, but if you start
include your statement of the dispute in your file entering your account number, personal
and in future reports. information, and pin, you may find your account
with surprise entries.
Even if an entry is verified, you can also
negotiate with the information provider. For Today, most credit card companies have
example, if you have actually forgotten about a computer programs that detect sudden unusually
debt, perhaps you can persuade the firm to large charges activites, and put the account on
withdraw their "bad" entry if you pay the debt. hold, pending contacting you for potential
Customer Service departments clear debts every fraudulent use. The new theft approach is to
day. If the firm agrees, if possible get them to make small charges, on a lot of stolen account
send the agreement to you in writing. If not, numbers. Would you notice a $9.95 charge to a
when you send your payment, send it to store?
whomever you negotiated with, include a letter
clearly stating the agreed terms, and include on If you lose your ATM card, the situation is
your check reference to the terms, including "aid different.
in full account number…" if that is the case.
This does not "guarantee" results, but is If you report the loss before it's used, you're
significant evidence in any subsequent court "safe". In general, if you wait to report the loss
proceeding. within:
What happens if someone else gets your credit 2 business days you're responsible for up to
card? $50.00
As soon as you know your card is missing, notify 2 to 60 days you're responsible for up to $500
the issuing institution. If a thief uses your card
before you can notify the issuer, you may be Over 60 days you're responsible for your entire
liable for up to $50.00 of unauthorized use of the account balance.
card prior to you making such notice. Finally,
unless the card itself provides some means of Somehow, I missed payments on a debt. What
identifying the holder, such as a photograph, no can happen to me?
liability will be incurred for unauthorized use.
If you fall behind in repaying your creditors, or
Even if your card is not missing, someone may an error is made on your accounts, you may be
have still gotten your number. Whenever you contacted by a "debt collector." You should
get your statement, review the charges carefully. know that in either situation, the Fair Debt
Thieves don't necessarily have to make huge Collection Practices Act (FDCA) requires that
charges, to rob you via your credit card number. debt collectors treat you fairly and prohibits
certain methods of debt collection. Of course, the
"SPOOF" CREDIT CARD EMAIL law does not erase any legitimate debt you owe.
If you receive an email, phone call, etc., that Personal, family, and household debts are
identifies itself as being from one of your credit covered under the Act. This includes money
cards, asking you to click a link, write back, or owed for the purchase of an automobile, for
call, check your credit card first. 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 you or any third parties they contact. For
basis. example, debt collectors may not:
A collector may contact you in person, by mail, Use threats of violence or harm.
telephone, telegram, or fax. However, a debt Publish a list of consumers who refuse to pay
collector may not contact you at inconvenient their debts (except to a credit bureau)
times or places, such as before 8 a.m. or after 9 Use obscene or profane language
p.m., unless you agree. A debt collector also may Repeatedly use the telephone to annoy someone.
not contact you at work if the collector knows
that your employer disapproves of such contacts. Debt collectors may not use any false or
misleading statements when collecting a debt.
For example, debt collectors may not:
You can stop a debt collector from contacting
you by writing a letter to the collector telling Falsely imply that they are attorneys or
them to stop. Once the collector receives your government representatives
letter, they may not contact you again except to Falsely imply that you have committed a crime
say there will be no further contact or to notify Falsely represent that they operate or work for a
you that the debt collector or the creditor intends credit bureau
to take some specific action. Misrepresent the amount of your debt
Indicate that papers being sent to you are legal
Please note: Sending such a letter to a forms when they are not
collector does not make the debt go away if you Indicate that papers being sent to you are not
actually owe it. You could still be sued by the legal forms when they are.
debt collector or your original creditor. Debt collectors also may not state that:
If you have an attorney, the debt collector must You will be arrested if you do not pay your debt.
contact the attorney, rather than you. They will seize, garnish, attach, or sell your
property or wages, unless the collection agency
If you do not have an attorney, a collector may or creditor intends to do so, and it is legal to do
contact other people, but only to find out where so.
you live, what your phone number is, and where Actions, such as a lawsuit, will be taken against
you work. Collectors usually are prohibited from you, when such action legally may not be taken,
contacting such third parties more than once. In or when they do not intend to take such action.
most cases, the collector may not tell anyone
other than you and your attorney that you owe Debt collectors may not:
money.
Give false credit information about you to
Within five days after you are first contacted and anyone, including a credit bureau.
if you dispute the debt, the collector must send Send you anything that looks like an official
you a written notice telling you the amount of document from a court or government agency
money you owe; the name of the creditor to when it is not.
whom you owe the money; and what action to Use a false name.
take if you believe you do not owe the money. Collect any amount greater than your debt,
unless your state law permits such a charge.
A collector may not contact you if, within 30 Deposit a post-dated check prematurely.
days after you receive the written notice, you Use deception to make you accept collect calls or
send the collection agency a letter stating you do pay for telegrams.
not owe money. However, a collector can renew Take or threaten to take your property unless this
collection activities if you are sent proof of the can be done legally.
debt, such as a copy of a bill for the amount Contact you by postcard.
owed.
If you owe more than one debt, any payment you
Debt collectors may not harass, oppress, or abuse 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. apply for credit and provide false information.
It's a federal crime to make false statements on a
You have the right to sue a collector in a state or loan or credit application, or to misrepresent
federal court within one year from the date the your Social Security Number. For example,
law was violated. If you win, you may recover numerous "new credit file" claims urge you to
money for the damages you suffered plus an obtain an "Employer Identification Number"
additional amount up to $1,000. Court costs and (EIN) from the Internal Revenue Service, and
attorney's fees also can be recovered. A group of use it as a new Social Security Number. Getting
people also may sue a debt collector and recover or using an EIN under such false pretenses may
money for damages up to $500,000, or one be criminal.
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


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Sustainable Civilization: From the Grass Roots Up

Contemplating Estate and Financial Planning Concepts Appendix

SUSTAINABLE CIVILIZATION: From the Grass Roots Up Page 1 of 65

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If you start college savings when your child is http://www.medicare.gov/MPDPF/Shared/Static/

SUSTAINABLE CIVILIZATION: From the Grass Roots Up Page 4 of 65

For discussion purposes say the plan you select

If you have a federal health benefit that you can

Employment Based Benefits - For military and

Social Security - As discussed in more detail in a

SUSTAINABLE CIVILIZATION: From the Grass Roots Up Page 5 of 65

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Community Property. In practice, this works a

SUSTAINABLE CIVILIZATION: From the Grass Roots Up Page 7 of 65

Basic terms. 2. Married with no children: Most states one-

SUSTAINABLE CIVILIZATION: From the Grass Roots Up Page 8 of 65

Destruction or Alternation. If the testator

New will. A standard phrase in a new will is that

Will Advantages vs. a Trust. For the testator,

SUSTAINABLE CIVILIZATION: From the Grass Roots Up Page 9 of 65

SUSTAINABLE CIVILIZATION: From the Grass Roots Up Page 10 of 65

Revoking (canceling) a Power of Attorney.

Cancellation Date. First, you can put an

Formal Revocation. If a power of attorney is in

Pocket Revocation. If you're PREPARED the

Summary. A power of attorney is a very useful

Estate planning is but one step in the overall

SUSTAINABLE CIVILIZATION: From the Grass Roots Up Page 11 of 65

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subtotal In either type of IRA, you have a wide selection

Total at end of year 5

SUSTAINABLE CIVILIZATION: From the Grass Roots Up Page 18 of 65

Educational IRA's. While often improperly Step Eight - Other considerations.

SUSTAINABLE CIVILIZATION: From the Grass Roots Up Page 19 of 65

SUSTAINABLE CIVILIZATION: From the Grass Roots Up Page 20 of 65

Global warming / Global cooling. There still

UFO's? Who knows, maybe we'll actually make

Key aspects are: recognizing what you have,

SUSTAINABLE CIVILIZATION: From the Grass Roots Up Page 21 of 65

20 62 $170,000. 3. Don't squander your capita on parties, booze,

SUSTAINABLE CIVILIZATION: From the Grass Roots Up Page 22 of 65

Individual Retirement Accounts. (Traditional

SUSTAINABLE CIVILIZATION: From the Grass Roots Up Page 23 of 65

SUSTAINABLE CIVILIZATION: From the Grass Roots Up Page 24 of 65

Government Debt - Government borrowing Break Even in Inflation - As shown above,

SUSTAINABLE CIVILIZATION: From the Grass Roots Up Page 25 of 65

SUSTAINABLE CIVILIZATION: From the Grass Roots Up Page 26 of 65

Medicare Drug Option - The prescription drug

SUSTAINABLE CIVILIZATION: From the Grass Roots Up Page 27 of 65

SUSTAINABLE CIVILIZATION: From the Grass Roots Up Page 28 of 65

SUSTAINABLE CIVILIZATION: From the Grass Roots Up Page 29 of 65

SUSTAINABLE CIVILIZATION: From the Grass Roots Up Page 30 of 65

WARNING: The risk in Commodities Trading

Collectibles. Gold, silver, jewels, paintings,

Investment Clubs. So, with all of the investment

If you happen to know someone in an

Perhaps you've heard in the national media of the