Capital Retirement Strategies: Capital Concepts Newsletter

January 2008

  Capital Retirement Strategies, Inc.
  Specializing in retirement plans
  and personal investment management

In This Issue
Teaching Kids About Money
Surviving a Bear (Market) Attack
2008 Retirement Plan Contribution Limits

Greetings!

Before many of us even had a chance to take down our Christmas trees this year, the economy seemed to drop a belated lump of coal in all of our stockings. Oil prices rose to historic prices, the stock market dropped right out of the gate and the housing and unemployment numbers look ominous. Economists and financial talking heads keep using the R-word. Recession. Yikes. Happy New Year to you too.

Whether we're entering a recession or not, there is no question that we're headed for a year of more uncertainty and volatility in the stock market. For survival strategies, read this month's article entitled, Surviving a Bear (Market) Attack.

Our lead story shares some interesting insights into teaching kids about money.

And, as is our tradition for the first issue each year, we outline the key changes to various retirement plan contribution limits in our final article.

If you read something you like, please consider forwarding my newsletter to someone who may also find it of value. Thanks for reading!

Best regards,

David Chwalek
Capital Retirement Strategies

Teaching Kids About Money

There’s no question that parents are a child’s first and most important teacher. As parents, we are given the responsibility of teaching our kids everything from their ABC’s and how to tie their shoes to sex education and the dangers of smoking. Some of the most under-appreciated lessons we can give our children are about money. Let’s face it- if we don’t do it, who will? Our schools- elementary, high schools and even colleges- can be wonderful institutions, but none give children and young adults the basics of dealing with money.

If you have young children, here are a few tips:

Allowances: A common misconception is that we should give an allowance as payment for doing chores. That’s wrong for a few reasons. First, every child should do some level of household chores and be taught that this is part of being a family. It’s a responsibility, not a job for which they need to be compensated. Second, the real purpose of an allowance should be educational- it’s a tool for learning money skills.
How Much? How much you give your children should first depend on your own financial situation and budget. Here’s a good rule of thumb: Give your children $1 a week per year of age and increase it by a dollar each year. So, your 4 year old would receive $4 a week. It’s crucial that you pay the allowances consistently- every week or every month on the same day. Consider paying your kids’ allowances on the days that you get paid. Just as we expect to get paid at regular intervals, it is important for our children to expect this as well.
Encourage Savings: While it’s okay and natural for your children to want to buy things with their allowance, you should encourage them to save part of it. The first savings vehicle can be as simple as the good old-fashioned piggy bank. Once they understand the short-term, piggy bank savings, consider taking them to the local bank with you and opening a savings account. Show them the monthly statements or passbook and explain how compound interest works. (Einstein called compound interest the Eighth Wonder of the World!) Remind them that this money is for big things when they get older- a bike, a car or maybe even for college.
Spending: When they want to buy something with their money, encourage them to think about it first. Example: “Do you want to buy this today or save for something better later?” If they make a mistake, it’s okay! Isn’t it better to make a $5 mistake now than a really big financial mistake when they’re adults? They will learn by trial and error. They will learn about buyer’s remorse- even if they don’t know what that means, they’ll understand the feeling.

Remember, even if you choose to ignore these valuable lessons, you are still teaching your children about money through modeling and your own examples. Do you and your spouse often argue about money? Do you believe that rich people are unethical? Are you careless with your money? Are you too cautious?

Whether you realize it or not, your own attitudes and actions around money are creating an indelible blueprint on your child’s psyche. Consider whether your financial beliefs are worth passing on to the next generation or if you need some adjustments in your own thinking first. You’re doing great by telling your kids about sex and drugs and smoking, but imagine the satisfaction of knowing that your children, as adults, will be financially responsible and savvy, even when you’re not there watching over them.

Surviving a Bear (Market) Attack

As the stock market plunged to open the New Year, oil hit $100 a barrel for the first time. Unemployment is at its highest level in two years and we are still uncertain about the long-term ramifications of last summer’s sub-prime mortgage meltdown. Economists argue about whether we have fallen into recession or are about to. There’s no question, investors have plenty to worry about.

Where have we seen this before?

During the late 1990’s, investing was easy. As the stock market soared to new heights in 1998 and 1999, individual investors poured billions of dollars into high tech stocks and mutual funds. Many opened online trading accounts and earned impressive returns by investing in… well, just about anything. By the spring of 2000, the party was over and the tech bubble had burst. The terror attacks of 9/11 occurred just 18 months later, further damaging consumer confidence, and the markets continued to plunge. After years of seeing their portfolios grow at rates of 20%, 30%, 40% or more, investors were now afraid to open their quarterly statements.

Is it déjà vu all over again?

Whether we are headed for the first down year for stocks since 2002 or simply experiencing a bump in the road, we can learn from the mistakes of the past.

Diversification: You’ve heard this one before, “Don’t put all your eggs in one basket.” If there is a Cardinal Rule of Investing, this is it. During periods of prosperity and stock market highs, investors flock to high-flying growth stocks, often ignoring less glamorous or more conservative asset classes. Consider adding investments with low or negative correlation to the stock market such as bonds, commercial real estate and commodities. A well-known study of modern portfolio theory indicates that asset allocation is the single greatest factor in determining the success or failure of an investment portfolio.

Risk Tolerance: You need to take time to assess your own comfort level with varying degrees of risk. There is a direct correlation between investment risk and reward. The reason that government bonds tend to pay low rates of interest is that they are extremely safe- they’re backed by the full faith and credit of the US government. Stocks generally have potential for higher returns, but there is always the possibility that you can lose your money- even all of it. If you can’t afford to lose money from time to time, or if the mere thought of negative returns keeps you awake at night, you should consider limiting your exposure to stocks.

Are You a Trader or An Investor? Sometimes we get caught up in the latest financial headlines or the hyped-up stories on CNBC. Chances are that a 200-point drop in the Dow Jones Industrial Average today will have almost no long-term effect on your retirement funds. If, on the other hand, you are an active stock trader, then big one-day swings in the market can be crucial to the performance of your investments. If you are an investor, you probably have a long-term strategy that already takes into account the fact that there will inevitably be bad days, weeks and even months and years. Although it is important to review your financial plans regularly, there is no need to overreact to short-term market news.

Don’t Attack the Bear! I heard a story several years ago about encountering a bear in the woods and what you should do. If you have the misfortune of running into a bear, experts say to remain calm. Analyze the situation and look for an opportunity to escape. If you panic and move quickly, the bear is more likely to become startled and attack you. The same can be said when dealing with a bear market. Don’t panic and make rash decisions about your portfolio. Remain calm, analyze the situation and look for new investment opportunities. Billionaire investor Warren Buffett once said, “Be fearful when others are greedy and greedy when others are fearful.” Whatever you do, don’t be afraid of the bear.

2008 Retirement Plan Contribution Limits

Contribution limits for individual retirement accounts, Traditional and Roth IRAs, have increased by 25% for the 2008 tax year. You can contribute up to the maximum of $5,000, unless you are over 50 years old, in which case you can put in $6,000. This catch-up provision is designed to help people over 50 make additional contributions to their accounts to "catch-up" and get their retirement accounts back on track.

The maximum contribution for some small company retirement plans, including SEP IRAs and Individual 401(k) plans, has increased slightly. The 2008 limit for 401(k) plans remains the same as it was last year- $15,500. Contribution limits for other popular plans, as well as the "catch-up" limits are listed below.

Plan Name Max Contribution Over 50 Max Contribution

401(k) $15,500 $20,500

IRA $5,000 $6,000

Roth IRA $5,000 $6,000

SEP IRA $46,000 Not Applicable

SIMPLE IRA $10,500 $13,000

Individual 401(k) $46,000 $51,000

If you've recently had something great happen in your life or in your career, I'd love to recognize you for it! Send an email to dave@capretirement.com and I'll try to get it in an upcoming issue of Capital Concepts.

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