It’s summertime!  Well, at least it’s the unofficial start of summer here in New England as we approach Memorial Day weekend.

I have recently updated my website to include an Archives of all previous Capital Concepts newsletters.  If you missed the January or April issues, go to the Resources page on the site.  If you are an existing client, you can also access links to your account information on this page as well.

A forgotten piece of many clients’ financial plans is insurance.  This month, our lead article is entitled, “Insurance: The Foundation of a Solid Financial Plan.”  The article briefly describes the most common types of insurance that most people should consider.

Many of my self-employed clients have recently taken advantage of a new type of retirement plan, the individual 401(k) plan.  There are several reasons why some self-employed people can benefit from this new program, and I have highlighted the most important ones in "Self-Employed 401(k) Plans."  If you know someone who runs their own business, with no other employees, suggest they check out this article.

Our final piece deals with dividends and why many investors and financial advisors are turning their attention to dividend-paying stocks.  If you invest in stocks or were burned by the market crash of 2000-2002, check out “Dividends Are Back in Style.”  It’s more proof that sometimes the old fundamentals still apply today. 

And lastly, don’t forget about my offer to send you free yellow wrist bands from Lance Armstrong’s LIVESTRONG organization.  I have recently purchased a number of these yellow bands in support of cancer survivors in our community and I will send them to anyone who emails me.  Last month, a few people inquired about these, and I was happy to send them the wrist bands.

Thanks for your continued support.

Best regards,

David Chwalek
Capital Retirement Strategies

In This Issue
Insurance: The Foundation of a Solid Financial Plan
Self-Employed 401(k) Plans
Dividends Are Back In Style

Insurance: The Foundation of a Solid Financial Plan

Many financial advisors will tell you that a good financial plan should start with a solid insurance program.  Your investment and retirement plans are in place if everything goes according to plan.  You need insurance in case it doesn’t.

What types of insurance should you consider?  The following list includes some of the most common types of insurance that many of us should consider.

Life Insurance- Almost nobody likes to talk about life insurance, because no one likes to talk about death.  While most of us will live well into our 70’s, 80’s and beyond, it’s a reality that a few of us will die prematurely and possibly leave loved ones behind.  We’ve all heard or read about families struggling to make it when a breadwinner dies suddenly.  Nothing bothers me more than reading about communities or charitable organizations who have to hold fundraisers to generate money for a family in need.  In most cases, it didn’t have to be that way.  Americans are living longer than ever before, and as a result, life insurance is less expensive than ever before.  In fact, the most popular kind of life insurance, term life, is surprisingly affordable.  A healthy 40-year old male can purchase $500,000 of 20-year level term insurance for about $42 a month.  For most of us, even if you can only afford a dollar a day or less, you can still buy upwards of $250,000 of insurance.  Life insurance is designed to replace the lost income of your deceased loved one.  The money is generally paid out tax free and can be used to pay off the mortgage, pay for childcare expenses, allow a mother to stay home from work and raise the children, provide for college or retirement expenses.

Disability Income- This is one of the more overlooked kinds of insurance available.  What would happen if you were disabled due to an illness or injury and not able to work?  If you are injured on the job, you may qualify for workers compensation, but that doesn’t cover non job-related claims.  Nearly one-third of Americans will suffer a disability that will keep them out of work for at least six months.  Quite simply, we have a much higher likelihood of being disabled than of dying prematurely.  If you can purchase short- and long-term disability insurance through your employer, you should consider it, but be aware that many group plans are more restrictive than plans you can purchase on your own.  Perhaps you can supplement your company plan with an individual policy.  If you are self-employed, you should certainly be sure that your income will not be lost if you are disabled.  The premiums for disability income insurance may be tax-deductible for business owners.  On the other hand, if you choose to pay with after-tax dollars, all claims paid will be tax-free.

Auto and Home Insurance- Obviously, most of us are required either by law or by our mortgage companies to carry these types of insurances.  But not all policies are created equally, and if you haven’t reviewed your coverage in the past few years, you should make it a priority.  Is your diamond engagement ring covered for theft?  Are you insured against identity theft?  What if you’re in an accident and the other driver sues you?  If you don’t know, ask your insurance agent.  Consider using an independent insurance agency- one that has access to multiple carriers and can shop for the best policy for your particular situation.  Do they offer discounts for good drivers?  AAA membership?  College alumni associations?  Do you get a deal for having your home and auto policies with the same company?  When you talk to your insurance agent, ask about an “umbrella” or personal liability policy.  In this age of lawsuits, you can protect yourself above the limits of your home and auto policies for only a few hundred dollars a year.

Long Term Care Insurance- Many people are under the false impression that most of the healthcare costs associated with aging are covered by medicare or Medicaid.  Many seniors also have the negative connotation that LTC insurance is “nursing home” insurance.  Nobody thinks they will ever need a nursing home.  While LTC insurance can cover the costs of nursing home care, it can also be used to pay for assisted living facilities as well as home care.  Like most other types of insurance, it’s best to apply for this insurance before you need it.  It gets more expensive as you get older, and more difficult to qualify for if you have certain medical conditions.  If you have built a sizeable estate (home, investments, IRA and other retirement accounts, etc.) consider exploring how a Long Term Care insurance policy can help protect your assets.

If you have questions about insurance or need a referral to a local insurance agent, please call or email.

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Self-Employed 401(k) Plans

Thanks to a recent change in the tax code, self-employed people can now have the same type of 401(k) plan that larger companies have offered for years.  This new individual 401(k) plan or Single K, as some companies have nicknamed it, offers some compelling benefits not found in other small business retirement plans.

Higher Contribution Limits- Most small businesses will be able to put more money into an individual 401(k) than they can in a SEP, SIMPLE IRA or profit-sharing plan.  For example, an individual who earned $100,000 in 2004 could contribute up to $38,000 in a Single K, versus only $12,000 in a SIMPLE IRA and $25,000 in a SEP or profit-sharing plan.  All contributions are tax-deductible and all interest, dividends and earnings are tax-deferred.

Loan Provisions- In many individual 401(k) plans, you are eligible to borrow from plan assets.  Typically you can borrow up to $50,000 or 50% of the account value, whichever is less.  This benefit may give a small business owner the liquidity necessary when emergencies arise or when quick capital is needed for new equipment or other business needs.  Loans cannot be taken from other retirement plans such as IRAs, SEP IRAs or SIMPLE plans.

Consolidate Old Accounts- If you’re like many of the people I meet, you may have several IRA or SEP accounts, as well as old 401(k) plans from jobs you left years ago.  There’s nothing wrong with having several different accounts, but it can sometimes make managing a diversified portfolio easier by combining smaller accounts into one larger account.  When was the last time you made changes or rebalanced these old plans?  It might be time to revisit those abandoned accounts.

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Dividends Are Back In Style

During the historic bull run of the late 1990’s, few investors cared about dividends.  Everyone wanted capital gains, and big ones at that.  Millions of dollars poured into companies that no one had ever heard of and that had never turned a profit. 

All that changed after the shake-up of 2000-2002, and we were faced with the hard realities that the stock market doesn’t grow to the sky and that some unscrupulous corporations lied about their earnings to fuel stock price appreciation. 

We’ve had a few years to evaluate the investment landscape and an old friend is back in style.  Like that 70’s-style retro baseball shirt or Santana, dividends are cool again. 

Dividends are one of two ways that investors can make money in the stock market.  They can make money by purchasing a stock and selling it when the price increases, or they can make money by buying a stock and holding it and receiving dividend payments that the corporation makes to its shareholders.  (Ideally, we’d love to make money both ways!)

Dividends, and dividend-paying stocks, are attractive to investors for a variety of reasons:

• Dividend-paying stocks historically have experienced less volatility and therefore, less risk.
• Since 1926, reinvested dividends have contributed 42% of the total returns for equities.
• Dividend Growth companies, those that have increased their dividend payment to shareholders annually for at least ten years, have shown an increased ability to survive recessions, wars, inflation and technological changes.
• Dividends can’t be faked.  While some companies lied about earnings and investors suffered losses as a result, dividends are either paid or they’re not.
• Favorable tax treatment: New tax laws provide that dividend income will be taxed at the same rates as long-term capital gains rather than ordinary income- a maximum of 15%.
• Reinvesting dividends gives you exposure to what Albert Einstein called the 8th Wonder of the World: the magic of compound interest.

Investing in dividend growth stocks could be appropriate for:

• Older clients seeking regular income payments to supplement their income, or
• Investors seeking equity exposure with less volatility.

Of course, investing in dividend-paying stocks is no guarantee against loss and past performance is no indication of future investment results.  Please consult your financial advisor to see if this strategy should be a part of your overall financial plan.

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