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Assessing Portfolio Risk

Most investors know that they should evaluate their risk tolerance when considering an investment. Oftentimes, investors think of risk only in terms of possibly losing money. However, in the investment world, risk is broadly defined as the probability that the actual return from an investment will be different from its expected return. Actual returns (making or losing money) can be affected by a number of factors, and total risk is a measure of variation in return due to all sources.

Most investors know that they should evaluate their risk tolerance when considering an investment. Oftentimes, investors think of risk only in terms of possibly losing money. However, in the investment world, risk is broadly defined as the probability that the actual return from an investment will be different from its expected return. Actual returns (making or losing money) can be affected by a number of factors, and total risk is a measure of variation in return due to all sources.

General Risk

General risk refers to factors that lie outside individual companies, but that affect an entire class of investments, or the market as a whole (although individual companies may be affected to varying degrees). One type of general risk, known as market risk, may be a function of political, economic, and sociological events, or changes in investor preferences. For example, market risk occurs when the overall business climate changes, bringing expectations of lower corporate profits in general, and causing the larger body of common stock prices to fall.

A second general factor that may broadly affect all companies is interest rate risk - the fluctuations in the general level of interest rates. The bond market is particularly sensitive to interest rate risk in that bond prices tend to move in the opposite direction of interest rates. Although fixed-income securities (such as bonds) are generally the securities most affected by interest rate risk, other investment vehicles may be affected as well. Companies that borrow heavily for plants and equipment (e.g., utilities) may see their common stock prices affected by changes in the cost of borrowing.

A third general risk factor is purchasing power risk - the impact of inflation (a general rise in prices) or deflation (a general fall in price levels) on an investment. Purchasing power risk is a reflection of the uncertainty of price levels during the time an investment is held, particularly the inability of a particular investment to keep pace with inflation. For example, if an investment returns 3% annually, but inflation averages 4% annually during the holding period, the investor will be losing purchasing power by holding the investment. Purchasing power risk is generally highest in investments paying relatively low fixed-interest rates, such as savings accounts.

Specific Risk

In contrast to general risk, specific risk is that portion of total risk that is unique to a firm, industry, or property (in the case of a real estate investment). Specific risk is typically subdivided into business risk and financial risk.

Business risk is the risk associated with the nature of the enterprise itself (or the industry in which the enterprise resides) and measures the company's ability to meet its obligations, remain a profitable entity, and provide acceptable returns to investors. It is generally believed that like kinds of firms or properties have similar business risk. However, among similar businesses, differences in management, operating costs, and market opportunities can create different levels of business risk.

Financial risk measures a company's mix of debt and equity used to finance its operations. Debt creates legal obligations (i.e., principal and interest payments) that must be met before earnings are distributed to owners (e.g., dividends to stockholders). The larger the proportion of debts, the greater the financial risk.

Risk can be affected by political, social, and economic influences. Consequently, fitting individual risk tolerance to specific investments is an ongoing process that examines the interplay between the individual investor's objectives and the constantly changing sources of risk that can impact investment returns.

Inflation and Your Dollars

Some people remember the "good old days" when gasoline prices were as low as 25¢ per gallon. Some even recall when a can of soda cost 15¢. Realistically speaking, prices tend to rise over time—sometimes steadily, and sometimes not so steadily. In the years ahead, inflation will most likely decrease the purchasing power of your money, which means that during retirement your dollars will buy less than they do today.

It's easy to misinterpret inflation as the rise in price of individual goods and services. Actually, inflation is the increase in the average price level of all goods and services. For example, the price you pay for natural gas or heating oil may rise during the winter due to unseasonably cold temperatures. On the other hand, if the winter is mild the average price of gas or oil may remain relatively level. In this case, the increase in the price of natural gas is not a result of inflation, but rather a function of supply and demand.

What Causes Inflation?

Inflation can result when either: 1) the total of all goods and services demanded exceeds production; or 2) there is a decrease in the amount of all goods and services supplied by producers. Note how, in the above example, the supply and demand for the natural gas had no effect on inflation. However, changes in supply and demand on a broader scale can result in inflation.

Let's take a look at two economic scenarios. Suppose business is booming. Unemployment is low and the average worker's wages are increasing. As a result, consumers have more disposable income available and will, therefore, be able to purchase more goods and services. Average prices will tend to rise due to the increase in demand for all goods and services.

In another scenario, suppose the economy is suffering. As unemployment rises and wages remain stagnant, consumers will be unable to purchase additional goods and services. As a result, producers will slow down production and raise prices in order to cut losses associated with decreased production. In this case, average prices will rise due to a decrease in the supply of all goods and services. This can be a vicious cycle.

It's also important to keep in mind that individuals as consumers are not the only market participants that can affect the economy. Businesses, government agencies, and foreign markets also spend billions of dollars on U.S. goods and services. Their spending, or lack thereof, can equally influence increases or decreases in supply and demand which, in turn, can result in inflation.

Inflation and Economic Policy Decisions

To a certain extent, some inflation may be a sign of a healthy economy. In fact, one of the economic policy goals of the United States is to maintain an inflation rate ranging from 0% to 3% per year. On the other hand, too much inflation, or no inflation at all, can be a sign of troubling economic times. Thus, one of the greatest challenges facing policymakers is to make decisions that will create desired inflation results.

There are two federal economic policies used in an attempt to control the economy. Fiscal policy, which falls under the auspices of Congress, uses taxation and spending to reach full employment, stabilize prices, and boost economic growth. In contrast, monetary policy, which is controlled by the Federal Reserve Bank (the Fed), manipulates the money supply and short-term interest rates in an attempt to spur growth or control inflation.

Congress and, especially, the Fed look at the Consumer Price Index (CPI) when making policy decisions. The CPI is considered by many to be one of the best measurements of inflation. The CPI gauges the average change in prices paid by urban consumers for a fixed market basket of goods and services over a period of time. The CPI represents all goods and services purchased by urban consumers. Each month, the CPI is calculated and constant fluctuations in the CPI will ultimately result in Congress or the Fed taking appropriate measures to attempt to regain control of inflation. However, in the short-term, it is the Fed that holds the ability to react quickly. Congress, as we all know, requires political debate and the passage of legislation before fiscal decisions can be carried out.

On a Personal Level

In addition to creating higher costs for goods and services, inflation creates a depreciation in currency values. In other words, as prices increase, the purchasing power of your income, dollar for dollar, decreases. During sound economic times, increases in prices will usually be accompanied by wage increases that are equal to, or greater than, inflation. However, during downturns in the economy when wages remain level, the cost of living increases as your purchasing power diminishes. In actuality, regardless of what state the economy is in, one of your greatest long-term financial challenges will be planning for your personal savings and investments to outpace inflation. Therefore, it's always important to take inflation into consideration, not only as you save, but also as you make purchase decisions.

Fixed-Income Strategies-Laddering

Investors who are seeking regular returns and a promise of the return of principal often choose to include fixed-income investments, such as bonds and certificates of deposit (CDs), in their portfolios. Conservative fixed-income investments, particularly government securities and federally insured CDs, are generally considered less volatile than other investment vehicles, such as common stock and, as a result, they tend to provide lower rates of return.

A portfolio that relies too heavily on fixed-income investments may be vulnerable to inflation or fluctuating interest rates. One technique commonly used to balance the return and risk of this particular asset class with an investor’s time horizon is laddering — a method of maintaining a series of fixed-interest investments with different maturities.

How It Works

With a "laddered" portfolio, fixed-interest investments come due in staggered intervals, at which time they may be cashed or reinvested. Because investments with shorter maturities generally have lower interest rates, laddering looks to provide an investor with the financial benefits of long-term interest rates, but the flexibility of shorter-term maturities.

Each investment acts like a rung on a ladder, so that rather than an investor taking one big step—such as investing in a single, long-term savings vehicle—he or she can take smaller steps toward long-term savings goals. Furthermore, stepped maturity dates may provide liquidity options that enable an investor to hold a security until its date of maturity, which may protect against early withdrawal penalties or a downturn in market value. For illustrative purposes, consider the following hypothetical example, which assumes no federal taxes or fluctuation in interest rates and does not represent the performance of any particular investment.

Alice Blackwell wants to invest part of her savings in a portfolio that will provide her access to her funds in the event she goes to graduate school. She chooses to deposit $10,000 into a laddered bond portfolio and reinvest the principal until she needs the funds. To start, Alice splits her principal between five bonds, each with different maturities and interest rates. Every year during the next five years, one of her bonds will mature.

Principal

Maturity

Interest

Total

Year Due

$2,000

1 year

2.5%

$2,050

2008

$2,000

2 years

3.5%

$2,142

2009

$2,000

3 years

4.5%

$2,282

2010

$2,000

4 years

5.0%

$2,431

2011

$2,000

5 years

5.5%

$2,614

2012

Upon maturity of the one-year bond, Alice pockets the interest earned and purchases a five-year bond with a higher interest rate that will mature in 2013. When her two-year bond matures, she takes the earnings as income and, with the original principal, purchases another higher yielding five-year bond, which will mature in 2014. While Alice is buying bonds with longer maturities and larger returns, one of her bonds will still reach maturity every year, providing her either access to her money, or the opportunity to reinvest.

Laddering offers fixed-income investors a way to manage certain risks and add liquidity to their portfolios. When implementing any investment strategy, be aware that different securities have varying levels of risk. The principal value of bonds may fluctuate due to market conditions. If redeemed prior to maturity, bonds may be worth more or less than their original cost.

Early Retirement—Some Rules of the Road

Have you ever reviewed your pay stub and entertained thoughts of taking an early retirement? Suppose you are 55 and could take home a pension income that amounted to 60% of your pay if you retire now. IF you earn a high income, it may seem that you'll be able to retire in reasonable comfort. However, before calling it quits, weigh all of the facts carefully to be sure an early retirement makes financial sense for you.


Here are eight rules you should consider if you're thinking about taking an early retirement:

Rule #1: Weigh the differences between the benefits of retiring now and in the future. Retiring at age 55 with, hypothetically, 60% of your income, may seem like a good deal at first. But, if you wait until age 65 to retire, you will have gathered another ten years of full earnings under your belt, along with any increases for promotions, merit, raises, and inflation. This will provide you with more money to save for retirement and, ultimately, may boost your Social Security and pension benefits. Also, if you consider the difference in the percentages you will receive now and in ten years—for example, 60% if you leave now, verses 80% if you retire in ten years—leaving now may not sound so good after all.

Rule #2: Remember to factor inflation into your decision. If you still think you can manage on, say, 60% of your income, remember that inflation will erode your pension. Consider this: If you retire today and receive a pension income of $1,060 per month for life, in 20 years at a 4% rate of inflation, you will have only the equivalent of $707 in today's dollars.

Rule #3: Prepare for longevity. The longer you live, the greater will be the effects of inflation, and more resources will be required to support your needs. As life spans lengthen, an early retirement plan should include a budget to cushion the financial burden incurred by potentially more years spent in retirement.

Rule #4: Evaluate other retirement income resources. If you already have a sizable retirement nest egg, or if you expect to collect a pension from a previous employer, the size of the pension you could receive from your current employer may not be critical. If so, perhaps you can leave work behind, since you will have other funds on which you can rely.

However, don't make the mistake of expecting Social Security to provide most of your retirement income. The Social Security Administration (SSA) projects that benefits will replace only 40% of the average worker's pre-retirement income (SSA, 2005). Also, the future of Social Security is uncertain, and cutbacks in other government programs, such as Medicaid and Medicare, may require you to provide even more of your own funds.

Rule #5: Part-time work may make early retirement feasible. If you decide to leave your present company, are you banking on securing employment elsewhere to supplement your pension? The prospect of ongoing income may make it possible to consider an early retirement option, even if it doesn't pay a high percentage of your earnings. However, keep in mind that it may be difficult to find another equally high-paying position. Be certain of the earnings and longevity you can expect from your next job before depending on it for income until you permanently retire.

Rule #6: Be aware of the effects early retirement may have on Social Security benefits. If you are under age 65 and continue working after you begin collecting Social Security benefits, you may have to "give back" a portion of your benefits. In other words, your Social Security benefits may be reduced once your earnings exceed a certain income cap.

You should also know that if you continue working after you begin collecting Social Security, a portion of your Social Security benefits might be taxed. The calculation to determine how much of your benefits will be included in your gross taxable income is somewhat complicated. For more information, contact the Social Security Administration.

Rule #7: Taking an early retirement may make sense if the specter of corporate downsizing looms. Is there a chance your company will lay you off if you do not elect to leave on your own? Many companies now lay off high earners as part of their cost-cutting measures. If your company is experiencing financial difficulties and downsizing appears imminent, you may get a better deal through early retirement than through the company's severance package.

Rule #8: Understand the potential tax consequences of early retirement. If you opt for early retirement, you may incur a 10% federal income tax penalty for early withdrawals from a qualified plan. Keep in mind that withdrawals taken from an Individual Retirement Plan (IRA) before ate 59 1/2 may also be subject to a penalty.


Early retirement may be a long-held dream and a financial possibility. But, before calling it quits, analyze your situation carefully. You will have to live with the effects of your decision for the rest of your life. Take the time now to make sure it will still be a smart decision in the long run.

How Social Security Affects Your Retirement

When contemplating retirement, you, like many other people today, may be counting on Social Security benefits to provide you with a basic level of income. The age at which you choose to retire is an important part of the equation. In addition, there are many other issues to consider when making a choice.

Some of these issues include the following: 1) How would an early retirement, for example at age 62 vs. age 65, affect your Social Security benefits? 2) How will those benefits be taxed? and 3) Is it in your best interest to continue working to earn extra income when your benefits could be reduced based on how much you earn?

What's the Maximum?

As most people realize, Social Security provides only a base level of income. The maximum benefit for a person who retired in 2007 at full retirement age (age 65 and 10 months) was $2,116 per month. In comparison, the maximum benefit in 2006 was $2,053 per month. It is important to note that the benefit for a non-working spouse is only 50% of that amount.

Should You Delay Retirement?

If you delay retirement past your full retirement age, your monthly benefit will increase, based on that age at which you elect to take retirement benefits. But, upon attainment of age 70, the benefit no longer applies, even if you continue to delay payment.

Taking benefits at age 62 (considered early retirement) is appealing to many people. However, some continue working and earn additional money to supplement basic Social Security income. Here is where you need to be careful. When you do earn additional income, you may forfeit some of your benefits if you earn more than the maximum amount allowed. If you decide to take early retirement benefits from Social Security at age 62, your monthly benefit amount will be permanently decreased by 20% - 30%, based on your full retirement age. If you are under the full retirement age, receive Social Security benefits, and earn additional income, your benefits would be reduced by $1 for each $2 you earn over $12,960 in 2007. The year in which you attain the full retirement age, your benefits would be reduced by $1 for every $3 earned over a certain amount ($34,440 in 2007). Upon attainment of a full retirement age, you may earn as much as you like, and Social Security benefits are not reduced.

Full Retirement Age - It's Changing

For a long time, the retirement age has been 65. Due to longer life expectancies, that age will increase in gradual steps until it reaches age 67. This change began in the year 2000 and affects people born in 1938 and later. Age 62 still remains the earliest you may begin to receive Social Security retirement benefits.

For Your Information

The Social Security Administration (SSA) provides a free service that allows you to check the accuracy of your Social Security records.

You can call Social Security at 800-772-1213 or visit their website at www.ssa.gov to request a Social Security Statement (Form SSA-7004). Once you complete the request online, or print the form and mail it in, they'll provide you with a yearly breakdown of salary credited to you since 1950. They'll also include an estimate of benefits to be received by you when you retire.

Required Minimum Distributions for Traditional IRA's

Saving as much as you can for retirement, as soon as you can, and as often as you can, is crucial to your financial well-being when you finally leave the workforce. Suppose you have spent a lifetime contributing to a traditional IRA and hope to leave your nest egg untouched for your heirs. The IRA says that once you reach a certain age, the time to spend has come. When you reach age 70 1/2, or by April 1st of the year following the year you reach this age, the IRA mandates that you either empty the account in one lump-sum payment or take required minimum distributions (RMD's). If you choose to take RMD's, ongoing distributions must be taken at the end of each following year. If your birthday is December 3, 2007, and you turn 70 1/2 on June 3, 2008, you can wait until April 1st of the following year—2009—to take your first distribution. But, doing so can have tax consequences. By December 2009, you will be required to take your next distribution, which will raise your taxable income for the year, potentially boosting you into a higher tax bracket or even causing your Social Security benefits to be taxable.

The minimum withdrawal amount is calculated by dividing the amount of your account balance by the appropriate life expectancy factor, which depends on your age. The IRA's “Uniform Lifetime Table” below illustrates the amounts for the majority of taxpayers, including singles, married persons with spouses 10 years younger or less, and married persons with spouses who are not the sole beneficiaries of the account and who are more than ten years older than the account owner:

Based on the table above, if you are age 70 and your account is worth $500,000, then your RMD amount is $18,248 ($500,000 / 27.4). Married persons whose spouses are more than 10 years younger and who are named as the sole beneficiaries of their accounts can use a joint life expectancy table to calculate their RMD's. Bear in mind that a required minimum distribution is just that—a minimum. You can always take out more than the required minimum. However, if you fail to withdraw at least the minimum amount, the IRS may impose a 50% penalty each year on the dollar amount that you neglected to withdraw. Based on the example above, if you failed to take your RMD, a penalty of $9,124 may be claimed by the IRA and go straight into their coffers.

Distributions from your traditional IRA can be taken without penalty after you reach age 59 1/2, but before you reach this age, a 10% penalty tax may be incurred on early withdrawals. There are some exceptions. Withdrawals taken for first-home, medical, or education expenses may not be subject to the penalty. In addition, distributions taken in a series of substantially equal payments over your life or life expectancy may not incur a penalty. You will work a lifetime to accrue enough savings to attain financial stability in retirement. Make sure that all of your efforts are concluded wisely. Speak with your financial professional before RMD's are due in order to make the right choices for your situation. Also consult your tax professional to help ensure that your distributions are taken in a tax-efficient manner.

Tax Tips from the IRS

Even with the best intensions, filing taxes often becomes an event that is put off until the very last minute. For those who are not accountants, tax laws can be confusing, leaving many unsure of what they may deduct, and how they should file. However, according to the Internal Revenue Service (IRS), the process can be much simpler than you may think.

  1. Organize. Take time throughout the year to store and organize your records and receipts in one place. Remember to include the income, deduction, or tax credit items that you reported the previous year. Organizing and maintaining a filing system will keep everything in one place, and make filling out forms that much simpler.
  2. Avoid Procrastination. Procrastination is often tempting. However, doing your taxes sooner rather than later will allow you extra time to sort out potential problems or questions that might arise. Also, with time on your side, you will be more likely to avoid mistakes, as well as have the opportunity to discover all applicable tax savings.
  3. Look up the IRS Online. At www.IRS.gov you will discover many sources of information. You will be able to download and print tax forms, have access to tax law information, and will find a list of answers to frequently asked questions.
  4. E-file. E-filing presents an easy and convenient method of filing your taxes. Errors are reduced, and refunds are returned in half the time as compared to those who mail their documents. At www.IRS.gov you will find a link, e-file, which will take you to companies that provide this service.
  5. Use Direct Deposit. If you are due a refund, the direct deposit option will allow for a faster return and decrease chances of theft. When you enter information for this option take the time to double check your bank account number to avoid errors.
  6. If necessary, apply for an Extension. If your time is up, and your forms aren’t ready, you can request an extension deadline of August 15th. If you owe money on your taxes, you will still be subject to payment due on April 15th. Failure to do so may subject you to late charges with interest.

Starting early, and organizing throughout the year, can greatly reduce chances of error and stress, help prevent unnecessary tax apprehension, and make the process that much smoother.

The Basics of Tax Basis

You probably know that when a capital asset is sold for profit, it is subject to a Capital Gains Tax. But, did you know that how you acquired the property, and what you have done with it since acquisition, will affect the determination of "basis" and, ultimately, the "gain" on which the tax is paid?

Basis is used to determine gain upon the disposition of an asset. In simple terms, basis is an owner's out-of-pocket cost for the asset. For purchased property, the starting basis is the original price paid (plus any acquisition costs). An asset's basis can be increased (e.g., by making improvements to real property) or decreased (e.g., after a casualty loss reduces the value of an asset) and can change according to how it was acquired and the nature of the eventual disposition. Adjusted Basis refers to changes in basis after an asset was acquired.

Selling an Asset

Assume Pat Smith bought an antique rug for $25,000. While having the antique appraised, Pat learned its current Fair Market Value (FMV) is $85,000. Pat's basis is the original cost of $25,000. If she were to sell the antique rug at current FMV, her taxable gain would be $60,000 ($85,000 selling price minus $25,000 basis).

"Gifting" an Asset

Now, suppose Pat decides not to sell the rug, but rather to give it to her daughter, Amanda. As a general rule, the donee (Amanda) assumes the basis of the donor (Pat) at the time of the gift (plus a portion of any gift tax incurred by the transfer). However, if Amanda were to sell the antique rug, her gain or loss on the sale would depend upon whether the FMV of the antique at the time of the gift was greater, or less, than its adjusted basis at that time.

If the FMV at the time of the gift is greater than the donor's (Pat's) basis of $25,000, then Pat's basis is used to determine the gain or loss. However, suppose the FMV at the time of the gift is less than Pat's basis-say $15,000. In that case, the foundation for determining a gain and loss are different. For a loss, the donee's (Amanda's) basis is the lesser of the donor's (Pat's) cost of $25,000 or the FMV at the time of the gift, which is $15,000. For a gain - assume the antique is still valued at $85,000 when Amanda sells it - the basis remains Pat's basis of $25,000.

"Bequeathing" an Asset

After reviewing these rules with her accountant, and being apprised of possible gift tax consequences for any gift exceeding $12,000 per person per year in 2006 ($11,000 for 2005), Pat wonders if other techniques exist to transfer the antique rug to Amanda with fewer tax complications.

Upon further investigation, Pat learns that the basis of property acquired by inheritance is adjusted to the FMV of the property at the time of the owner's death. Thus, if she were to bequeath the antique to Amanda, Amanda's basis in the antique would be the FMV of the antique on the date of Pat's death.

In summary, the main advantage of acquiring property through inheritance is that it allows the recipient to sell the property shortly after inheriting the property with little or no capital gains tax. Assuming that an immediate sale of an inherited asset would be at the asset's FMV, there would be no recognized gain since the basis (FMV) would also be the same. Even if the asset were held for some time after inheritance, an eventual sale would result in a smaller capital gains tax, due to the higher (stepped-up) basis established at inheritance.

Capital gains tax laws can be complex. Understanding how basis is determined can help you make wise choices about disposing of your capital assets. This knowledge can help you minimize the tax burden for yourself, your heirs, and those to whom you make gifts.

Is an Appraisal Part of Your Financial Plan?

Is your family heirloom a hidden treasure? Television shows featuring auctions and appraisal fairs have ushered the art of appraising into the limelight with fascinating stories-an ancient artifact unknowingly passed down from generation to generation, a rare trinket picked up at a yard sale, or a historic relic found tucked away in the corner of an attic. While appraisals occasionally lead to surprising discoveries, they may also play a key role in developing financial plans. If you know you own expensive items, such as antiques or artwork-or even think you might-consider having your valuables appraised for insurance, estate planning, and tax purposes.

An appraisal is an expert valuation of property. Appraisers, practitioners of valuation, are experts trained to provide more than a guess at an object's worth-they assess value based on formal methodology and comply with standards and codes of conduct generally practiced in the field. An appraisal can help you make informed financial decisions, as well as provide you with professionally prepared documentation should you need to validate your property's worth to a third party, such as the Internal Revenue Service (IRS) or an insurer.

The "Value" of an Appraisal

Appraisals can help you secure appropriate insurance coverage, plan your estate, and develop tax strategies. You may not be able to put a price on your antique clock, but an independent appraiser can. Knowing the worth of your valuables can help you tailor your financial plan to your needs.

For insurance purposes, valuation can help you choose appropriate coverage for your property, as well as receive the reimbursement to which you are entitled in the event you need to file a claim. In general, the maximum benefit under homeowners policies applied to the contents of a home is 50% of the coverage bought for the house, though it may be 75% under some policies. Furthermore, most homeowners policies limit coverage for expensive items, such as furs, jewelry, and silver, but do offer protection at additional cost.

Under most standard policies, the most that may be claimed for loss to a particular category of property (such as jewelry or furs or firearms, for example) is limited ($1,500 or $2,500 is common). The category limitations may be increased for an additional premium. Broader coverage, covering losses that are not included in the basic policy, such as mysterious disappearance or breakage, can be obtained via a "scheduled personal property endorsement." This coverage extension usually requires you to supply bills of sale or appraisals dated within the last few years. Choosing the best approach, either by increasing the existing limits of coverage or scheduling items separately, depends on the possessions involved and the premium formulas of the insurance company.

Certain life events, such as death and divorce, often call for the equitable distribution of property. When a person dies, all possessions of the deceased play a part in the cumulative value of the estate, so having appraisals for the items of value will assist in the division of the estate, as well as the determination of estate tax. Probate often requires that an entire estate be inventoried and valued. In the event of a divorce, appraisals often assist with the division of marital property. Consult your attorney for legal advice.

If you donate an item to a charitable organization, an appraisal may be needed to show the IRS that the charitable donation is worth what you claimed on your tax return. The IRS generally requires a qualified appraisal for deductions over $5,000 claimed for a single item, or a collection of similar items, such as coins. Consult your tax professional for more information.

Appraisals may play a valuable role in your overall financial plan. They can help you determine your insurance coverage, as well as your estate and tax strategies. Consider appraising your prized possessions before the need arises.

Is It Time to Refinance?

Over time, mortgage rates often fluctuate up and down. Depending on where rates currently stand, now may or may not be a good time for homeowners to consider refinancing their mortgages. How can you determine whether it makes sense at any given point to refinance your mortgage?

In the past, one common rule of thumb was that if the current interest rate was 2% lower than the rate you were paying on your existing mortgage, it made sense to refinance. Today, that general rule still holds true in many cases. However, even if the current rate is less than 2% lower than your existing rate, refinancing may still be appropriate. Of course, a lower interest rate is not the only reason to refinance. Here is a review of several reasons why refinancing might make sense for you:

Move from an Adjustable Rate to a Fixed Rate Mortgage. Many first-time homebuyers may find they have no choice but to go with an adjustable rate mortgage (ARM) because they cannot qualify for a fixed rate loan. If such was the case for you, perhaps your ARM is about to go up. If so, you may be able to "lock in" a lower rate by refinancing with a fixed rate mortgage.

Build Up Equity at a Faster Rate. Perhaps you would like to pay off your mortgage in less than the traditional 30 years. A drop in interest rates may allow you to refinance your 30-year mortgage and replace it with a 20- or 15-year mortgage with a monthly payment that may be close to what you have been paying. This option may be especially attractive to homeowners who are nearing retirement and would like to pay off their mortgages before then.

Replace a Jumbo Mortgage with a Conventional One. The threshold for a jumbo mortgage has steadily increased in the last few years to its current level of $417,000 (and 50% higher in Alaska, Hawaii, and the U.S. Virgin Islands). The difference between a jumbo and a conventional mortgage can be significant-usually 3/8 of a point or more. If you have a jumbo mortgage, you may be able to refinance and pay down enough to qualify for a conventional mortgage to get the lowest possible rate.

Eliminate Private Mortgage Insurance (PMI). PMI, which is required by most lenders if your original down payment was less than 20% , is tacked on to your monthly payment. If the value of your home has increased since you bought it, you may be able to have the PMI removed just by having your house appraised. In any case, you can get rid of the PMI when you refinance if you end up with more than 20% equity in your home.

Tap into your Home Equity. If you have other debt or are anticipating new expenses, such as college tuition bills, you may want to refinance for a larger mortgage at a lower interest rate and use the extra cash to pay off the debt or forthcoming tuition bills.

Take Advantage of a Lower Interest Rate. The most common reason for refinancing is that the current interest rate is significantly lower than the rate you are paying on your existing fixed rate mortgage. Much depends on variables such as refinancing costs, points, and how long you plan to stay in your home. It is always wise to shop around to make sure you are getting the lowest rate possible and paying the lowest costs. Many lenders now offer "no points, no closing costs" programs.

Deciding when to refinance depends on your personal financial situation and your plans for the future. You may want to do some number crunching in advance to determine how low rates would need to drop for refinancing to make sense for you. Then, you will be ready to make your move if rates decline.

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