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Tuesday, April 14, 2009

CERTIFICATES OF DEPOSIT

The Retirement Advisor has previously recommended that our subscribers consider joining the Pentagon Federal Credit Union (Penfed). The Retirement Advisor has looked into the organization and Penfed offers some wonderful opportunities for those approaching or in retirement, including one very unique opportunity that is discussed below.

By way of background, Penfed serves 700,000 members in the Air Force, Army, Coast Guard, Department of Homeland Security, Department of Defense, defense- related companies, and the Veterans of Foreign Wars. It was federally chartered in 1935 and has $8 billion in assets. Penfed consistently offers some of the most attractive rates on money market savings accounts, certificates of deposits, loans and other financial instruments.

The National Credit Union Administration (NCUA), an agency of the U.S. Government, insures your savings with Penfed up to $250,000. Penfed offers Money Market Certificates and IRA Certificates to its members. Both of these are the equivalent of Certificates of Deposit. In other words, these Certificates are debt instruments where in exchange for tying up your invested money for the duration of the certificate's maturity, you will earn a fixed rate of return.

Penfed's IRA Certificates require a minimum investment of $1,000 where you can lock in prevailing rates and hold these Certificates in your IRA. Penfed offers maturities ranging from 1 to 7 years. Dividends are compounded daily and paid monthly for maximum returns. When we first recommended PenFed in our third newsletter, they were offering CD rates in the 3-5 year maturity with well over a 5% yield!

To learn about the special opportunity at Penfed that we discussed in our Retirement Advisor Newsletter, subscribe now!

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Don't Delay Your Financial Health Any Longer!

Friday, April 10, 2009

401(k) Plans, Fees and Expenses

Have you ever wondered how much your 401(k) plan cost to run? Most investors look only at the returns, but at The Retirement Advisor we have always been concerned with the cost of investments since that impacts your bottom line.

Ever since U.S. companies started adopting 401(k) plans as a retirement savings vehicle in the early 1980s, they have grown to be the savings vehicle of choice, with the number of participants in 401(k) plans surpassing those in traditional defined benefits plans during the mid 1990s.

Many employers tack on additional fees to administer their 401(k) plan. A recent publication from the Investment Company Institute (ICI) on “The Economics of Providing 401(k) Plans” breaks down the sources of fees into the following three general groups:

1. Administration services: This includes recordkeeping, transaction processing, and trustee services.

2. Participant-focused services: This includes participant communication (such as web access or call centers), participant education, investment management, and loan processing.

3. Regulatory and compliant services: This includes creating plan documents, consulting services (assistance in selecting the “right” mutual funds), accounting and auditing services, and legal advice.

According to a report published by the U.S. Government Accountability Office (GAO), out of all the different subgroups mentioned in the ICI publication, investment fees (fees that are charged by companies managing mutual funds) and plan recordkeeping fees together account for nearly all of the fees being charged to 401(k) plans. Investment fees are typically borne by the participants in the 401(k) plan, while recordkeeping fees generally by the company (that is, the plan sponsor).

So Where is the Problem?

While mutual funds are legally required to disclose their fees and expenses to the participants, the current disclosure requirements are limited in nature and does not allow for an easy comparison across investment options or across different plans. In the GAO’s own words, ERISA “requires that plan sponsors provide participants with certain disclosure documents, but these documents are not required to contain information on fees borne by individual participants. Additional fee disclosures are required for certain – but not all – plans in which participants direct their investments. These disclosures are provided to participants in a piecemeal fashion and do not provide a simple way for participants to compare plan investment options and their fees.”

Given the opaque nature of fee arrangements, and given the sheer size of the $2.4 trillion 401(k) plan industry, there is a significant incentive for service providers to overcharge 401(k) plan participants or to mask the nature of their fee arrangements (such as arrangements that result in conflicts of interest). Make no mistake: An extra 0.5% or 1.0% charge on a midsize 401(k) plan (approximately $100 to $200 million in assets) can result from additional fees of $500,000 to $2 million on an annual basis – hardly a trivial sum. For the retiree as well, having an extra 1% annual fee deducted from his or her 401(k) plan would result in a 19% “savings shortfall” relative to his original savings (the amount which the participant would have saved if the extra 1% charge had not been implemented) if compounded over 20 years. In other words, a 19% savings shortfall is not trivial! For plan participants who are not sure how much they are being charged in their 401(k) plans, we recommend at The Retirement Advisor that you ask your employer for a full disclosure and start saving money.

To learn how to subscribe to The Retirement Advisor Newsletter, visit our web site where you can download a free issue with instructions on how to subscribe. Subscribers are able to obtain all of our back issues at no extra cost.

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Don't Delay Your Financial Health Any Longer!

Tuesday, April 07, 2009

States With No Income Taxes

There are seven states in the United States that have no income taxes at all. If you are considering a place to retire and you want to keep as much of your money as possible, then you should consider one of the seven states that have no income tax. They are Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. (From "Individual Tax Rates by State for 2008.")

Once you let a politician start to tax you, they find it easier to raise taxes "just a little" to take more of your hard earned income.

The three states with the highest tax rates are 9.0% or more. They are Oregon at 9.0% California at 9.3% and Vermont at the top with 9.5%.

To see the individual and married tax rates by state, see "Tax Rates by State for 2008".

Don't forget to look at sales taxes! I live in California where the incremental tax rate at the top is 9.3% then we have a sales tax too! That means for every $100 in 2008 income above $44,815, we pay $9.30 cents to California in income tax. Then what is left over, we now have a 9.25% sales tax in Santa Clara and San Mateo Counties where I spend most of my time and money. I heard on the news last night that Oakland California is considering raising their city tax to balance their budget (common excuse) so their total "sales tax" will be 10%!

Wednesday, April 01, 2009

2.5% CDs at Citibank

Citibank is offering a 2.50% APY FDIC insured CD with an 8 month term.

Strings:
  • $1,000 minimum
  • Must have a Citibank checking account
You can also get a 1-yr CD with only $500 and no checking account with a 1-year term according to the web site as of 4/1/09.

For more rates and terms for Citibank certificates of deposit plus contact information, see Citibank or call 1-800-374-9500.

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The Retirement Advisor Model Portfolios all began with $200,000 on 1/1/2007