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Volume 14, Issue 7

Insurance Protection for Dual Income Families

As we move further into the 21st century, the idea of the “traditional” American family has changed. The dual income family— with husband and wife each maintaining separate careers and contributing to the financial success of the household—has now become commonplace.

The economic challenges and opportunities of this new century may often require two incomes to meet overall family expenses. Many families are left asking themselves, “How will we be able to plan for our retirement, save for our children’s education, and perhaps help our aging parents deal with some of their financial burdens?” These concerns may be especially pressing given today’s high—and rising—cost of living.

The Cost of Working

Although it may seem that dual income families should have a lot more disposable income to pay for life’s necessities, this may not always be the case. First, families with both spouses working will lose some portion of the second paycheck to extra expenses, such as unreimbursed childcare, domestic help, job-related transportation, business attire and dry cleaning, lunches and dinners at restaurants, and take-out meals. These additional, daily expenses all eat into that second income.

When both parents work outside the home, childcare concerns are especially critical. High quality childcare is a major expense of many dual income families—after housing, food, and taxes. It is this cost that potentially reduces the income that could be used to help fund education or retirement.

Second, as American businesses continue to restructure and downsize, some dual income families may face the possibility of living on a single or reduced income for some period of time. For those who need the additional income to assist in paying for basic expenses—such as the mortgage, food, and clothing—a loss or reduction of one income could have a serious impact on the family finances.

Protecting Your Family’s Future

How would your family protect its income if either working parent should die or become disabled? One solution may be to purchase a life insurance policy that will pay a death benefit upon the death of the insured spouse. There are several advantages to life insurance: For example, policies bought at a younger age may have lower costs, provide cash value buildup, and maintain level premiums.

Generally speaking, the cost for life insurance policies may be lower when purchased at an earlier age. However, the benefits that life insurance policies provide for dual income families can best be calculated by analyzing all life insurance needs in order to determine the best course for the family.

Now, what about loss of family in-come due to disability? This possibility is not as unlikely as you might think. According to the Insurance Information Institute (III), a disabling injury occurred every two seconds in 2004, affecting 23,200,000 people. The average worker, at age 40, faces a 21% chance of suffering a disability that lasts over three months, compared to only a 14% chance of suffering an untimely death (III, 2007).

A debilitating illness or injury that cuts off or reduces your family’s pr i-mary source of income can be a financially devastating experience. It could be worthwhile to see if using an individual disability income insurance policy to replace those lost dollars would be right for your needs.

It Takes Two

Dual income families have become a fixture in today’s society. Although individuals may have a variety of different motives for working, most families come to depend on that sec-o nd income, whether it is used to meet current or future needs. Thus,it is important to be certain that the incomes contributed by each spouse are protected from loss.

Retirement Savings: Do Yours Measure Up?

When envisioning retirement, you may picture living in tropical climes, traveling and sight-seeing at leisure, or doing whatever suits you on any given day. Regard-less of your age or circumstance, it might surprise you to learn that a “lifestyle plan” is an important part of retirement planning.

Knowing how you want to spend your years after you retire from your job, deciding where you might like to live and which activities you plan to pursue, is necessary to deter-mine the total amount of cash you’ll need. In order to live comfortably in retirement, you may need at least75% of your current income per year(American Savings Education Council (ASEC), 2008). If this figure comes as an uncomfortable surprise,you are not alone.

Social Security

Many people still have the notion that Social Security will provide aa large portion of their retirement income. However, Social Security was designed to be a supplement to retirement savings, rather than a main source of income. To estimate what your Social Security benefits may be, obtain a Social Security Statement (SSS) from the Social Security Administration (SSA) online at www.ssa.gov. Or call 1-800-772-1213, and ask for Form SSA-7004, Request for Social Security Statement. By obtaining a copy of your statement, you can check for errors that might affect your payout later, learn the amount of your expected payout, and be able to plan for the amount of income you will need to supplement your desired lifestyle.

Since Social Security provides only a portion of needed income, many people rely on savings to make up the difference. And yet, according to the 2007 Retirement Confidence Survey conducted by the Employee Benefit Research Institute (EBRI, 2008), only 59% of workers ages 25–34 and 60% of those who are ages 35–44 have begun saving for retirement. When asked to estimate the total amount of savings accumulated thus far, the highest percentage of all age groups polled (49%) said their savings were less than $25,000. Only 31% of workers ages 25–34 felt confident about the likelihood of having enough financial resources to be comfortable during retirement, and that figure went down three points to 28% for those ages 35–44 (ASEC, 2008).

With the decline in popularity of traditional pensions and the uncertain future of Social Security, individuals are increasingly responsible for their own retirement funds, but according to these statistics, many have yet to take that important first step.

Taking the First Step

Starting a retirement savings plan can be a lot easier than you may think. In fact, the first step is to accept “free” money. This means taking full advantage of all of your employer’s benefits. This may include a traditional pension, also known as a defined benefit plan, that your employer contributes to on your behalf, which is then payable to you upon retirement.

These days, a more common benefit option is a defined contribution plan, such as a 401(k). Like some employers, yours may match your contributions up to a certain percentage of your salary. That’s free money increasing your principal that did not come out of your pay-check, but first you have to take some initiative. In order to fully benefit from the matching contribution, you must make contributions. 401(k) contributions may be deduct-ed from your paycheck before taxes, and they have the potential to grow tax deferred.

Because money is deducted from your gross pay, you may find that your contributions have a relatively small impact on net income and can be of great benefit to your overall nest egg. For example, saving $5,000 today, over a period of 15 years, at a hypothetical 5% rate of return, could amount to over $10,569 in addition-al savings income (ASEC, 2005).

Individual Retirement Accounts

Since retirement could require 75–90% of your current income, many people are contributing to Individual Retirement Accounts (IRAs) in addition to employer-sponsored plans. Traditional and Roth IRAs allow for annual contributions of $5,000 for 2008. In addition, for those age 50 and older, annual “catch up” contributions of $1,000 are allowed in 2008. Funds in both accounts will be subject to a 10% federal income tax penalty if distributions are taken before age 591⁄2; however, certain exceptions may apply.

Depending on your income and participation in an employer-sponsored plan, contributions to a traditional IRA may be tax deductible, and earn-ins grow tax deferred. Contributions to a Roth IRA are made after taxes, but they are tax exempt when you withdraw in retirement, provided you are age 591⁄2 or older and have owned the account for at least five years. Taking the opportunity to save as much as you can afford each year could have a favorable and significant impact on your ability to reach your retirement goals.

The outlook for retirement is rapidly changing as more and more people anticipate and prepare for active and adventurous lifestyles. Taking time now to set life goals and implement the steps necessary to reach them will greatly enhance your chances of “rockin’ on” when that happy day finally arrives.

Transferring Credit Card Balances

If you have run up a large bill on a credit card that charges a high annual percentage rate, it may make sense to transfer the balance to another card that offers a lower rate.

But before you agree to move existing debt to a card that promises a very low APR on balance transfers, read the fine print. Even if you are offered a great initial rate on a transfer, it may only last for a short time. If you have a debt you are unlikely to pay off within the introductory period, you may be better off opting for a card that offers a slightly higher rate that does not expire. Watch out, too, for annual, late, and over-the-limit fees, as well as high rates on new purchases.

Understanding the Student Loan Interest Deduction

Paying for a college education can be very expensive, but the federal government makes it a little easier by allowing taxpayers to de-duct the interest paid on student loans on their income tax returns. If you are considering claiming this deduction now or in the future, there are some restrictions that you should be aware of for tax planning purposes.

The maximum amount of student loan interest payments each taxpayer may deduct is currently set at the lesser amount of the actual interest paid on the loan in the course of the year or $2,500. To qualify for the deduction, your modified adjusted gross income (MAGI) must be below $70,000 if you are single or $140,000 if you are married. The deduction is gradually phased out if your MAGI is above $55,000 for single filers and $110,000 for married filers. If you are married, you must file jointly in order to claim the student loan deduction; you are barred from claiming the deduction if you are married and filing separately.

You don’t have to itemize your deductions to qualify for this tax break, but there are some restrictions on who is permitted to claim it. The loan must have been taken out to finance your own education or that of your spouse or dependent. You cannot claim the deduction if you have been claimed as an exemption on the tax return of someone else, usually your parents. On the other hand, if your parents took out a loan to help pay for your education at a time when you were no longer their dependent, the interest they paid on the loan does not qualify for deduction.

The Internal Revenue Service (IRS) also stipulates that students for whom the deduction is claimed must have been enrolled at least half-time in an educational program that leads to a degree, certificate, or other educational qualification. The student must have been enrolled in an eligible educational institution,which includes any college or other post secondary educational institution eligible to participate in the Department of Education’s Federal Student Aid (FSA) programs. Generally, most accredited post secondary institutions in the United States qualify, as do certain educational institutions located outside of the country, provided they participate in FSA programs.

The loan on which the interest is paid must have been taken out solely for the purposes of paying for educational expenses, which may include tuition, room and board, supplies, equipment, and other necessary expenses, such as transportation. These expenses must have been incurred within a “reasonable period of time” after the loan was disbursed. If, however, you took out a personal loan that was used in part to pay for educational expenses, interest payments on the personal loan are not considered deductible. If you took out a home equity loan to help pay for college, you may be able to deduct the interest under the mortgage interest deduction, but the interest payments do not qualify for the student loan deduction.

Under IRS rules, you can deduct all the interest paid in the course of the year on a student loan, including voluntary payments, until the loan has been paid back. If you have been paying back a loan from a bank or government agency and have made interest payments of $600 or more in the course of a given year, the loan servicer should automatically send you a Form 1098-E by January 31 of the following year. This form can be useful in helping you calculate the amount of interest paid, but the IRS does not require you to have a Form 1098-E to claim the deduction. In some cases, the information provided by Form 1098-E will not accurately reflect the full amount you are permitted to deduct. If, for example, loan origination fees are not reported on your Form 1098-E, the IRS allows you to use “any reasonable method” to allocate the loan origination fees over the term of the loan.

The student loan interest deduction can provide valuable tax savings for students and others facing higher education expenses. For more information, consult your tax professional.

The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Entities or persons distributing this information are not authorized to give tax or legal advice. Individuals are encouraged to seek advice from their own tax or legal counsel.

The information contained in this newsletter is for general use and it is not intended to cover all aspects of a particular matter. While we believe all information to be reliable and accurate, it is important to remember individual situations may be entirely different. Therefore, information should be relied upon only when coordinated with professional tax and financial advice. The publisher is not engaged in rendering legal, accounting, or financial advice. Neither the information presented nor any opinion expressed constitutes a representation by us or a solicitation of the purchase or sale of any securities. This newsletter is published by Liberty Publishing, Inc., Beverly, MA, Copyright © 2008.



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