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Who will ever forget 2001? It was a challenging and difficult year on many levels. Economically, our nation officially entered a recession. Companies have laid off nearly a million workers, and we are likely to see negative returns in the stock market for the second year running. What does 2002 hold in store? What is the best way to approach the uncertain financial future? My advice is to emulate those highly effective people we read about by keeping last year in mind while planning for 2002. A well thought out financial plan takes into account the five basic elements: investments, insurance, taxes, retirement and estate planning. These components interact and overlap in the planning process and, therefore, each should be viewed in the context of the whole. INVESTMENTS Starting with the investment component, let’s talk about how the past two years’ disappointing results can be a starting point for this year’s plan. It’s time to rebalance your portfolio. Lopsided performance in a volatile year can leave even the best-planned allocation skewed in an unintentional direction. If you received $200,000 to invest today, would you invest in the stocks, bonds and funds you now hold? If the answer is no, it’s definitely time to re-position your portfolio. In the case of 401(k) and other employer retirement plans, there are typically no trading costs and no tax consequences associated with rebalancing. Don’t let market fluctuations determine your risk tolerance. Instead, these factors should affect your choices on the risk reward continuum: � When will you need access to the money that is invested? � How vulnerable to tax risk is your present portfolio? � What are your goals? Are your investments designed to pay for college, finance a business dream or fund your retirement? Once you’ve determined what fuels your personal investment engine, start driving it home by setting solid savings goals and standards. If you earn $250,000 this year, how much of it will you end up paying yourself? Remember, it’s not what you earn but what you keep that lets you create and maintain wealth. Even if you don’t feel the need to live on a strict budget, be aware of your spending patterns as they affect your savings goals. Set up a savings plan now and keep it going for the entire year. If higher education is among your long-term goals, make this the year you look into the benefits of 529 plans. Maryland and Virginia have announced plans to offer new, souped-up versions of their own 529 plans. Because investors are free to choose among any state plans, states have an incentive to offer attractive, competitive plans to potential investors. Watch for more to come on this topic as new information becomes available, but start doing your homework now. Many fund companies are working to expand their product line to give investors more and better choices designed specifically for the education funding market segment. INSURANCE Insurance is all about managing risk in the real world we live in, day to day. Most of the questions I get on this subject concern life insurance: How much should I carry? Should I buy term or permanent insurance? How do I know whether I am adequately insured? You’ve probably had that conversation with your own financial adviser or insurance professional. For this year, I suggest you try to become familiar with two forms of personal insurance other than life insurance. Statistically, a working adult is far more likely to become disabled than to die. Yet few attorneys look beyond the disability plans put into place by their firms when planning in this important area. Premiums for most employer-provided plans are paid with pre-tax dollars, meaning that benefits, when paid, are fully taxable. Assume for a moment that your benefit, when paid, equals two-thirds of your present salary and is subject to income tax. Could you and your family live on that amount? Consider also that a working spouse may have to devote time to the disabled partner, further reducing financial resources. Scott Greenberg of Greenberg, Wexler & Associates assures us that “for healthy adults with a low-risk lifestyle, supplemental disability plans can be purchased at surprisingly affordable rates.” Plans can be customized to accommodate the individual needs of the family. Your financial planner or insurance professional should be able to help you assess your needs in this area and line up appropriate coverage as necessary to guard against the real risk of lost income due to disability. Another consideration in deciding about supplemental disability coverage is the possibility of changing firms at some point in your career. The plan offered by your next employer is not necessarily the same as what you have now. Because personal circumstances can change the costs associated with obtaining coverage, locking in coverage when you’re younger and healthier makes good sense. In light of the significant expense associated with quality long-term care, individuals and employers are paying more attention to the need for LTC insurance. LTC coverage can help pay for all or part of the costs associated with nursing homes, assisted-living facilities and home care. Planning ahead can help preserve the value of accumulated wealth for families faced with the demands of extended incapacity. There is no one “best” LTC policy. The most cost-effective policy varies, depending on the benefits chosen, age, state of residence and budget. Again, check with your insurance professional or financial planner. You will need help to compare policies and benefits and determine what is best for you. You may want to touch base with your firm’s benefits management department, as more and more employers are offering long-term care insurance as a benefit. In many cases, corporations can deduct the cost of providing such coverage without creating a taxable benefit for employees. TAXES Taxation impacts our ability to accumulate and retain wealth. Knowledge can be your best ally in blunting that impact as much as possible. Knowing when and if to take deductions and understanding the consequences associated with changing tax rates can help. The Economic Growth and Tax Relief Act of 2001 has many features that are being phased in over the next few years. Awareness of those features can help you make the most of the changes. A good resource for planning in this area can be found at quicken.com, which provides a tool called the tax relief estimator. By making use of the information gathered through the estimator, savvy taxpayers can decide when to defer and when to accelerate income as they reach the end of each year. Deductions are worth more in the earlier years, while income gets taxed more gently in the later years (assuming there’s no tinkering by Congress between now and then — admittedly a big assumption). Use the quicken.com estimator throughout the tax year to avoid unpleasant surprises the following April. Taxpayers who use such tools can calculate their potential tax bill as income and expenditures change throughout the year. Income for lawyers is usually not so much a steady stream as it is a faucet with settings that include everything from trickle to flood. Checking your figures from time to time can help you adjust quarterly payments or withholding as necessary. As was the case last year, many investors experienced a capital loss in 2001, rather than a gain. If your actual loss exceeds the allowable $3,000 limit for this tax year, be aware that you can carry forward losses in excess of this amount. If 2002 is a more favorable year on the investment side, those losses may help to offset next year’s gains. RETIREMENT According to Tim Pegler of Uniglobal Pension Planning Inc. in Fairfax, Va., the big news on the retirement planning front for next year centers around two changes. First, there are some significant adjustments to the limits on total contributions to qualified plans. Second is the fact that “you can concentrate your money in one location, a change that is very useful from the standpoint of money managers.” The balances in traditional and rollover IRAs now may be added to 401(k)s, 403(b)s and 457 accounts, facilitating more effective asset allocation. In addition, the old formulas have been adjusted significantly. In past years, total contributions to a 401(k), profit-sharing plan and money purchase plan could not exceed the lesser of $40,000 or 25 percent of compensation. Under the new rules, total contributions to qualified plans, including a 401(k) and a profit sharing component within the same plan, can reach the lower of $41,000 or 100 percent of compensation for participants over 50 and $40,000 for those who are not in the over-50 catch-up group. Where spouses earn disparate incomes, the spouse who earns less can, in 2002, save as much as 100 percent of his or her salary in a company plan, as long as that figure does not exceed $40,000 (for those under age 50) or $41,000 (for all others). This new rule allows couples to put away as much as $80,000 to $82,000 a year on a tax-deferred basis. In the past, many firms have included three components to their plans to maximize retirement savings options for employees. Thus, companies and firms have funded 401(k) plans, profit-sharing plans and money purchase plans. Under new regulations this year, the maximum can be tucked away in a combined 401(k) and profit-sharing plan, thus eliminating the need for money purchase plans. Why is that important? Each plan carries its own burden of administrative costs; cutting down on the number of components in a firm’s retirement arsenal cuts down on firm expenses. ESTATE PLANNING Most analysts are skeptical about the phaseout and elimination of inheritance taxes. Given the reality of federal spending today, is it likely that these taxes will disappear on cue in 2010? Can or should anyone make such repeal the linchpin of an estate plan? Regardless of impending changes in the amount that can be passed along to heirs, everyone should have a well thought out estate plan based on today’s tax environment. There’s no excuse for a smart lawyer not to have his or her estate plan in order. Estate planning is not just a matter of protecting assets. The saddest cases I have seen in my practice are people with minor children who end up suffering the consequences of poor or nonexistent estate planning on the part of parents or guardians. Your list of things to accomplish this year probably includes some worthy goals. You may have resolved to lose weight, exercise more and call your mom on a regular basis. Add one more. Make and implement a solid financial plan that includes these five elements. Barry Glassman is a certified financial planner and first vice president with Cassaday & Co. in McLean, Va. He specializes in assisting attorneys with individual financial planning and law firms with evaluating and implementing firmwide retirement plans. His e-mail address is [email protected]

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