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SAMUEL A. RAMIREZ JR.
Managing Director
Samuel A. Ramirez and Co.

Samuel A. Ramirez Jr. heads the New York investment banking firm's private client group, including retail and institutional sales in all major asset classes, overseeing investment advisory accounts and real estate investments, and coordinating the firm's advertising and business development. He is involved with New York's Municipal Bond Club and Municipal Forum.

Mr. Ramirez predicts moderate GDP growth of 3.5 percent to 4 percent this year amid continued productivity gains and only gradually rising inflation.

Samuel A Ramirez Jr.

Overall, he says, both inflationary and deflationary forces are at work in the economy. Most of the increases in commodity prices are caused by external forces such as demand from China and India. Deflationary forces include large debt burdens and a globalization process that is introducing less-expensive goods and labor. Inflationary issues stem from low interest rates that are keeping the cost of money low for both consumers and corporations, and fueling real estate prices. Mr. Ramirez expects that these contrary forces will keep interest rate increases at moderate levels, with the Federal Funds rate expected to peak in the 3 percent to 3.5 percent range, and the 30-year Treasury bond to adjust to the 5 percent to 5.25 percent range.

Using this economic forecast, Mr. Ramirez constructed investment strategies that weighted a variety of factors, including short- and long-term goals, time horizons for retirement, and the investors' risk tolerance. In choosing investments, he sought to accomplish three criteria: risk tolerance, consistent return, and diversification.




INVESTOR PROFILE #1
Married couple, both of whom are 48 years old, college educated, and employed full time. Both are business professionals and they have two children, ages 4 and 10. Average annual household income is $136,900. They recently purchased a new home valued at $350,000 and have a 30-year, fixed-rate mortgage with monthly payments of $2,100. Currently, they have $50,000 in savings invested in 401(k)-based mutual funds. The couple's risk tolerance is moderate, with an investment time horizon of 15-plus years.
Financial objective Plan for full retirement at age 65; secure spouse's finances; save for children's college education.

Monthly Financial Statement
Income: $6,080.25
Expenses:
•Mortgage $2,100
•Food $1,000
•Electric, heat, phone, etc. $400
•Insurance $100
•Fuel, misc. $200
•Vacation $200
Total $4,000

Leaving a net savings pool of $2,080.25 per month ($24,963 annually).




Strategies and Assumptions
A joint salary of $136,900 would result in federal and state taxes of about 33 percent. After combined maximum 401(k) contributions of $28,000, taxable income would be $108,900, resulting in after-tax take-home pay of $72,963 ($6,080.25 per month). A working assumption is that health insurance for the family is provided through an employer plan.

Recommendations
401(k) Max out all contributions at $14,000 per individual. This would total $28,000, lowering the couple's tax base to $108,900.
Cash For emergencies, it's generally recommended to keep enough capital to cover one to three months of living expenses (in this case $6,000 to $7,000) in investments that are relatively easy to access, such as money market accounts.
College savings To achieve $40,000 per year (the general rate for tuition and expenses these days) a total of $1,850 a month would have to be invested. This is an aggressive target and, based on individual needs or expectations, could be adjusted higher or lower.

Investment Structure
Retirement account With 17 years until retirement, recommendation is for $28,000 per year allocated into 401(k).
Diversification Based on the couple's moderate risk tolerance and time horizon, strategic diversification is key. Mr. Ramirez recommends a portfolio of mutual funds because individual equities would be too volatile and would not allow for a fully diversified portfolio.

Identifying the risk profile and quality of various mutual funds can be achieved by reviewing the fund's style of investing, strength of the portfolio manager or team, and past performance on a 3-, 5-, and 10-year basis, as well as looking at the fund's volatility. Ideally, the fund should have a strong, tenured management team that has produced consistent returns during different market cycles. To assess a fund's volatility, Mr. Ramirez cites the "beta" an estimate of an investment's volatility that is compared to its benchmark index; the lower the beta, the less volatile the investment. Analyzing fixed-income mutual funds is, for the most part, similar; however, the average maturity of the portfolio and credit quality must be evaluated. These two factors are important in determining the potential volatility of the fund.
Additional savings $230.25 per month ($2,763 per year). Ultimately, this is a little tight and may be adjusted based on individual preference. This money could be used to purchase additional life or disability insurance. With the future needs of the children, having such insurance is very important.

Term insurance although the least expensive initially is not a permanent solution; a whole-life policy would be preferable because it provides a permanent solution and cash value over time.

Allocation Proposal
50 PERCENT IN EQUITIES
25% Large-Cap Value
25% Large-Cap Growth
20% Mid-Cap Blend
20% Small-Cap Blend
10% International

50 PERCENT IN FIXED INCOME
45% Preferred
45% Corporate Bonds
10% Cash




INVESTOR PROFILE #2
Successful business owner, 47 years old, married, college educated. Business has average annual revenues of $7 million; line of credit available from lending facility; no outstanding debt; annual profit margin of 15 percent. Average total household income is $400,000. The business owner and spouse own their own home, valued at approximately $1 million, as well as vehicles. They have two children already in college, with financing already set. Their investment portfolio value is $90,000 in a broad variety of instruments including mutual funds and equities. They currently have $10,000 available to invest, and also have equity in life insurance. The couple's risk tolerance is moderate, with an investment time horizon of 15-plus years.
Financial objective Plan for full retirement at age 65; buy a second home; establish trust fund and/or investments for their grown children/grandchildren.

Monthly Financial Statement
Income: $19,300
Expenses:
•Mortgage, life insurance, bills, etc.: $10,000

Leaving a net savings pool of $9,300 monthly.




Strategies and Assumptions
This individual has built a successful business but has not made individual financial plans. The couple has done preliminary planning for their children's college education and established a small pool of savings. They must now prepare for their retirement and estate planning.

Recommendations
Business retirement plan Evaluate what type of business retirement plan can be implemented in the company. Investing as much pre-tax money as possible is the most powerful savings vehicle. Insurance coverage for principals and employees should also be examined.
401(k) Allocation of $14,000 annually recommended. A profit-sharing or defined-benefit plan also should be explored. Assuming 17 years until retirement, $14,000 invested at a 7- percent rate of return would generate $431,763 for retirement. This would bring the taxable income down to $386,000, with take-home pay of approximately $231,600.
Family financial statement A financial statement should be completed to determine what this household takes home after retirement allocations and taxes. Questions include: How much is needed on a monthly basis? Is there a mortgage payment? What is needed for food, clothing, expenses, etc.? What are the monthly or annual payments for life insurance?
Set-asides for savings Determine a monthly amount to allocate to a savings pool, which will determine what is allocated to growing the investment account, saving for a second home, and/or possibly increasing insurance coverage.
Estate planning A balance sheet listing all assets and liabilities of the individuals is the first step. The goal is to determine what the total estate is worth today, including real estate, investments, and the business. Among questions to answer: What goals will need to be accomplished financially? What will this estate be worth at retirement? What can be done today to minimize the estate tax bite? For this individual, a life insurance trust and/or an irrevocable trust, a tax-efficient investment account, and a will are recommended.
Allocations into these accounts should be determined based on investments that accomplish both short- and long-term goals and fit the couple's moderate risk tolerance.
Business strategy For a complicated scenario such as this, specialized analysis by a strategic business and banking team would be advisable. The team would assist with both short- and long-term business planning, and analyze the business industry for trends, competition, and opportunities to grow the business through the use of organic or borrowed funds. Any possible mergers or acquisitions also may be considered.
Investment account $100,000 presently in account ($90,000 plus additional $10,000 available to invest). With a moderate risk tolerance, asset allocation recommendation would be 50 percent equity and 50 percent fixed income with a combination of equity mutual funds and tax-free municipal bonds.
Second home Based on the outcome of estate planning, a determination would be made on how to invest the monthly savings pool of $9,300. Since the purchase of a second home is a short-term objective, a large portion may be allocated to this investment account until sufficient funds have been accumulated to accomplish this goal.
Life insurance More life insurance may be purchased, and a life insurance trust established. This can ensure that the death benefit transfers to heirs outside of the estate. Other types of trusts can be established to transfer assets to children and grandchildren.

Allocation Proposal
50 PERCENT IN EQUITIES
50% Large-Cap Growth & Income
20% Mid-Cap Blend
20% Small-Cap Blend
10% International

50 PERCENT IN FIXED INCOME
100% Tax-Free Municipal Bonds
Municipal bonds offer high yields because no federal, state, or local taxes are paid on dividend income when purchasing bonds issued in the investor's state of residence. Look for tax-free municipal bonds with a yield potential of 3.76 percent or a taxable equivalent yield of 6.56 percent.




Louis Barajas

Louis Barajas
Certified Financial Planner
Louis Barajas & Associates

Louis Barajas is a certified financial planner and founder of Louis Barajas & Associates in Los Angeles. In addition, Mr. Barajas is a principal in the accounting and business consulting practice Barajas & Torres Inc., as well as a principal in Financial Greatness Inc., a company that offers finance and investment-related books, seminars and other products. Mr. Barajas currently serves on the board of directors of the 28,500-member Financial Planning Association.




Investor Profile #1
Married couple, both of whom are 48 years old, college educated, and employed full time. Both are business professionals and they have two children, ages 4 and 10. Average annual household income is $136,900. They recently purchased a new home valued at $350,000 and have a 30-year, fixed-rate mortgage with monthly payments of $2,100. Currently, they have $50,000 in savings invested in 401(k)-based mutual funds. The couple's risk tolerance is moderate, with an investment time horizon of
15-plus years.
Financial objective Plan for full retirement at age 65; secure spouse's finances; save for children's college education.

Monthly Financial Statement
Income: $6,080.25
Expenses:
•Mortgage $2,100
•Food $1,000
•Electric, heat, phone, etc. $400
•Insurance $100
•Fuel, misc. $200
•Vacation $200
Total $4,000

Leaving a net savings pool of $2,080.25 per month ($24,963 annually).




Retirement
In this scenario, the couple hopes to retire at age 65. However, based on their current plan, they will not pay off their home until they are 78 years old. To meet their goal, they should increase their monthly mortgage payment to pay off the home by age 65. Paying off their home 13 years earlier will require an additional $641 per month but will also save the couple more than $198,836 during the life of the loan. Assuming a mortgage interest rate of 6 percent, the new mortgage payment would
be $2,741.
401(k) The couple only has $50,000 invested in their 401(k), and 17 years until retirement. To achieve a desired income of approximately 70 percent of their current income by retirement, assuming a 3-percent inflation rate, the couple will need to have an annual income of $163,144. To achieve this, they will need to build a critical mass of $2,719,067 with an average portfolio return of 6 percent when they retire.

To build such a portfolio in the next 17 years, and assuming that they are already starting out with $50,000 in their 401(k), the couple will need to invest an additional $40,000 per year for the next 17 years at a 10-percent rate of return. Currently they can each invest up to $14,000 in their 401(k). Once they turn 50, they will be able to invest more through IRS Catch-Up Provisions.

Considering this, the couple should invest their salaries in their pension portfolios based on asset-class investing. Typically, money can be invested in portfolios using one of three methods: market timing, stock selection, and asset-class variety. Academic white paper studies have shown that, on average, 94 percent of the variability in returns of a given 10-year investment portfolio can be explained by asset-class selection.

Since the couple has at least a 15-year investment horizon, Mr. Barajas suggests they select a portfolio for their 401(k) to mirror his global equity investment strategy to achieve an approximate 10-percent return over the next 15 years.

For all of the 10-year periods during the past 26 years, Mr. Barajas says this simulated global portfolio experienced a minimum 10.2-percent compounded annualized return and a maximum compounded annualized return of 18.5 percent.

Secure the Spouse's Finances
Because the couple recently purchased their home and most likely needs both family incomes to cover expenses, they will not have enough income if a spouse prematurely dies before they achieve all of their financial goals.

Therefore, both individuals need to purchase 20-year term life insurance policies to cover liabilities that may become a financial burden to the surviving spouse and to cover college funding for the children. Because of their monthly cash flow obligations, Mr. Barajas recommends term insurance as a sensible, low-cost option. Considering the age of their children and their mortgage obligations, a 20-year term policy should be enough time to meet their financial goals.

Long-Term Security for Children
Because of the recent home purchase, current build-up of an investment portfolio, and children who are still dependents, the couple will not be able to transfer their assets to their children if they both die at the same time.

Mr. Barajas recommends creating a revocable living trust with an estate-planning attorney to ensure the proper transfer of the home and any other assets to the children in the event of an untimely death of both parents. A properly composed estate plan would create a will as well as name a guardian and trustee to handle the affairs for the children.

Allocation Proposal
5% Cash and Equivalents
10% Short-Term Fixed Income
17% U.S. Large Company
17% U.S. Large Value
17% U.S. Small Company
23% International Large Value
7% International Small Company
4% Emerging Markets




INVESTOR PROFILE #2
Successful business owner, 47 years old, married, college educated. Business has average annual revenues of $7 million; line of credit available from lending facility; no outstanding debt; annual profit margin of 15 percent. Average total household income is $400,000. The business owner and spouse own their own home, valued at approximately $1 million, as well as vehicles. They have two children already in college, with financing already set. Their investment portfolio value is $90,000 in a broad variety of instruments including mutual funds and equities. They currently have $10,000 available to invest, and also have equity in life insurance. The couple's risk tolerance is moderate, with an investment time horizon of 15-plus years.
Financial objective Plan for full retirement at age 65; buy a second home; establish trust fund and/or investments for their grown children/grandchildren.

Monthly Financial Statement
Income: $19,300
Expenses:
•Mortgage, life insurance, bills, etc.: $10,000

Leaving a net savings pool of $9,300 monthly.




Retirement
The business owner appears to be funding retirement with a variable universal life insurance policy and probably is hoping that he will be able to build enough equity from his company to sell it one day. Mr. Barajas suggests he also should consider establishing a defined contribution retirement plan for his company. Not only would the business owner be able to put away an additional retirement fund for himself, he also will help his employees meet their retirement needs. Deductions in the plan would be deductible by the company, and the business owner's personal salary deferral contributions would be deductible from his personal income. This should also provide significant reductions in his current federal tax bracket of 35 percent.

Second Home
Mr. Barajas suggests the couple use the $10,000 they currently have available to invest as a down payment to buy their second home. Current federal tax law allows a personal income-tax deduction of a second residence on the Schedule A of the 1040 tax return. With a 35 percent federal tax bracket, the deduction on mortgage interest and property taxes would help minimize the current tax liability.

Financial Security for Children
Mr. Barajas recommends working with an estate-planning attorney to establish a trust fund for the couple's children and future grandchildren. A revocable living trust with a generation-skipping feature could provide for the children and grandchildren, although the couple needs to be aware of the legal and tax implications of transferring real estate assets and stock of a company to children.
Charitable contributions Charitable contributions also can be discussed, including creation of a charitable remainder trust to donate appreciated assets that can be sold by the charity without tax consequences. This allows the business owner to avoid individual capital-gains taxes he would have incurred, giving him a larger annuity (cash flow) from the investment.
Irrevocable life insurance trust To cover estate taxes on his and his spouse's death, an irrevocable life insurance trust is also recommended. The business owner's company could potentially be worth millions, creating a significant tax burden for the family. Irrevocable life insurance trusts are usually funded with second-to-die life insurance policies (for a husband and wife). The amount of the life insurance policy should be enough to cover the potential estate tax burden projected by the estate planning attorney, accountant, or financial planner.
Place children on payroll The business owner also should consider putting his children on payroll to transfer income from a high tax bracket to a low tax bracket. Based on the current reported income, Mr. Barajas notes that the business owner may no longer be able to claim his children on his individual tax return. By shifting income to children, the children would file their own tax returns and could also qualify for some of the tuition tax credits or deductions.
Succession plan Since it appears that most of the couple's wealth is in the business, Mr. Barajas notes that a key consideration will be a succession plan in case of a premature death or disability to ensure capable continuance of the business and continued income for the family in the event of the business owner's death.

Allocation Proposal
5% Cash and Equivalents
25% Short-Term Fixed Income
14% U.S. Large Company
14% U.S. Large Value
14% U.S. Small Company
18% International Large Value
6% International Small Company
4% Emerging Markets

Mr. Barajas suggests the business owner review his $90,000 investment portfolio
to ensure asset-class diversification.




SAVING FOR COLLEGE

Mr. Ramirez: Assuming four years of college at an estimated cost of $40,000 per year, a total of $160,000 would be required for each child. Savings and investments can continue throughout their college years.
With a 4-year-old:
Factoring in that the child has 13 years until college, and assuming a 6 percent return, approximately $683 per month would have to be invested.
With a 10-year-old:
Factoring in that the child has seven years until college, and assuming a 6 percent return, approximately $1,200 per month would have to be invested.
529 college savings plan:
Different states offer different plans; in some cases the plan offered by an individual's residency state may not be suitable for an individual's goals. Generally, $11,000 per individual may be deposited into this account per year, without gift tax. For this investor profile, a combined total of $22,000 can be deposited into a 529 account, tax deferred. Earnings and withdrawals for qualified higher-education expenses are free from federal tax.




Mr. Barajas: The couple's children are 14 and 8 years away from entering college. The probability of both children entering college while both parents are professionals is very high. Mr. Barajas recommends establishing education savings accounts. Contributions to all education savings accounts are made with after-tax dollars, but the treatment of withdrawals varies substantially. Withdrawals from certain accounts are federal income-tax free when used for certain qualified expenses, while other accounts tax a portion of the withdrawals but place no restrictions on their use. In addition, control of the assets in certain accounts changes as the beneficiary or student reaches legal age, and the types of assets that can be held in education accounts also vary.

For the couple in this scenario, Mr. Barajas notes that two 529 college savings plans would be a solid investment choice for the children. Among investment options:

529 college savings plans
Authorized and created under section 529 of the Internal Revenue Code, the plans help families save for their children's higher education. These plans are sponsored by states and managed by investment managers, and proceeds can be withdrawn, federal income tax-free, for use at any accredited post-secondary school in the country. Generally, contributions are invested in specific portfolios and mutual fund-based investment options. The plan accommodates as little as $15 a month, as well as larger contributions (up to $11,000 per year without exceeding the federal gift tax exclusion). The plan allows contributions on behalf of beneficiaries over age 18, as well as the individual, and remains under the control of the account owner indefinitely.
Coverdell education savings accounts
Formerly Education IRAs, these can be used to pay for college, secondary school, or primary school. Earnings accumulate tax- and penalty-free if used for qualified education expenses such as tuition and books. Accounts can be established by any adult, with contributions up to $2,000 per year allowed on behalf of a child through age 18. Accounts can have assets invested in a range of securities, including mutual funds and individual stocks and bonds. Accounts transfer to the beneficiary once he or she reaches age 30.
UGMA and UTMA accounts
Traditionally, parents and other family members have used UGMA (Uniform Gift to Minors Act) or UTMA (Uniform Transfer to Minors Act) accounts as a tax-advantaged way to provide funds for college. But control over withdrawals remains an issue, Mr. Barajas notes. For UGMA and UTMA accounts, contributions are considered irrevocable gifts that generally transfer to the minor when he or she reaches age 18 or 21, depending on the state. UGMAs and UTMAs can accept virtually any form of contribution, and in certain cases, even works of art or precious metals. The assets in UGMA/UTMA accounts automatically transfer to the child when the child reaches legal age (21 in most states). If a child decides not to attend college, for example, assets can be withdrawn, beneficiaries can be changed to another family member, or the account can be left for future use.

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