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Show Sunday, February 19, 2006 + DAILY HERALD THE WALL STREET JOURNAL SUNDAY. Encore / By Kelly Greene ee Love & Money / By Jeff D. Opdyke MustAll Gifts Be Cre ated Equal? iets n Christmas Eve, as my wife, Amy, and I got ready for the next morning, Amy said she had onelast present for Medicaid’s New Rules tary difference really matters when both kids ultimately receive what they want. If Child No. 1 desperately wants a $300 camera and Child No. 2 is crazy for a $200 scooter, Child No. 2 isn't going to be happy with a $300 videogame system simply because it’s the sameprice as the camera. our two kids: a $100 bill stuffed into each of their’ stockings. I balked. I understood why she might wantto give the money to our 944- year-old son. We didn’t buy many x of the itemson his oh-so-long wish Myproblem, according to Amy, is that I am an onlychild and “this is a sibling thing you can’t under- list; the cash would allow him to purchase those things that were most important to him. “But why,” I asked Amy,“would you feel compelled to give a $100 ity. “I always watched to see what mybrotherreceived to make sure bill to a 24-year-old?” It wasn’t haveto be equal with what we give our kids.” Though I completely disagreed, Amywassteadfast, and so each of our kids found Ben Franklin hiding in their stockings Christmas morn- ing. My daughter, as expected, couldn't have cared less. T've been thinking about that episode for several weeks now, wondering just how far the notion of equality should extend within.a family. Just because kids are equal ‘Katy Docks that the gift was extravagant— thoughit certainly was.It was that the gesture was entirely meaningless. Ourlittle girl doesn’t know a greenback from the green construction paper shescribbles on. “You have to be equal,” Amy insisted. “My parents have always been equal with what they've given me and mybrother, and we increased the amountof savings going into that account. At séme point, I figure, we can split that Here's the problem I have with Amy's approach: If we drop $350 on a video iPod for our son, then account in half and give that por- our daughter stands to get $350 of dolls and crayons. Sure, that’s an extreme example,but it’s the logical extension of Amy's argument. tion to her—and, voila, equality. In truth, that's lame on my part. Whenour son goesto college, he could end up consuming the entire account for whatever reason. ‘That would leave our daughterreliant on loans and grants or force her to consider a lesser-quality Asshe told me when I questioned her for this column, “If I spend $300 on one child, then I try to balance that out by spending roughly $300 on the other child.” School. In the end, that's just not fair to her. So, conteding that To be sure, with kids closer in age, the demands of equality can Amy’s correct,I’m opening a separate account for our daughter to makethings equalfor their college be tougher to navigate. My New funding. That’s a relatively easy deci- Orleans friends, Drew and Colleen, have a boy and girl very close in age and, Colleen says, when the kids were younger “we play favorites. The solution seems obvious: If our son questions why the value of his gift is greater thanhissister’s, explain to him that at her age she dbesn’t have the same need for Then, when our daughter is ald enough to question why her older brother gets more, we'll explain to her that as her wants grow in value she'll be receiving more, too, the kids ultimately wantto useit. And then there's the situationlike we faced at Christmas, when you aim to make equalthe discretionary expensesfor gifts—or, maybe, for vacations the kids take with receive—onlythat she doesreceive friends and family, or extracurricular activities they pursue. stantively different daughter's. gifts, too. Call it the equality of volume,not value. Toa certain degree,age plays a role in this. Our son is at an age scooter, a digital camera, video- $100,but for a sibling the price tag because we're saving for our son, and after our daughter arrived I games—allprettypricey stuff. Our daughter is happy with the doll I won at a church fair, or the crayonsthat cost a dollar a box. is $200. It assumesthat kids don’t care what they get, as long as the price is right. I don’t believe that the mone- Watch Out for Painful Pension Math “freezing” pension plans strike fear into the hearts of many workers counting on regular pension income when they retire. And for Long Tenure Pays Off Estimated annual pension at age 62 for a worker whois coveredby a typical pension plan beginning at age 30. $35,000 _Pension benefit at age62___ good reason. The pensionfreezes highlight a key aspect of pension mathvital to anyone covered by these retirement plans: Pension benefits’ increase dramatically in the final years of a long career at a single firm. That means you could end up with substantially reduced retirement income if your company freezesits planorif you leave your employerbefore thetraditional res 45 50 55 ‘Age when you leave plan 62 ‘Source: Boston College Center for Retirement Research freezes can particularly sting peo- 50-year-old making $55,000 a year ple in their 50s, because they are who has worked under the same approaching the stage at which planfor 20 years can expect a pen- company or because your employerfreezestheentire plan, the result is the same: You'll be hardpressed to makeit up. The 401(k) plansthatoften replace traditional pensions are of limited help because they are most valuable when you start saving early. Boston College. retirement-savings plans to make Anotherfive years on the job, to age 55,brings his or her pension at age 62 to $16,655. Staying on the job seven more years afterthat, to age62, doubles the pension benefit to $33,284 a year—three times what the employee was entitled to “You can spend 15 years in a defined-benefit plan from age 25 to wholelot,” says Greg Schultz, a financial adviser in Walnut Creek, Calif, “It was designed to reward those people who gave their lives and careers to the company.” One big obstacle for workers: Many companies, through layoffs and corporate restructurings, have made it tough for employees to stay around that long. Stayt Early with 401(k)s up for frozen pensions. However, for older workers, a 401(k) may be too little too late. A 50-year-old whose pension is frozen and who saves the maximum in a typical 401(k) plan can expect combined retirement income of $21,189 a "what matters most ig what you do for years—and then speed up at the end, says independent pension search center's figures show that Mr. Tierney personally is collecting a pension of $2,456 a year from insurer John Hancock, his employer for 13 years early in his career, Had he worked there all the wayuntil retirement, he says, “I'd probably be pensioning out at about $100,000 or $110,000 right year by age 62—just two thirds of That assumes you weren't sav- makeup the lost pension benefit. Even the “enhanced” 401(k) plans offered by some companies don't make catching up easy. A 50-year-old employee who saves 6% | of pay each year,plus receives another 10% from his or her employer, can expect retirementin- come of $28,765 a year under an enhanced 401(k), the Centerfor Retirement Research estimates. | may-actually vary from state to state, depending on whether state governments require their legislatures to enact the changes. Forlocal guidance, there's a state-bystate directoryof lawyers specializing in elder law at www.naela.org: transferred and the monthly cost of long-term care in each state). But the clock started ticking as soon as the asset changed hands. If you wererelatively healthy, you easily could run through the wait- ing period before the need for longterm care and Medicaid was even after Feb. 8. Buttheeffective date (click on “Locate an Elder Law Attorney”in the top left window on the home page). Email: encore@wsj.com early on. The Boston College re- Funds Where ‘Muni’ Means Money ome holders Of municipalbond funds will be in for a surprise this tax season whenit turns out that their taxfree investments are subjectto tax after all. But others won't get stung because they have chosen the right municipal funds—those geared to avoidingthealternative minimumtax. that excludes several common deductions. It was intended to foree wealthy Americans to pay their bara Steinmetz, headof Steinmetz it, and sometimes there isn't a thing you can do,” One of the biggest AMT surprises awaits investors who use tax-free muni bond funds and muni money-market funds to generate income. Under the AMT, someofthat income mightnot really be tax-free at all. HOW TO CONTACT US Our address: the same employee, saving 6% of The Wall Street Joumal Sunday 4300 Route 1 North typical 401(k) plan (with the employer matching 3%), can expect to receive $36,733 a year from his or hersavings in retirement, slightly South Brunswick, NJ. 08852 Our email: Return 4.53% projects suchas airport terminals, 5.22 442 091 1,000 T.RowePrice Tax-Free Inc (PRTAX) 269 4.59 436 054, 2,500 Oppenheimer AMT-Free A(OPTAX) 6.08 8.40 555 092 1,000 Thomburg Limited Term A(LIMFX) 110 2.00 3.08 0.90 Source Note: Data as of Feb. 15 companydirectly. “You have to be careful what fund you're getting star Inc. Several fund companies have devised a way to ease the AMT bite, offering funds that are com- pletely free from AMT exposure. Someevenlabel these funds “AMTfree” to maketheirobjective clear. ‘Selling Point’ “AMT-sensitive is a_ selling point,” says Brian Boswell, a re- search analyst at Boston-based consultant Financial Research Corp., who has studied AMT-free funds. And Mr. Boswell says many of these funds, even though they risk. “The drawback would be if performancetooka hit or the qual ity of the bondportfolio dropped,” Mr. Boswell says. “But that doesn't appear to be the case.” Eaton Vance Municipal Bond Fund (ETMBX)is a good example. The fund ownsnoprivate-activity bonds amongthe longer-term secu- on private-activity bonds is tax- one, three and five years through clue is in the name. Call a fund “tax-exempt” or “tax-free,” and under Securities and Exchange Commission rules, it can invest up sunday03@wsj.com Readers’ Forum: sheets on fund-companyWebsites pension example, But by starting to save just 10 forum.sunday03@wsj.com often show the percentage of AMT bonds held. If not, ask the fund ¥ Muwmum_ $1,000 Pioneer AMT-Free Muni A(PBMFX) 3.11 rities that dominate its portfolio, Avoiding the AMT Finding which funds hold those Annual! Expenses 091% hospitals or certain typesof industrial parks, Unlike traditional muni bonds, the interest income able under the AMT, although not under the regular incometax. 12-month) 4.66% ing AMT-exposed bonds, deliver competitive returns without excess married investor owing a combined 34% in federal andstate tax. Investors:can run into trouble whentheir funds buy so-called private-activity bonds, issued on behalf of a corporation for public 3¥eRetun Yield (aiing (Annualized) “6.17% California would expect if they boughta tax-free bond fund today with a 3.65% yield thatis billed as the taxable equivalentof 5.53% toa more than under the traditional t Ly Fund (Symbol) Eaton Vance Muni Bond A (ETMBX) don’t hold the higher-interest-bear- to 20% in AMT bonds. Call it a “municipal” fund and the percentage can go higher. A fund's prospectus will tell you if it invests in AMT-exposed bonds. And fact pay from age 30 to age 62 in a Competitive and AMT-Resistant ‘That's not whatholders in, say, bonds can be challenging. Ome By contrast, for 401(k) plans, mean pensions build very slowly specialist Tom Tierney. apply to all transfers made on or to three years after parting with Financial Planning in Burlingame, Calif. “Sometimesyou can plan for companies freeze or terminate their pensions. (Companies freezing plans occasionally exempt those closest to retirement.) Many companies improve their ing anythingin the 401(k) already. If you were, it’s even harder to is highest just before retirement, form Inc. in Seattle. ‘Thelaw saysthat the new rules the hurdles were fairly low. For example, a person had to wait up often take the biggest hit when sion of $11,448 a year at age 62, according to figures calculated for The WallStreet Journal by the Center for Retirement Research at 40 and you're not going to get a the fact that most people's income the Center for Long-Term Care Re- Some limits on this practice have been in place for years, but eter Owen Bardy,a fund analystat investment researcher Morning- comerises to $66,000 by age 62.) Pensions canoften be taken as a lump sum atretirementinstead, butthe principle is the same. The nature of the formula, and middle- and upper-class people,” says Stephen Moses, president of before entering a nursing home. more middle-income taxpayers, and barring congressional action, millions more people will be subject to the AMTin 2006. “It’s always a surprise to clients,” says investment adviser Bar- fit," pensions guarantee a set an- employer(say, the average earned over the final five years) by the number of years you worked there and then multiplying that by a set percentage such as 1.5%. someoneelse, often your children, savings—is to transfer assets to even when you change jobs, and you can often roll the assets into anotherplan or an IRA. Of course, 401(k) plans also leave workers with more investmentrisk. ‘Together, the pension/401(k) dynamic means ‘mid-career workers whatthetraditional pension alone would have offered, the Center for Retirement Research estimates. ample, the benefit is often calculated by multiplying your salary in your final years of work for the threshold—without exhausting your into because different funds will havedifferent mandates,”says Di- based on leaving at age 50. (This example assumes the worker's in- determined by a formula. For ex- ments. (There are exceptions that vary from state to state, but you generally get to keep your house and car.) One wayof reaching that fair share of federal taxes. But over time it has come to snare Check the Formula Traditional, or “defined benenual paymentin retirementthat is Jeff Opdyke covers personalfinance for The Wall Street Journal. Write him at lovemoney@ws).com The AMTis a separate system keep earning investment returns 40 tirement age of 62 or 65. Pension Whether your ‘pension benefit is capped because you leave the Start saving at age 50, and retirementincomefalls to $9,741 a year. Starting early is critical because savings have more time to grow with compoundinterest or investment returns, potentially greatly enhancing the sum youset Take It With You Unlike pensions, 401(k) plans are portable: Your contributions now.” For a typical pension plan, a benefit growth accelerates. years later, at age 40, the employee can expect less than twothirds that much—$21,685 a year. aside. 35 rently, individuals becomeeligible for Medicaid after using upall but $2,000 of their cash and invest- Also under the new law, your houseisn't necessarily left out of the equation. If you have more than $500,000 in home equity, you can't qualify for Medicaid coverage. (States havetheoptionof raising thatlimit as high as $750,000.) In all, congressional budget an-, alysts expect the new measure to save the federal government $2.4 billion over five years. “Medicaid will no longer be a resource for MarketWatch/ By Jonathan Burton ne Family Finances/ By Theo Francis ea ecent announcements that Re Motors, Interna‘tional Business Machines and Verizon Communications are volving “Medicaid planning.” Cur- for Medicaid. (Waiting periods are based on the amount of money Amystill disagrees, and so our cent Russo, a lawyer heading the National Academyof Elder Law At- off with a smaller amount and growsinto larger sums with age. “You give them equal amounts, or you give them each nothing.” timeon homehealth care, says Vintorneys’ Medicaid taskforce. an asset before becomingeligible debate continues. As she says, alty wouldn’t start until she enters ‘a nursing home and applies for Medicaid. Presumably, she'd have spentthe other $50,000 in the mean- long-term-care insurance. allowance: A youngerchild starts riding me to open college-savings plan for our daughter. I haven'tfelt muchof a rushto do so just as it was with her brother. new rules,the five- to 20-month pen- Encore column, we'll talk about plies that the gift is all aboutits nominal value—the equality of He wants an iPod, a motor our 2004, almost half of the country’s As I seeit, it’s not unlike an For months, Amy has been than the joint federal and state program for the needy, spent about $46 billion on nursing-homecarein this is all blind mathematics.It imcost—notthe psychic value of what the gift might represent. It doesn’t take into account that for one child, theperfect gift might cost where his material wants are sub- the latest, she wotld qualify for Medicaidin early 2008. Under the of long-term-care bills. Medicaid, Asset Transfer The new law tightens rules in- value, Drew says, “we find our- are forced to give the other a matchinggift.” But whatever the age, to me cost of care whereshelived. So, at to cutting the government's share parents—must de:in> equality by our kids’ expectation. or by whatever strategy our parents employed to show that they didn’t moneythathe does, but that when she reaches the age he's at now she'll receive equivalent gifts. appreciation of the comparative value of what she and her brother eligible for Medicaidfor five to 20 months, depending on the average der the old rules, she wouldn't be 50. It’s a stick-and-carrot approach nursing-homebills. This week, we will go through the Medicaid changes; in the next things, though not necessarily a monetary equality.” Now that the you save or invest for each child for college or for whatever reason where it currently operates to all care insurance more affordable and useful from the four states That maybe true, although perhaps that’s because of the lessons we're teaching them. And even if our kids dolookat it that way, that doesn’t necessarily mean that we—_ the same opportunitiesin life. But that logic disappears when you apply it to equalizing discretionary spending for the sake of not playing favorites. My daughter has no selves in thesituation often where we give one child something and Meet Mrs. Elder Here’s an example: Mrs. Elder has $100,000. She gives $50,000 to herchildren this coming July 1. Un- the samething.” must also be equalin your wallet? ing equal the amount of money an awkward spotif parents need to take money back from their kids. Medicaid help. That means you could face up-to five years of longterm-carebills on your own. There is an appeals process for hardship ‘costs of long-term care. ‘The new law also expands a program designed to make long-term- think he gets more than his sister. Andwhile our daughter might not understand the equality yet, when she’s older she'll be looking to see gave them the same numberof issues at play. First, there’s mak- waivers in the new law. But many families could find themselves in long-term care. That means people doesn't start until you apply for fying for Medicaid assistance for he and his sister pulled from the stocking. “I don’t want him to sion to make; both kids deserve kids are older and understand Feb. 8, changed therules for quali- the window is up to two years longer—andtheineligibility period could find it harder to leave their assets intact for their children and still get governmenthelp with the it was equal with what I got,” she told me, adding that our son was keeping tabs at Christmas on what in your heart, does that mean they * * * AsI seeit, there are two broad considered. Under the new law, tle easier. The Deficit Reduction Act, which President Bush signed on # stand.” Kids, Amyinsists, want equal- etting the federal government to pay your nursinghomebills could get tougher under a new law—but buyinglongterm-care insurancecouldgeta lit- yet returns rankin the top 3% ofits national-municipal fund class for Feb.15, according to Morningstar. Otherhigh-performing national muni funds that also bar AMT bondsinclude Pioneer AMT-Free Mu\ nicipal Fund (PBMFX) and T. Rowe Price Tax-Free Income Fund (PRTAX), The T. Rowe Price fund has the added benefit of being free from a sales charge. Meanwhile, AMT: 8.4% gain is in the top 9%. Fidelity Investments is among those addressing the tax concerns of investors who park cash in money-market accounts. All six of Fidelity's tax-free money funds are AMT-free. National munifunds buy bonds, from all states and are exempt only from federal tax. As such, they're good options for investors in states that levylittle or no in- cometax Single-state funds typically buy issuesonlyin onestate so that residents of that state get both a federal and state exemption. (States generally don't tax bond income fromissuesof their own municipali- ties.) Those funds are better choices for residents in high-tax states such as NewYork, New Jersey, California and Massachusetts. Says Ms.Steinmetz, the California financial planner: “It really comes down to how muchyou get tq keep.” Weighing Alternatives If you arepulled into the AMT's orbit, fund companies Web sites can be good resources. Fidelity, for instance, devotes a good por- tion of its online tax center to managing AMT exposure. Besides ad- vising that investors should do carefulresearch on tax-free funds, Fidelity suggests spreading income deductions, tax payments and capital gains over time. For instance, if the AMT could hit you next year, pay estimated state income andlocal property taxesthis year to claim the deduction. One boutique fund company, Thornburg Investment Management, also provides extensive on- line education about the AMT. The Thomburg Limited Term Municipal Free Municipals (OPTAX) stands Fund out in the category of high-yield munifunds, those that buy lower- mostly short-term debt, typically quality bonds with higher yields strong three- andfive-yearresults. and risks. Its 6.08% return for 12 months lands in the top 25% of the group, Morningstar data show. The fund's three-year annualized a (LTMFX), which holds holds no AMT debt.and has shown Jonathan Burton writes for Market: Watch (www. tch.com). Email: forum.sunday03@wsj.com |