Sfg Newsletter November 2006

Synergy Financial Group Your Personal CFO November 2006 Synergy Financial Group

George Van Dyke 401 Washington Ave #703 Towson, MD 21204 410-825-3200 [email protected]

Are You Ready for Stormy Weather? Hurricanes, tornadoes, and severe rainstorms often cause catastrophic property damage, yet many people are still unprepared. Here are some steps you can take to protect yourself, your family, and your home from stormy weather. Review your insurance coverage The worst time to find out that you don't have the right kind or amount of insurance is after a loss. Ask your insurance agent or representative to help you review your homeowners or renters insurance policy to make sure it adequately covers your home or belongings. Like many people, you may be underinsured and not even know it. For example, do you own unique and expensive items, such as antiques, artwork, or collectibles? Although your insurance provides coverage for your belongings, it may not be sufficient to fully protect valuable possessions. Ask your insurer about purchasing an endorsement or floater that will provide broader coverage and higher loss limits for these items.

In this issue: Are You Ready for Stormy Weather? Municipal Bonds Social Security: What Should You Do at Age 62? Ask the Experts

Has your insurance coverage kept pace with rebuilding costs? If you haven't reviewed your coverage in a while, or if you've recently remodeled your home, you may need to increase the amount of insurance you have. If your home isn't insured for at least as much as it would cost to rebuild it, then look into purchasing additional coverage. Finally, do you know what losses are excluded from your policy? For example, severe weather often results in serious flooding, yet many people don't realize that flood damage is not covered under standard homeowners or renters policies. To get coverage, you'll need to purchase a separate flood insurance policy. A 30-day waiting period generally applies before coverage becomes effective, so don't

wait until storm warnings are posted before purchasing flood protection. Prepare a home inventory If your home were destroyed, would you be able to recall the contents of your entire home, or even one room? Few people could, yet you'll be asked to do so when you submit an insurance claim. That's why a home inventory that lists your personal property is essential. An easy way to prepare one is to walk around your property with a video camera and describe every item you see. However, you can also prepare a written inventory, accompanied by photographs. Make sure that your inventory is as detailed as possible, including serial numbers, make and model information, and the purchase price and purchase date of items. Include copies of receipts and appraisals if you have them. Store your inventory in a safe-deposit box or other secure place away from your home, and keep it up-to-date. Other tips •

Prepare a family emergency plan. Where will you go if a storm strikes? How will you communicate with your family if you get separated? What about your pets?

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Put together an emergency kit including food, water, toiletries, a battery-operated radio, matches, and other necessary supplies, and keep it in an accessible place.

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Round up important documents and records (e.g., birth/marriage certificates, tax returns, military records, wills, titles) and store in a safe location. Learn more For more important tips on disaster preparedness, visit the Federal Emergency Management Agency's website, www.fema.gov, or contact your local chapter of the American Red Cross.

Page 2 Municipal Bonds Municipal bonds (commonly known as "munis" or "muni bonds") are debt obligations issued by cities, counties, states, and other government entities to raise funds that are used to build schools, roadways, hospitals, sewer systems, and other infrastructure projects that benefit the public. A muni bond is essentially an IOU from the issuer with a specified repayment date and a predetermined schedule of interest payments. Like other debt instruments, munis are bought and sold between dealers and investors. You can choose to invest in individual muni bonds, bond mutual funds, or exchange traded funds. Types of muni bonds There are two main types of munis: general obligation (GO) bonds and revenue bonds. GO bonds are approved by the voters within a municipality. Principal and interest are secured by the full faith and credit of the issuing authority and supported by the ability of the issuer to levy taxes. For this reason, they're considered less risky than revenue bonds, but they usually pay a lower interest rate.

Most muni bonds are tax exempt--the interest payments you receive aren't subject to federal income tax. And, if you're a resident of the state where the muni is issued, the interest may also be free from state and local income taxes.

Revenue bonds are issued to finance public works projects such as bridges, sewer systems, or tunnels. Revenue bonds aren't supported by the taxing power of the municipality issuing the bond. Because they're generally dependent solely on the successful operation of the project they fund, revenue bonds are considered riskier, and typically pay a higher interest rate, than GO bonds. Are munis right for you? Most muni bonds are tax exempt--the interest payments you receive aren't subject to federal income tax. And, if you're a resident of the state where the muni is issued, the interest may also be free from state and local income taxes. Earnings on muni mutual fund shares are paid in the form of dividends and are also tax exempt at the federal level. The taxexempt status of munis allows the issuers to effectively borrow funds at a much lower interest rate than would otherwise be possible. Although the stated interest rate on a muni bond is generally lower than the rate offered on a taxable bond of similar credit and duration, once the effect of income taxes is considered, a tax-free muni bond investment may actually provide a greater after-tax yield.

The higher your tax bracket, the more attractive a tax-exempt investment becomes. The chart below compares various tax-exempt yields with their taxable yield equivalent. For example, if your marginal tax rate is 35%, a taxable investment would need to yield 9.23% to equal a tax-exempt yield of 6%. TaxExempt Yield

Taxable Yield Equivalents Federal marginal tax rates* 15% 25% 28% 33% 35%

4%

4.71

5.33

5.56

5.97

6.15

4.5%

5.29

6.00

6.25

6.72

6.92

5%

5.88

6.67

6.94

7.46

7.69

5.5%

6.47

7.33

7.64

8.21

8.46

6%

7.06

8.00

8.33

8.96

9.23

*State and local income taxes may result in even higher marginal tax rates

Given their tax-exempt status, munis generally make the most sense for investors in higher marginal tax brackets (generally, over 28%). For those in lower brackets, the higher interest rate provided by a taxable bond often provides a higher after-tax yield. Your financial professional can help you crunch the numbers and determine if investing in tax-exempt munis is right for you. Other factors to consider Like other types of bonds, munis are subject to a variety of risks, including market risk (munis rise in value when interest rates fall, and fall in value when rates rise); credit risk (the issuer may be unable to make interest or principal payments); and inflation risk (as consumer prices rise, the purchasing power of fixed investments is reduced). Although most munis are tax exempt, there are also taxable muni bonds. Taxable munis were developed because the federal government won't subsidize the financing of projects that don't provide a significant benefit to the public at large (for example, the construction of a local sports facility). Because they don't offer the benefit of tax-free interest, these munis carry an interest rate more comparable to corporate bonds than to those of taxexempt munis.

Synergy Financial Group

Page 3

Social Security: What Should You Do at Age 62? Is 62 your lucky number? If you're eligible, that's the age you can begin receiving Social Security retirement benefits. And if you decide to do so, you'll be in good company. According to the Social Security Administration (SSA), more than 70% of Americans elect to receive early Social Security benefits, rather than waiting until full retirement age. Although collecting early retirement benefits makes sense for many people, there's a major drawback to consider--if you receive Social Security before your full retirement age (which ranges from 65 to 67, depending on the year you were born), your monthly retirement benefit will be permanently reduced. So before you put down the tools of your trade and pick up your first Social Security check, let's take a look at some factors you'll need to weigh when deciding whether to retire at age 62. What will your lifetime benefit be? If you begin collecting retirement benefits at age 62, each monthly benefit check will be 20% to 30% less than it would be if you had waited until full retirement age. (The exact amount of the reduction will depend on the year you were born.) According to the SSA, however, retiring early will generally give you approximately the same total lifetime Social Security benefit as waiting until full retirement age. That's because although you'll receive less money per month, you'll receive more benefit checks. But you may actually come out ahead financially if you postpone retirement. If you live longer than your "break-even age," the overall value of your retirement benefits taken at full retirement age will begin to outweigh the value of reduced benefits taken at age 62. Although everyone's break-even age is different, you'll generally reach this point about 12 years from your full retirement age. For example, if your full retirement age is 66, you're likely to reach your break-even age at 78. If you live past this age, you'll end up with a higher lifetime benefit if you wait until full retirement age to receive an unreduced benefit; otherwise, collecting benefits early may be more financially advantageous. If you'd like to determine your break-even age, you can do so using calculators available at the SSA website, www.socialsecurity.gov.

How much income will you need? Another important issue to consider is how much retirement income you'll need. If there's a big gap between your projected retirement expenses and your anticipated income, waiting a few years to retire may improve your financial outlook. Not only will your Social Security benefit be significantly larger, but the longer you stay in the workforce, the more time you'll have to build up your overall retirement savings. Have you had years of low earnings? Your Social Security retirement benefit is calculated using a formula that takes into account your 35 highest earnings years. If you earned little or nothing in several of those years (if you left the workforce to raise a family, for instance), it may be to your advantage to work as long as possible, because you'll have the opportunity to replace a lower year of earnings with a higher one, potentially resulting in a higher retirement benefit. And if your spouse's Social Security benefit will be based on your earnings record, this may result in a higher benefit for your spouse as well. Do you plan on working after age 62? Another key factor in your decision is whether or not you plan to work after you begin receiving Social Security benefits. That's because income you earn before full retirement age may reduce your Social Security retirement benefit. Generally, $1 in benefits will be deducted for every $2 in earnings you have above an annual earnings limit, which is $12,480 in 2006 (special rules apply in the year you reach full retirement age). However, once you reach full retirement age, you can earn as much as you want without affecting your benefit. Are you eligible for retiree health benefits? Even if you retire early, you're not eligible for Medicare until you reach age 65. So unless you can afford to pay health insurance costs out-of-pocket, find out if you'll be eligible for retiree health benefits through your employer, at least until Medicare kicks in. For more information For more information about Social Security benefits, visit the Social Security Administration website, or call (800) 772-1213 to speak with a representative.

Each year, you'll receive a Social Security Statement from the SSA that summarizes your earnings history, and estimates the benefits you may receive based on those earnings. Use this information to explore your retirement options.

Ask the Experts What is vesting? Does your employer offer a retirement savings plan such as a 401(k) or profitsharing plan? Did you receive a stock option grant as a year-end bonus? These employee benefits and others like them are often tied to a timeline known as a vesting schedule. Synergy Financial Group

George Van Dyke 401 Washington Ave #703 Towson, MD 21204 410-825-3200 [email protected]

Linsco/Private Ledger Member NASD/SIPC

The vesting schedule determines when you'll acquire full ownership of the benefit. For example, say your employer grants you 10,000 stock options as a thank-you for a job well done. If the options are subject to a vesting schedule, you won't actually own the right to exercise your options until some time in the future. Say the conditions of your stock option grant provide that 25% of your options vest each year over four years (i.e., you'll be 100% vested after four years). If you were to leave your job after two years, you would be vested in half of the options, and you would forfeit the other half. With retirement plans like 401(k)s, federal

law generally limits the maximum amount of time your employer can make you wait before you own employer contributions. The vesting schedule depends on the type of employer contribution. In general, employer matching 401(k) contributions must either vest 100% after three years of service ("cliff vesting"), or gradually vest with 20% vesting after two years of service, increasing by 20% annually until 100% vesting is achieved after six years ("graded vesting"). Other employer contributions must either vest 100% after five years of service, or vest 20% after three years of service, increasing by 20% annually until 100% vesting is achieved after seven years. Your employer can adopt a faster vesting schedule, but not a slower one. Of course, any personal contributions that you make to your employer's plan are automatically fully vested and remain yours no matter how long you stay with your employer. To find out about your plan's vesting schedule, check with your human resources representative, or read your summary plan description (SPD).

Does the federal government insure pension benefits? The federal government insures defined benefit plans (but not other types of retirement plans) through the Pension Benefit Guaranty Corporation (PBGC), a federal agency created by the Employee Retirement Income Security Act of 1974 (ERISA). A defined benefit plan is a qualified employer pension plan that promises to pay a specific monthly benefit at retirement. While the PBGC insures most defined benefit plans, it doesn't insure defined contribution plans (like 401(k) and profit-sharing plans). These plans don't promise to pay a specific dollar amount to participants. Rather, an employee's benefit is the amount reflected in his or her individual account, which may include both employer and employee contributions, as well as investment earnings.

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In general, your defined benefit plan will be covered unless it meets an exception. Plans not covered include those belonging to professional service corporations (e.g., doctors and lawyers) with fewer than 26 employees, church groups, and state and local governments. To find out if your defined benefit plan

is insured by the PBGC, ask your employer or plan administrator. The PBGC guarantees that you'll receive basic pension benefits up to a certain annual amount. This amount may be lower than what you would have normally received from your plan. For plans terminating in 2006, the maximum annual amount is $47,659.08 (or approximately $3,971.59 per month) for a worker who retires at age 65. (If you begin receiving payments before age 65, or if your pension includes benefits for a survivor or other beneficiary, the maximum amount is lower.) If your employer's pension plan is to be terminated, you'll receive notification from your plan administrator and/or the PBGC. If the PBGC takes over the pension plan because your employer doesn't have enough money to pay benefits owed, the PBGC will review the plan's records and estimate what benefits each participant will receive. For more information, see the PBGC's website at www.pbgc.gov.