Recently there was a nine car and truck pile-up in Florida caused by fog and smoke that suddenly came across the highway in the middle of a dark night. Unaware of the danger ahead, drivers blindly slammed into each other at high speeds. The light of day revealed a gruesome scene of twisted metal strewn for over a mile. Ten lives were lost.

About six months ago, someone I know was standing on a wooden deck at a friend’s home when suddenly the deck gave way and crashed to the ground. He fell from a height of around seven feet, leaving him with bruised ribs, cuts, and a very sore knee. Fortunately for the homeowner, no one was killed or seriously injured and no lawsuit ensued.

For those who have worked hard and saved a sizeable amount of wealth, these stories highlight that, without the right kind and amount of liability insurance, the risk is very real that you could lose all or part of your nest egg to some sudden and unpreventable event. Many people correctly buy an umbrella policy to cover these kinds of risk, but they fail to increase the amount as their net worth increases over time.

If I haven’t scared you enough already, the median award nationwide as a result of a wrongful death due to an auto accident is $1.5 million, not including loss of service, grief, sorrow, or punitive damages or payments to additional injured passengers riding in a car owned by you.

Another scary thought….the next time you’re driving along the interstate, look around at the drivers surrounding you. One out of six has no auto insurance whatsoever. And that number is rising. This does not even include the people who are underinsured.

With the cost of umbrella insurance averaging only $100 to $200 per $1 million in coverage per year, why keep this on your worry list any longer? Although this is beyond the scope of the advice provided by Merriman to our clients, your property and casualty insurance agent stands ready to do a personal insurance review for you.

So if you want to sleep better tonight, pick up the phone and make that call today!

I am asked this question often, which is good because if someone is not saving enough we can make adjustments and get them on the right track. The people I worry about are the ones who don’t ask this question, either of me or of themselves. Maybe they are afraid of what the answer might be or they figure their employer or the custodian of the plan is looking out for them. Well, typically they aren’t.

In 2006, the Pension Protection Act went in to place. This was a nice step towards increased retirement savings, even for the most complacent of employees. This Act allows employers to automatically enroll their employees in the company 401(k) plan. Everyone has the ability to opt out, but they have to request it. Due to human nature, we tend to follow the path of least resistance, so the results were a huge increase in 401(k) plan participation. According to a recent study done by Aon Hewitt Associates, the participation rate in company 401(k) plans is now at 85% compared with 67% for companies who do not have an automatic enrollment program.

So if you are automatically enrolled in to your company’s 401(k) plan, will you have enough money to retire? The answer is: Not likely. You will need to dig a bit deeper in to your personal situation.

The Pension Protection Act I mentioned also allows companies to set an initial default contribution amount. So a company could automatically enroll an employee in their 401(k) plan, designating for example, 3% of that person’s salary for deposit in to the 401(k) plan. This has turned out to be good and bad. The good news is that the complacent employee is participating in the 401(k) plan and automatically contributing 3% of their salary, unless they make the effort to opt out. The bad news is that 3% savings per year of your salary is not likely going to get you through retirement, unless you are expecting to really reduce your standard of living.

Let’s assume our complacent employee is named Larry. Larry makes $50,000 a year and is 35 years old. He plans to retire at age 65. If Larry adds 3% per year to his 401(k) plan (because he just can’t be bothered to opt out or add more), he will have added $45,000 over 30 years (this is before any investment gain).

If Larry made no investment selections for his 401(k) plan (which we know he probably wouldn’t, as he is Lazy Larry), then he would have automatically been invested in the money market. This would amount to about $45,000 in today’s dollars of spending money when he turns 65. Even with some Social Security, that isn’t going to last Larry long. Read More…

Each year, the IRS releases inflation-adjusted figures for key retirement contribution limits.  Some limits remain the same, while others may experience a slight increase.  Below are the contribution limits for 2012.  The “catch-up” limits apply to those 50 years or older.

2012 Contribution Limits

*indicates a change from 2011 tax year limits.

I am considering buying bond funds and would welcome your recommendations. I recently read in Time magazine that you could get hurt if you’re invested in a bond fund. How can I get hurt holding bonds?

Many people think bonds are risk free, but that is not actually true. There are multiple risks associated with bonds, but they can be an extremely important component of a portfolio despite those risks. And, if properly allocated, they can provide a level of security above and beyond the equity markets. Of course there is no free lunch, and the added stability of bonds requires a tradeoff. Namely, you are foregoing the equity premium associated with stocks.

We recommend using a mix of high quality short- and intermediate-term government and Treasury issues. For tax-deferred accounts we include Treasury Inflation Protected Securities (TIPS). This allocation is purposefully designed to be very conservative. Nonetheless, it is still subject to certain risks. Interest rate and inflation risk make the top of the list. You can alleviate the risk of inflation through the use of TIPS. Interest rate risk is somewhat of a different story.

There is an inverse relationship between bond prices and interest rates. As rates rise, bond prices fall and as rates fall, bond prices rise. Longer-term bonds are hit hardest in a rising rate environment; short-term issues are hurt the least. Of course shorter-term issues generally pay less interest. If you want an appreciable return – especially in today’s low rate environment – you need to extend beyond extremely short-term debt. Our solution is to limit risk exposure and also gain some additional yield by using high quality short- and intermediate-term US government and Treasury debt.

Every year, we update some of the core articles in our Best of Merriman library.

The 2012 update of The ultimate buy-and-hold strategy, which includes performance information through 2011, is now available in our Best of Merriman library.

The new cost basis legislation means some changes to the 1099 Composites you will receive from your custodians in late January. The most notable change is the revised 1099-B, which now displays cost basis information, including: the date of acquisition, the adjusted cost basis, disallowed wash sale losses, covered and uncovered securities status, as well as the specific holding period indicating your total short and long term gains and losses.

Also included in the Form 1099 Composite this year is a newly revised Year-End Summary Report (for Charles Schwab accounts) or a Supplemental Information Report (for Fidelity accounts). These additional summary reports provide a consolidated view of the realized gains and losses, the cost basis summary and the wash sale data for the tax year 2011. A summary of fees and expenses has also been added to help you identify the total management fees debited from your account(s).

This new format now consolidates all of your tax information into one easy and convenient report, making the headache of tax preparation much easier for yourself and your tax preparer. For tax year 2011, the cost basis information is being provided to you for informational purposes only and will not be reported to the IRS. However, cost basis information on mutual funds and ETFs purchased on or after January 1, 2012 will be reported directly to the IRS on an annual basis beginning with the tax year 2012.

If you have questions, please consult with your tax preparer or refer to these guides from Charles Schwab and Fidelity. Additionally, some custodians provide tax information electronically, so you don’t have to wait for the hard copy to arrive in the mail. If you have not already selected that option for your account(s), you may do so by accessing your account online or, if you’re a Merriman client, by calling your Merriman Client Service team at 1-800-423-4893.

In case you missed one, or are just tuning in, here are the top 5 most-listened-to Sound Investing podcasts of 2011:

#5 – Les Masonson helps us debunk the myths about market timing

#4 – What returns should we expect from the stock market in the future?

#3 – 10 year report card, DFA vs Vanguard

#2 – What should I do with my Required Minimum Distribution if I don’t need it for income?

#1 – Quarterly report, DFA vs Vanguard

As we enter a new year, we thought it would be fun to look back at the ten most-read blog posts of 2011:

#10 – Fixed index annuities: Perfect product or a ripoff? By Jeremy Burger

#9 – Performance: Time Weighted Return vs. Internal Rate of Return by Dave Spratt

#8 – Social Security as fixed income by Paul Merriman

#7 -  Tracking error: What is it, and why does it matter? by Jeremy Burger

#6 – We’ll say it again: The choice of assets can make a big difference by Larry Katz

#5 – Is rampant inflation an upcoming problem for the US? by Mark Metcalf

#4 – Strategies for recovering from market downturns in retirement by Mark Metcalf

#3 – Evaluating new investment products by Dennis Tilley

#2 – How to invest so your money lasts in retirement by Larry Katz

#1 – Are dividend-paying stocks good bond substitutes? by Larry Katz

Our friends at Thomson Reuters have provided another wonderful checklist of year-end tax planning opportunities. As we enter the final week of the year, it’s worth considering if any of these options can save you money. Read More…

I have 5 nieces ranging in age from 2 to 14. We want to give them money instead of toys for birthdays and Christmas. We are talking about $25 each for birthdays and Christmas for now. That’s only $50 per year until we can increase it. Where is the best place to put that money?

The ability to delay gratification goes hand in hand with long term success.  Not only will your gift help provide financial security but it will set an important example.  Sure, every kid would love to have the latest and greatest toy.  But – at least to us boring adults – the prospect of an extra several thousand dollars for college, retirement, or a down payment on a home is much more appealing.  Granted this is not as tangible and doesn’t present as well to a 7 yr. old as a box of Legos, for example.

The option you choose depends upon the circumstances of each child.  If the goal is to fund college my first recommendation would be to use the West Virginia Smart 529 Select plan.  This plan has a low minimum initial investment and offers age-based portfolios that allocate amongst stocks and bonds based upon the beneficiary’s age.  As the child approaches the distribution phase (college) the portfolio automatically adjusts to a more conservative allocation.

However, the West Virginia does assess a $25 annual maintenance fee for smaller accounts.  The details of which can be found in the aforementioned link.  In your case it may be best to explore the 529 plan associated with your state of residence.  When the account meets one of the exceptions for the $25 West Virginia plan fee you can roll the assets into it.

Another option would be contributing to a custodial account such as a UTMA or UGMA.  The downside to a custodial account is that there are no real tax advantages.  However, if the child is not going to go to college it may be a sensible option.  Unlike 529 plans the only restriction for a custodial account is that the money must be used for the presumed benefit of the minor.  As mentioned above this would be an appropriate vehicle to save for something such as a down payment on a home.

Finally, once the kids begin to earn income you have the option of helping them set up an IRA.  What I love about this option is the time horizon and the shared responsibility.  Not only could you contribute $50/year, but you could encourage them to do the same.  Again, this is setting an example that will help shape their perspective and increases their chances, in this case for retirement success.

At the end of the day the foregone toy will be a distant memory.  More importantly, you will have made a lasting contribution to the financial security and education of your nieces.