The Money Class Part 12

WHAT YOU MUST UNDERSTAND ABOUT BONDS.

The longer the maturity of a bond, the more its price will fall when rates rise. Since 1983 we have been in a long cycle of falling interest rates, and that has been great for long-term bonds. But now we are at the end of that falling-rate cycle. So going forward, it is the long-term bonds with the highest yields that will suffer the biggest price declines. Sure, if you buy a 20-year Treasury bond at 4% and you hold it until maturity you are indeed guaranteed to get 100% of your princ.i.p.al back. But during that 20 years your 4% yield will not budge, and it will be less than what you could earn if you invested in new debt. While you are stuck with your 4% yield, new debt in a rising rate environment could yield 5%, 6%, etc. Now when that happens, you could decide to sell your 4% bond so you could reinvest at the higher rates. But remember, the price you will get when you sell a bond before it matures, and with a below-market yield, will be less than what you paid for it. And here is what is also so very important. When interest rates rise so does inflation. Therefore, as your cost of living goes up, your retirement income should also increase. If you are stuck with 20-year bonds paying only 4% when you could be getting 5% or 6% or more you will not be very happy as you struggle to pay your bills or are frustrated your money isn't earning more.

Because we will eventually be seeing interest rates rise, my recommendation is that you invest in bonds with maturities of less than 3 to 5 years. If you own shorter-term issues, when they mature you will have the ability to reinvest at what I expect will be higher rates.

HOW TO BUILD A BOND LADDER.

A smart way to deal with the prospect of higher interest rates in the future is to construct your bond portfolio so you have some bonds maturing every year or so. This will allow you to reinvest that money in a higher-yielding bond. It's what is known as bond laddering. I'll give you an example. Let's say you have $50,000 to invest. Rather than taking all $50,000 and investing it in a 5-year bond you could divide up the money among different maturities. For example: - $10,000 in a 1-year bond - $10,000 in a 2-year bond - $10,000 in a 3-year bond - $10,000 in a 4-year bond - $10,000 in a 5-year bond That way every year you have $10,000 that will mature and you can reinvest it in a higher-yielding bond, a.s.suming rates do rise. Even if rates don't rise, your laddering strategy gives you more income than if you stuck with super-short maturities, and also protects you from the very real risk of rising rates. Given where we are with historically low rates, the important fact to stay focused on is that at some point rates will indeed rise. Bond laddering is a strategy I want you to keep handy for the future; once we see rates rise, you should think about staggering your maturities in order to have money available every year to reinvest at those potentially higher rates.

But I have to tell you that bond laddering is not the best move for right now. As I write this in early 2011, we have a very abnormal situation given how Federal Reserve policy is keeping all short-term Treasury issues very low. The yield of a 1-year Treasury bill (the technical term for Treasury bonds with shorter maturities) is 0.29% and the yield on a 5-year Treasury is 2%. At the same time you may be able to earn 1% in a 1-year bank or credit union certificate of deposit.

It does not make sense to invest in a longer-term security with a lower yield. My recommendation: Rather than ladder your portfolio as long as Treasury yields are so low, stick with a safe and simple bank or credit union CD. (Remember, up to $250,000-and potentially more depending on your mix of different accounts-is 100% safe if it is deposited at a federally insured bank or credit union.) You should be able to earn 1% or more. You can shop for the best deals at Bankrate.com.

Beware of Long-Term Bond FundsI always prefer direct investments in individual bonds rather than investing through a bond mutual fund. There is no set single maturity date with a bond fund because the fund owns dozens or hundreds of different bonds that are being bought and sold. I think that's a huge disadvantage when interest rates rise-as I expect them to in the near future. At least with a high-quality individual bond you know that if you hold it until it reaches maturity you will be repaid your princ.i.p.al. There is no such guarantee with a bond fund.That is one reason why I always recommend that once you leave a job (or turn 59) that you move money out of a 401(k) and into a rollover IRA. Most 401(k)s only offer bond funds, whereas with an IRA at a discount brokerage you have the flexibility to invest directly in individual bonds.And the big lesson here is that bond funds that own long-term issues will be the most vulnerable if interest rates rise. Remember, when rates rise the price of bonds declines. The longer the maturity, the bigger the decline. If you want to have your money in short-term bond funds (maturities of 3 years or less), that's okay; given the very short maturity, your potential loss will be much less in a rising rate environment. But I have to point out that in early 2011 the yield on a supersafe 1-year bank or credit union CD looks a lot smarter to me. Any money you don't expect to need for a year or more just might be better off in a bank account.

BEYOND TREASURY BONDS: OTHER BOND INVESTMENTS.

Investing in Treasury bonds offers important safety: The bond is backed by the full faith and credit of the United States Treasury. No matter what you may think of our current state of affairs, that promise is rock-solid. But there is an obvious trade-off: Typically the interest you can earn on Treasuries is lower than other types of bonds. Here is what you need to know if you want to venture beyond Treasury issues: Munic.i.p.al Bonds I have made no secret of the fact that since 2007 I have been in love with munic.i.p.al bonds. But investing in munic.i.p.al bonds is indeed tricky today. Not only have bond values already risen sharply, but we now must consider the troubling finances of states and munic.i.p.alities that could impact their ability to pay their bond interest. I want to stress that to date, muni bond defaults have been extremely rare. But the fiscal straits of many states and cities are very real. That just increases the need to be extra careful and smart in how you invest in munic.i.p.al bonds.

Munic.i.p.al bonds are issued by state and local governments and public agencies to help finance public projects. There is no federal income tax on the interest you earn on a munic.i.p.al bond. If you live in a state that levies a state income tax, interest from a bond issued by an ent.i.ty within your state can also be free of state tax. If your retirement income is still high enough that you are in the 35% federal tax bracket, the tax-free yield can be a good advantage. There is of course the risk that if the state or munic.i.p.ality that has issued a bond falls into dire financial shape it could have trouble making all its interest payments. To date this has been extremely rare. Still, I would only recommend you invest in munic.i.p.al bonds if you have a trusted advisor who specializes in building a well-diversified portfolio of high-quality munic.i.p.al issues.

Trusting most of the rating agencies and buying bonds with safe ratings is not good enough today. Nor is buying general obligation bonds in certain states. I myself have switched from buying general obligation bonds to general revenue bonds that are tied to an essential public service, such as water service. I think general revenue bonds for essential services can be a smarter investment in this environment. People tend to keep paying their bills for essential services, so bonds whose own payments are made from that revenue flow are likely to have a steady source of money to keep paying their bond interest. As I write this, the states that currently are in the biggest financial trouble are California, Illinois, New York, New Jersey, and Florida. That is not to say all the other states are healthy, mind you; you have to do your homework here. You have to know what backs the bonds, the condition of the state, and the risk you can afford to take. So if you are going to invest in munic.i.p.al bonds at this point in time, you really have to know what you are doing. Again, I would encourage you to seek out the help of an expert in munic.i.p.al bonds and make sure you are thoroughly diversified among various states-and be aware that you might end up owing state taxes on some of those.

Corporate Bonds Please be very careful if you are buying corporate bonds. I recommend sticking with high-quality bonds rated above BBB. And the same maturity rule applies; I don't think you want to own corporate bonds that mature in more than 5 years. Now, I know many of you may be investing in high-yield corporate bonds, which are also called junk bonds. They definitely pay much higher yields; in early 2011 the average yield for an index of junk bonds was near 8%. I want you to understand, however, that junk bonds are nothing at all like regular bonds. They pay that higher yield because there is a higher risk that the company that issued the debt could run into financial trouble and not be able to honor its payments. Even if that doesn't come to pa.s.s, when the markets are volatile, junk bonds will resemble stocks more than bonds. Consider that in October 2008, as the financial crisis was deepening, an index of junk bonds fell 20%! My recommendation is that if you want to invest in junk bonds, you think of them as part of your stock portfolio, not your bond portfolio, because of the risk factor.

Okay, I bet you're getting a little frustrated with me as I tell you not to chase higher yields in the bond market. Stick with me. I actually have a plan that will allow you to earn yields of 3% to 5% or higher without investing in long-term bonds.

LESSON 5. EARN HIGHER YIELDS BY INVESTING IN DIVIDEND-PAYING ETFS AND STOCKS EARN HIGHER YIELDS BY INVESTING IN DIVIDEND-PAYING ETFS AND STOCKS.

Yes, as I write this in early 2011, I am recommending ETFs and stocks over bonds for generating income to help you meet your living expenses.

Stocks belong in most every retiree's portfolio. From a pure planning perspective, if your retirement spans 20 or 30 years, having a small portion of your a.s.sets invested in the stock market, with its history of providing inflation-beating gains, makes a lot of sense. And for those of you who intend to leave a.s.sets to your heirs, your time horizon is even longer. You need to consider the life span of your beneficiaries-your children and grandchildren.

There is also a timely reason to consider investing in stocks. As I explained in the prior lesson, it is likely that we will see interest rates rise in the coming years and that will present challenges for bond investors. As tempting as it is to think that bonds are the best place to be right now, that is only using the rearview mirror as your guide. And you must look at the road ahead. In an economy where interest rates are rising, bond returns will not be as great as they have been over the past 20 years.

Let's be clear: I am not telling you to sell all your bonds and invest everything in the market. What I am recommending is that you take time to consider seriously what the proper mix of stocks and bonds would be for you to meet your goals. As a retiree, most of your money absolutely belongs in bonds and cash. Most, but not all. Let's go back to that very good rule of thumb: Subtract your age from 100. That is how much you might consider investing in stocks. So if you are 75 I am recommending you consider keeping 25% of your investments in stocks. That is just a guideline; if you have lots of other retirement income-pensions, etc.-and you don't think you need stocks, that's fine. Or if you want to focus on a longer-term strategy for your heirs and keep 30% in stocks, that's also fine. You must stand in the truth of what is best for your life, right now and in the years ahead.

THE CASE FOR DIVIDEND-PAYING ETFS AND STOCKS.

Not all companies pay a dividend, but many do. Dividends are a retiree's best friend. Actually, they are great for investors of all ages, but they are especially smart for retirees in search of income. To start this lesson I want to review a point I made earlier: As I write this in early 2011, a six-month certificate of deposit (CD) has a yield of less than 1%. In 2008, before the financial crisis, that same CD was yielding 5%. Let's say you had $250,000 that you kept safe and sound in CDs. Three years ago that portfolio might have generated $12,500 in interest. In late 2010 the same account would be earning just $2,000.

I mentioned all of that at the start of this cla.s.s, but I think that is shocking enough that it deserved to be written twice.

And I know it is creating a dangerous problem for many of you. Because your bank deposits and CDs aren't producing enough income, you are withdrawing more of your princ.i.p.al to make up the difference. Using the same example, if you needed to make up the $10,000 shortfall, you would withdraw the money from your $250,000 balance, leaving you $240,000. That leaves you less money to be earning interest. And you and I both know that if you have to withdraw even more-and keep it up for years-you are putting yourself in danger of running out of money. I cannot imagine a more harrowing way to spend your golden years than watching your funds dwindle.

So what I am about to suggest is a strategy that our grandparents and their fellow retirees used to pay their bills years ago. If you focus your investments on dividend stocks with a long history of paying out, you will have yourself a steady income stream. As I write this in early 2011 there are many high-quality stocks that have dividend yields of 3% to as much as 6%. Compare that to the 1% you can currently earn on a short-term CD and you can see why I think dividend stocks can be a great solution to your income shortfall.

Now, that said, it is absolutely true that any stock investment is going to be more volatile than investing in a CD or a short-term bond fund. I do not recommend that you invest any money you think you will need within 10 years or so in stocks. But remember how we talked earlier about the need to own stocks as well as bonds and cash? The fact is, the stock portion of your portfolio can do double duty for you right now. It can provide the opportunity for long-term growth that we know is important given the odds you will live a long time. But while you are investing for that long-term growth you will also receive an income payout-the dividend-that is in fact higher than what you can get in bonds these days. And unlike bond interest rates that are fixed, a dividend can increase over time. That's an important way to keep your money growing along with inflation.

I want to repeat this important point: As long as you know you will not need to sell a stock in the next 10 years or so to cover your living expenses, dividend-paying stocks are a great way to generate income. As long as you know you will not need to sell a stock in the next 10 years or so to cover your living expenses, dividend-paying stocks are a great way to generate income.

I think the smartest way for most of you to invest in dividend stocks is by investing an exchange-traded fund (ETF) that specializes in dividend-paying stocks. An ETF will typically own at least a few dozen individual stocks, so with one investment you will own a diversified portfolio of stocks. For those of you with at least $100,000 or so to invest in stocks, direct investment in individual issues can indeed make plenty of sense. That is how I invest in dividend stocks. Later on in this cla.s.s I share some guidelines for how to build a portfolio of individual dividend-paying stocks. But I want to stress that I think using ETFs that focus on dividend-paying stocks is a great way to own a diversified portfolio of dividend stocks.

Why do I want you to be protected by diversification and not just buy individual dividend-paying stocks? Let me answer that one by giving you an extreme example. For years BP, British Petroleum, paid shareholders 6% dividends, month in, month out. Then in April 2010, disaster struck in the Gulf of Mexico when a BP oil rig exploded, killing eleven people and touching off an environmental disaster. The stock price crashed, falling more than 50% by July, when the spill was brought under control, and the firm stopped paying its dividend for 2010. And as some of you may have experienced, in the wake of the 2008 financial crisis many banks abolished or sharply reduced their dividend and have yet to restore those payments. Diversification affords protection from the volatility of any given individual stock.

I also want to stress another point about ETFs that invest in dividend-paying stocks: While I think they deserve to be a permanent part of your retirement portfolio given their ability to help you manage inflation, at the same time I recognize that there is indeed much greater peace of mind for many of you by sticking with bonds. As I have explained, the current interest rate environment makes it likely that we will see bond rates rise in the coming years. Until that happens, I hope you will consider adding dividend-paying ETFs or stocks to your portfolio to produce more income. But then, once you see rates rise to a level that you are comfortably certain will provide you plenty of income, you can consider redirecting more of your money into bonds, if that is the truth that will make you feel more secure.

STOCK DIVIDEND BASICS.

Some publicly traded companies choose to give a portion of their profits back to their shareholders over the course of a year. That payment is called a dividend. For every share of stock you own, you are ent.i.tled to the per-share dividend. For example, let's say you own 10 shares of the XYZ Corp. And the XYZ Corp. pays a quarterly dividend of 25 cents. That means that four times a year you get 25 cents for each share you own. So over a year you would collect $1 for each share you own; in this case, your 10 shares would ent.i.tle you to a dividend payout of $10 a year. You are paid that dividend simply because you are a shareholder.

Dividend yield is the per-share dividend divided by the share price of the stock. So let's say you buy a share of the XYZ Corp. for $35 and the company pays a per-share annual dividend of $1. The $1 dividend divided by the $35 share price means your dividend yield is 2.86%. In fact, some solid companies have dividend yields of 3% to 5% or higher. Utility and telecommunication firms such as ConEd and Verizon were yielding 5% or more in early 2011. By way of comparison, a 10-year Treasury bond in early 2011 had a yield of about 3.5%. And remember, a 10-year bond maturity is way too long, in my opinion, given that when general rates rise, longer-term bonds will suffer the biggest price declines, and so if you hold on to that 10-year bond for the entire 10 years you have no chance of earning a higher yield. In other words, there is indeed "risk" in owning a 10-year Treasury. So what if you were to keep your money in a 1- or 2-year Treasury bill instead? Well, your yield in early 2011 was less than 1%. is the per-share dividend divided by the share price of the stock. So let's say you buy a share of the XYZ Corp. for $35 and the company pays a per-share annual dividend of $1. The $1 dividend divided by the $35 share price means your dividend yield is 2.86%. In fact, some solid companies have dividend yields of 3% to 5% or higher. Utility and telecommunication firms such as ConEd and Verizon were yielding 5% or more in early 2011. By way of comparison, a 10-year Treasury bond in early 2011 had a yield of about 3.5%. And remember, a 10-year bond maturity is way too long, in my opinion, given that when general rates rise, longer-term bonds will suffer the biggest price declines, and so if you hold on to that 10-year bond for the entire 10 years you have no chance of earning a higher yield. In other words, there is indeed "risk" in owning a 10-year Treasury. So what if you were to keep your money in a 1- or 2-year Treasury bill instead? Well, your yield in early 2011 was less than 1%.

See why I think dividend stocks yielding 3% to 5% or more can be a smart part of your retirement portfolio?

The Protection of a Stop-Loss Order For those of you who are interested in owning dividend-paying stocks but are also worried about downside volatility, I recommend you learn how to place a stop-loss order on an investment. With a stop-loss order, you instruct your discount brokerage to sell any stock once it hits your designated price. So, for example, if you bought an ETF at $35 a share but can't bear the thought of your princ.i.p.al investment losing more than 15%, you could place a stop-loss order on your account that directs the brokerage to sell your shares if the ETF price falls to $29.75. But please know that in a volatile market there is no guarantee you will be cashed out at exactly $29.75. With a stop-loss order you are basically telling your brokerage to get you the best market price once it hits your target.

HOW MUCH TO INVEST IN DIVIDEND-PAYING ETFS.

Here are my recommendations: * Determine how much of your portfolio you can comfortably devote to the stock market Determine how much of your portfolio you can comfortably devote to the stock market. I know I am repeating what I said above, but this is so important I want to make sure you hear me loud and clear: No stock investment, even an ETF portfolio of dividend payers, is to be mistaken for a cash investment, or a bond investment. You are to only invest money in dividend-paying ETFs that you will not need to tap for at least 10 years.

* Diversify Diversify. There are two ways to invest in dividend-paying stocks. You can do it via ETFs that focus on dividend payers, or you can build your own portfolio of individual stocks that pay dividends. If you want to own individual stocks your portfolio should have a minimum of 10 to 12 stocks. It is never smart to have a larger portion of your retirement funds invested in one stock. No matter how stable that stock looks, we can never be sure of its future. If the money you want to devote to stocks is not enough to buy that many individual shares, then I recommend you focus on dividend-paying ETFs.

HOW TO CHOOSE A DIVIDEND-FOCUSED EXCHANGE-TRADED FUND.

If you choose to invest in a diversified portfolio of stocks through an ETF, there are in fact many good options to choose from. ETFs tend to have lower expenses than many no-load mutual funds. And many brokerage firms are allowing you to buy and sell certain ETFs for free. As of late 2010, firms that were waiving their commission on certain ETFs included Fidelity, Schwab, TD Ameritrade, and Vanguard.

ETF Fees: All ETFs, like mutual funds, have an expense ratio (the annual charge for administrative and management costs). It is expressed as a percentage. The average expense ratio for a stock mutual fund is about 1%, but some funds charge 1.5% or higher. Every penny that goes to pay the expense ratio is money you lose. And expenses are the one factor that is entirely within your control. You are the one who decides if you will pay high expenses or low expenses. In today's world, where you want to earn as much as possible on your investments, focusing on minimizing the expenses you pay becomes crucial. All ETFs, like mutual funds, have an expense ratio (the annual charge for administrative and management costs). It is expressed as a percentage. The average expense ratio for a stock mutual fund is about 1%, but some funds charge 1.5% or higher. Every penny that goes to pay the expense ratio is money you lose. And expenses are the one factor that is entirely within your control. You are the one who decides if you will pay high expenses or low expenses. In today's world, where you want to earn as much as possible on your investments, focusing on minimizing the expenses you pay becomes crucial.

Below are some ETFs you might consider for your portfolio. They all focus on dividend-paying stocks and have low expense ratios.

TIPS FOR OWNING INDIVIDUAL DIVIDEND-PAYING STOCKS.

If you are interested in building a portfolio of individual dividend stocks rather than purchasing an ETF that holds a basket of dividend payers, make sure you follow a few key steps in putting together a strong portfolio: * Avoid the highest yielding stocks Avoid the highest yielding stocks. As I write this in early 2011, the yield of the S&P 500 stock index, considered a solid benchmark of "the market," is 1.8%. That average yield includes some firms that have lower yields and others with higher yields. For example, the utility and telecommunications sectors have mature companies that tend to offer higher dividend yields; the average payout right now for those two sectors is 4.3% for utilities and 5.5% for telecom stocks.

Those are good benchmarks to keep in mind when investing in dividend stocks. When you see a dividend yield of 8%, 10%, or higher, that should be a big warning signal. When a stock yield is that high it is a sign that the company may be in trouble and unable to continue to make its dividend payout. It's important to remember how a dividend yield is calculated: dividend/price. A $1 dividend on a $30 stock is a 3.3% yield. But let's say that company runs into a big problem and its stock price falls to $10. Its yield is now 10% ($1/$10). Not because the dividend grew but because the stock price has taken a huge plunge. (Note: You will be averaging only 3.3% if you bought it at $30, but new investors will be getting 10%.) My recommendation is to avoid the highest-yielding stocks. Stick to solid blue-chip firms that have a long history of making dividend payments. They will typically yield anywhere from 2% to 6% or so, depending on their industry.

Stock Tip: Standard & Poor's maintains a Dividend Aristocrats index of firms that have managed to increase their dividend payouts for at least 25 years. It's a good resource for anyone looking for investments to research. As of early 2011 the Aristocrats included: Standard & Poor's maintains a Dividend Aristocrats index of firms that have managed to increase their dividend payouts for at least 25 years. It's a good resource for anyone looking for investments to research. As of early 2011 the Aristocrats included: 3MAflacAbbott LaboratoriesAir Products & Chemicals, Inc.Archer Daniels MidlandAutomatic Data ProcessingBard, C. R.Becton, d.i.c.kinson & Co.BemisBrown-FormanCenturyLinkChubbCincinnati FinancialCintasCloroxCoca-ColaConsolidated EdisonDoverEmerson ElectricExxon MobilFamily Dollar StoresGrainger, W. W.Integrys Energy GroupJohnson & JohnsonKimberly-ClarkLeggett & PlattLilly, EliLowe'sMcDonald'sMcGraw-HillPepsiCoPitneyBowesPPGProcter & GambleSherwin-WilliamsSigma-AldrichStanley Black & DeckerSupervaluTargetVFWalgreenWal-Mart Stores * Diversify among different types of businesses Diversify among different types of businesses. You want to build a portfolio that owns a mix of stocks that operate in different fields. For example, make sure you don't own all energy stocks, or all consumer stocks.

* Buy at the right time Buy at the right time. There is one tricky aspect of investing in dividend stocks. Every company that pays a dividend chooses a date at which all shareholders as of that date will be ent.i.tled to the next dividend payout. For example, let's say XYZ declares a dividend on September 15, with an ex-dividend date of October 15 and a payment date of October 31.

The most important date to pay attention to is the ex-dividend date. This is the cutoff date for receiving the dividend; if you buy the stock on October 16 you will not be ent.i.tled to the dividend. The actual dividend payment will be made on October 31.

You want to purchase your shares before an ex-dividend date to be eligible for the upcoming dividend. When you are considering selling shares of a dividend stock, if you wait until the ex-dividend date you can sell at any time between that date and the payment date and you will still receive the dividend. Just know that when it comes to buying and selling a dividend paying company, they reduce the price of the stock by the amount of the dividend so in the end it all comes out about the same.

One of the sources that I use to pick good quality dividend stocks for my own portfolio is the newsletter published by Dividend.com. Founder Paul Rubillo writes a newsletter that is full of great information and is easy to understand. Not only does Paul offer tips on what to buy, but he also shares his insights on when a stock should be sold as well.

WHERE TO FIND MORE INCOME.

Retirees in need of more income may want to consider a reverse mortgage. A detailed lesson on reverse mortgages is in the Home Cla.s.s, but I ask that you carefully consider the often high costs and risks involved.

No Free LunchDuring your retirement years you may be invited to many luncheons where a financial advisor will present you with what he believes is the answer to your retirement needs. Please be careful. All too often, what is pitched to you as a great solution to your income shortage is in fact an inappropriate and expensive investment you should never make.My quick list of investments to avoid: - A whole-life insurance policy - A variable life insurance policy - A variable annuity - A universal life insurance policy - A mutual fund that charges a load (sales commission) - An immediate annuity (only as long as interest rates are low) LESSON 6. DOUBLE-CHECK YOUR BENEFICIARIES AND MUST-HAVE DOc.u.mENTS DOUBLE-CHECK YOUR BENEFICIARIES AND MUST-HAVE DOc.u.mENTS.

It may be years, if not decades, since you first opened your retirement accounts or purchased a life insurance policy. That is a long time for any number of life-changing events to have occurred. Marriage. Divorce. The death of a spouse. A remarriage. Children from a remarriage. Stepchildren. Grandchildren. Stepgrandchildren. A part of your legacy is to make sure you have updated your beneficiary statements to reflect your most current wishes. Please don't leave this to memory. If you are not sure, go back and check.

I also want you to pull out your must-have life doc.u.ments and make sure they are also up to date. If you have any doubt as to whether you have all the doc.u.ments you must have in my opinion, then please consult the Family Cla.s.s, where I run them down in detail.

The good news is that any estate planning-such as trusts-you have reviewed with your estate-planning attorney sometime in the past few years is likely in good shape. In late 2010 Congress voted in increases in the estate tax exemption. The current law, good through 2012, exempts the first $5 million ($10 million for married couples) from estate tax, and the tax rate on sums above that amount is 35%.

LESSON RECAP.

Now that you have made it through this retirement cla.s.s I hope you are feeling more confident about how you can best navigate what you and I both know are very challenging times for retirees. But as we discussed in "Stand in Your Truth," sometimes the most powerful action we can take is to be willing to change our perspective. Instead of becoming stuck in frustration and fear over what you have lost, or how much harder it has become, please stand in this truth: With the right perspective, I am confident you can make the necessary changes to keep your retirement dream alive and well.

- Recognize that even once you retire, you still have 20+ years that you need your money to last.

- Make sure that at the rate you are withdrawing money, your savings will last your lifetime; a 4% annual rate is a good rule of thumb.

- Protect yourself from a future in which interest rates will likely rise: Do not invest in long-term bonds or bond funds.

- Consider dividend-paying ETFs or stocks for a portion of your portfolio; many currently pay double the income yield of bonds.

CLa.s.s.

THE ULTIMATE LESSON.

I have a confession to make. The Money Cla.s.s The Money Cla.s.s has been the most difficult book for me to write. For months I struggled to come to terms with just why I was having such a hard time with it, and that in itself was quite a jolt. After all, this is my tenth book; I wasn't exactly suffering from a case of first-time jitters. Eventually what I realized is that I myself was having some trouble coming to terms with the very strong, sobering message of the book. I came to understand that I needed to dig deep before I could start to tell you how to dig deep. has been the most difficult book for me to write. For months I struggled to come to terms with just why I was having such a hard time with it, and that in itself was quite a jolt. After all, this is my tenth book; I wasn't exactly suffering from a case of first-time jitters. Eventually what I realized is that I myself was having some trouble coming to terms with the very strong, sobering message of the book. I came to understand that I needed to dig deep before I could start to tell you how to dig deep.

I want to share with you the process I went through in overcoming my personal roadblocks in writing this book. I offer this last lesson to you in the spirit of shared experience. I know that your journey has yet to begin; you end this book at a starting point. It's now time for you to find the strength and resolve to put the lessons of The Money Cla.s.s The Money Cla.s.s into action. It is my hope that in sharing the process I went through to bring this book to life I can provide added motivation for you. into action. It is my hope that in sharing the process I went through to bring this book to life I can provide added motivation for you.

I never wavered in my enthusiasm for this project. When I approached my publisher a year ago to discuss the idea for the book I was eager to get rolling. When I wrote Suze Orman's 2009 Action Plan Suze Orman's 2009 Action Plan during the height of the financial crisis in the fall of 2008, I saw myself as an emergency room doctor; I needed to act fast to get you out of harm's way. The message for that time was about survival, in the short term. How to get through. But I knew even then that I would soon want to follow up that crisis management book with a more expansive discussion of how to move forward once the worst of the crisis was past. To use the hospital a.n.a.logy just one more time: Once you make it out of the ER and ICU, the next phase is often long-term rehabilitation, which takes a more holistic approach to how to live the best-most healthy-life going forward. during the height of the financial crisis in the fall of 2008, I saw myself as an emergency room doctor; I needed to act fast to get you out of harm's way. The message for that time was about survival, in the short term. How to get through. But I knew even then that I would soon want to follow up that crisis management book with a more expansive discussion of how to move forward once the worst of the crisis was past. To use the hospital a.n.a.logy just one more time: Once you make it out of the ER and ICU, the next phase is often long-term rehabilitation, which takes a more holistic approach to how to live the best-most healthy-life going forward.

The Money Cla.s.s is that long-term rehabilitation plan. The focus and intent of this book have not changed conceptually from those early planning days. But I soon became bogged down in the enormousness of what I was going to ask you. The financial advice wasn't the problem. I knew exactly what I needed to teach you. But I began to realize that the overriding message of the book was anything but easy to digest. The death of the American Dream as we know it is not exactly the sort of uplifting, inspirational message that has always been the powerful undercurrent propelling my financial advice. is that long-term rehabilitation plan. The focus and intent of this book have not changed conceptually from those early planning days. But I soon became bogged down in the enormousness of what I was going to ask you. The financial advice wasn't the problem. I knew exactly what I needed to teach you. But I began to realize that the overriding message of the book was anything but easy to digest. The death of the American Dream as we know it is not exactly the sort of uplifting, inspirational message that has always been the powerful undercurrent propelling my financial advice.

I was always clear that the New American Dream was the right message. I knew that if you agreed with the premise-that the new realities of life in these times require a reimagining of the dream-and followed my advice you would begin to shed your anxieties and fears and build a life defined by calm and confidence. But what slowed me down was that I was well aware of how incredibly difficult it was going to be for many of you to get from here (old, broken dream) to there (new, realistic dream). The att.i.tude reform and the specific measures I was going to ask you to take were more drastic than anything I had ever suggested before. We are long past the days when tr.i.m.m.i.n.g the cable bill and stretching out the time between haircuts was enough. As you now know, The Money Cla.s.s The Money Cla.s.s asks you to contemplate far more life-altering changes. asks you to contemplate far more life-altering changes.

Granted, I am not exactly shy when it comes to telling the truth. As my friends who work on The Oprah Winfrey Show The Oprah Winfrey Show like to say, I am not afraid to deliver a Suze Smackdown when necessary. But it's all in the service of what I see as my mission: To help you be the best you can be. To help you to live the life you not only want to live, but deserve to live. Am I direct and honest? Guilty. Do I react pa.s.sionately? I sure do. But I think you appreciate that it is done with the best intentions: to help you fix what isn't working, quit habits that aren't empowering, and gain the confidence to know how to move forward toward a better life. In like to say, I am not afraid to deliver a Suze Smackdown when necessary. But it's all in the service of what I see as my mission: To help you be the best you can be. To help you to live the life you not only want to live, but deserve to live. Am I direct and honest? Guilty. Do I react pa.s.sionately? I sure do. But I think you appreciate that it is done with the best intentions: to help you fix what isn't working, quit habits that aren't empowering, and gain the confidence to know how to move forward toward a better life. In The Courage to Be Rich The Courage to Be Rich I wrote of how to create a life of material and spiritual abundance. More recently, I wrote of how to create a life of material and spiritual abundance. More recently, Women & Money Women & Money was about creating the power to own your destiny. Abundance. Destiny. Such powerful words. And if you've read those books you know the power I place on the words we choose: Your thoughts, your words, your actions-all must be in harmony. was about creating the power to own your destiny. Abundance. Destiny. Such powerful words. And if you've read those books you know the power I place on the words we choose: Your thoughts, your words, your actions-all must be in harmony.

Yet here I was, sitting at my computer, writing a book that p.r.o.nounced the American Dream dead. Not exactly a fabulous truth to share. I worried that the power of those words would be crippling to the traits I prize so very much and rely on to power us through: optimism, courage, hopefulness, clarity. I worried that the message I had to deliver would affect your very ability to dream.

My breakthrough came when I finally reminded myself to take the advice I dispense early in this book. I had to change my perspective. Yes, I was telling you that an outmoded version of the American Dream was over and that its demise-no matter how good for us in the long term-would create a period of difficult transition. But the real message I had for you was not about that death, but about the rebirth each and every one of you can experience once you let go of the dreams that are broken.

I came to see that the New American Dream I am asking you to embrace and build for yourself and your family is in fact my most inspirational message ever. The steps I have laid out for you in this book, the truths that I have presented, and the truth I am asking each of you to locate within yourself will propel you into a future that is so much more hopeful and enjoyable than what I know many of you feel right now.

Will the transition be difficult, will it test your strength and commitment? Yes. I am not going to sit here and pretend that walking away from a home is easy, or that accepting a job that pays 15% less than your previous job is a snap. The road ahead no doubt has its b.u.mps, potholes, and pitfalls. But navigate it you will. I have to ask you: What is the alternative? Do nothing, change nothing, and you will get nowhere. Commit to making change and you have the power to get it right once and for all.

I hope you are spared the months of angst I went through and can, right here, right now-as you read these words-train your perspective on what you are moving toward toward. Take your eyes off the rearview mirror. I ask you to let go-surrender what is no longer relevant to your well-being, so that you can step into that better future.

With time I also came to see that the central message of this book is not in fact hard or beyond your grasp. And that, too, released me from my writer's block. "Stand in your truth" is my clarion call that you have faith in yourself. To have faith that what you choose to do with your life-the conscious choices you decide to make-is what brings abundance and allows you to control your destiny. And I know that each and every one of us has that ability to turn inward and trust ourselves to take care of ourselves far better than anyone else.

What we collectively experienced over the past two decades has ultimately been a hard lesson learned. And in an odd way, that is why I am so hopeful that you are ready to act on the lessons I have shared in The Money Cla.s.s The Money Cla.s.s. We now understand that change is necessary. We are motivated to rethink our ways, because, well, we're feeling anything but abundant and in control of our destiny.

The authentic, sterling values of old are ready to make their comeback. Our grandparents and great-grandparents had a pretty good handle on standing in their truth, and that is what propelled us individually and as a nation for so many generations. It is time to turn back to them for help in making our way forward. The payoff is not merely a better life today and next year, but a life of lasting integrity and honesty whose effects are far-reaching-for us, our children, our community, and beyond. Most important, we will all be back on track, creating an enduring legacy for future generations. And that, my friends, is the greatest dream of all.

ABOUT THE AUTHOR.

SUZE O ORMAN is a two-time Emmy Awardwinning television host, #1 is a two-time Emmy Awardwinning television host, #1 New York Times New York Times bestselling author, magazine and online columnist, writer/producer, and one of the top motivational speakers in the world today. bestselling author, magazine and online columnist, writer/producer, and one of the top motivational speakers in the world today.

Orman has written eight consecutive New York Times New York Times bestsellers and has written, co-produced, and hosted seven PBS specials based on her books. She is the seven-time Gracie Awardwinning host of the bestsellers and has written, co-produced, and hosted seven PBS specials based on her books. She is the seven-time Gracie Awardwinning host of the The Suze Orman Show The Suze Orman Show, which airs on CNBC, and host of the forthcoming Money Cla.s.s Money Cla.s.s on OWN: The Oprah Winfrey Network. She is also a contributing editor to on OWN: The Oprah Winfrey Network. She is also a contributing editor to O: The Oprah Magazine O: The Oprah Magazine.

Twice named one of the "Time 100," 100," Time Time magazine's list of the world's most influential people, and named by magazine's list of the world's most influential people, and named by Forbes Forbes as one of the 100 most powerful women, Orman was the recipient of the National Equality Award from the Human Rights Campaign. In 2009 she received an honorary doctor of humane letters degree from the University of Illinois at Urbana-Champaign and in 2010 she received an honorary doctor of commercial science from Bentley University. as one of the 100 most powerful women, Orman was the recipient of the National Equality Award from the Human Rights Campaign. In 2009 she received an honorary doctor of humane letters degree from the University of Illinois at Urbana-Champaign and in 2010 she received an honorary doctor of commercial science from Bentley University.

Orman, a Certified Financial Planner professional, directed the Suze Orman Financial Group from 1987 to 1997, served as Vice President-Investments for Prudential Bache Securities from 1983 to 1987, and was an account executive at Merrill Lynch from 1980 to 1983. Prior to that, she worked as a waitress at the b.u.t.tercup Bakery in Berkeley, California, from 1973 to 1980.

ALSO BY SUZE ORMAN.

You've Earned It, Don't Lose It

The 9 Steps to Financial Freedom

Suze Orman's Financial Guidebook

The Courage to Be Rich