Remember the character played by Chevy Chase in "Christmas Vacation"? He counted on his year–end bonus to provide his family with built–in pool in their backyard. He saw his bonus as found money, a windfall, a one–shot deal.
What about you? If you receive an annual bonus from your employer, do you treat it as mad money, good for one wild splurge, such as an expensive vacation or an opportunity to buy that super–screen state–of–the–art television? Or do you put it to work enhancing your family's financial security?
Your bonus is not fun money. It's part of your income. That's why, as a financially savvy person, you should view your annual bonus as an opportunity to enhance your financial position, build assets and work toward achieving long–term objectives.What to Do With Your Bonus: Several Suggestions
Use your regular income to buy that new car, pay down debts or take a vacation. Use your bonus to make your life and your family's life more secure. Here are just three suggestions to consider:
Shore up your life insurance protection. We don't just say this because we're New York Life. We're New York Life because we believe in the value and importance of life insurance. Life insurance protects your family. If you die prematurely, your policy will pay your beneficiaries cash in the amount you select. This money is generally income tax–free, so $100,000 in proceeds is usually $100,000 received.
How much life insurance should you have? There are a number of off–the–rack formulas, such as: (A) basing coverage on five to ten times your income (so if you earn $80,000 a year, you may need between $400,000 and $800,000 of coverage); (B) owning enough to generate X dollars in replacement income if you die (so you may need $1 million in proceeds to provide $50,000 a year for life for your spouse, assuming a 5% return on principal, leaving the original amount as an inheritance for your children); (C) basing the amount on what is known as your Human Life Value, determined by multiplying your annual income by the number of years to your projected retirement (so, if you are 40 years old, earn $75,000 a year and plan to retire at age 60, you may need $1.5 million of coverage).
The only real answer to how much life insurance you need is: enough! Enough to protect your family from financial want if you die. Enough to help them realize all the dreams and goals you have for them. Enough to assure that you – and they – sleep well at night, knowing you have this need covered. Your New York Life agent can help you sort through your needs and determine the amount that is right for you. Most of all, consider the power of using some or all of your annual bonus to strengthen your life insurance program and your family's financial security.
If you have minor children, consider putting aside your bonus for their college educations. Why? Two reasons. First, this is perhaps the best gift you can give your children – a debt–free college degree. Second, college is expensive, and the cost keeps rising every year.
For example, this year (2005–2006) the total annual price tag (including tuition, fees, room and board) averages $12,127 (or more than $48,508 for four years) at public universities and $29,026 (more than $116,104 over four years) at private institutions. That does not factor in the price of graduate school or that you may have more than one child attending college.("Trends in College Pricing 2005," The College Board)
Fortunately, there are several tax–advantaged options to help you accumulate all or a portion of these costs in advance. Among these are Coverdell Education Savings Accounts, formerly known as Education IRAs (which let you contribute up to $2,000, non–deductible, a year, with earnings received tax–free if used to cover qualified expenses); and state–sponsored Section 529 Savings Plans (which can have high, state–determined limits on non–deductible contributions, with federally income tax–free distributions for qualified withdrawals.*)
*For withdrawals not used for qualified higher education expenses, earnings are subject to income taxes at the distributor's rate plus a 10% federal tax penalty.
Please contact your financial professional for more information on 529 plans and/or obtain the appropriate disclosure statements and the applicable prospectuses for the underlying investments of the 529 Plans we have available. Investors are asked to consider the investment objectives, risks, charges and expenses of a portfolio carefully before investing or sending money. The disclosure statements and prospectuses contain this and other information about the investment options and their underlying investments. Please read this material carefully before investing or sending money.529 plan are offered by properly registered representatives of NYLIFE Securities Member FINRA/SIPC, A Licensed Insurance Agency, an affiliate of New York Life.
"Educational Tax Incentives," 2003 Field Guide by Donald F. Cady, National Underwriter 2003, p. 309. Also, "Your Savings Options," The College Board, 2004. Web page: www.collegeboard.com/parents/article/0,3708,715-716-0-21393,00.hmtl)
How will that money grow? Let's say you take $2,000 from your bonus and put it aside for your children's education. Based on several rates of return, here is how that money will grow over time.
(Table is based on standard tables using Compound Interest & Annuity Tables (McGraw-Hill).) (Figures quoted are for illustrative purposes only and are not necessarily indicative of past or future results of any specific investment. They do not include consideration of the time value of money, inflation, fluctuation in principal or in many instances, taxes.)
A hypothetical example to show how a single contribution of $2,000 will grow over time, based on various average rates of return. After Year 5% 6% 7% 8% 5 $2,552 $2,676 $2,806 $2,938 10 $3,258 $3,582 $3,934 $4,318 15 $4,158 $4,794 $5,518 $6,344 18 $4,814 $5,708 $6,760 $7,992
Do the numbers seem like a drop in the bucket? Keep in mind that this is compounding from just one lump sum contribution toward your children's college fund. Designate each year's bonus to the college fund and the results could be rewarding.
Put a lump sum to work for your retirement. It's the same principle as saving for college, but with potentially more time to build cash. The goal is to have a comfortable retirement nest egg waiting for you when you retire. The following chart takes that same $2,000 and projects accumulation out further.
(Figures quoted are for illustrative purposes only and are not necessarily indicative of past or future results of any specific investment. They do not include consideration of the time value of money, inflation, fluctuation in principal or in many instances, taxes.)
A hypothetical example to show how a single contribution of $2,000 will grow over time, based on various average rates of return. After Year 5% 6% 7% 8% 20 $5,306 $6,414 $7,740 $9,322 25 $6,772 $8,584 $10,854 $13,696 30 $8,644 $11,486 $15,224 $20,126 35 $11,032 $15,372 $21,354 $29,570
Once again, these are the numbers after just one payment of $2,000. Do this every year, and you will have gone a long way toward helping achieve your long–term financial security.
The bottom line
You have a choice when you receive your year–end bonus. You can spend it; or you can put it to work for you, your family, the future. If you need help working out the details of how to allocate your bonus money for maximum accumulation, contact your NYLIFE Securities Registered Representative. He or she will meet with you to help map out a strategy that works for you.
Please review your individual situation with an investment professional and/or tax professional to ensure this product is suitable for your individual objectives and circumstances. College savings plan offered by each state may differ significantly in investment option, fees, benefits and state tax implications.
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