For the rest of us, the lack of Congressional action on the estate tax could provide for a precarious future. Effective January 1, 2011, if your total estate, including your house, vacation home, cars, retirement savings, etc, totals more than $1 million, your  estate could pay 41% of the value of all of your property, exceeding $1 million, to the US Government.  The progressive estate tax rapidly escalates to 55% for estates that exceed $3 million.

Years ago, when the $1 million dollar estate tax exclusion was implemented, few American had an estate worth $1 million, billionaires were virtually unheard of and we would talk about the US government expenses and debt in millions or sometimes billions.  Today, billionaires are fairly common, virtually everything that our government does is in billions or trillions of dollars and there are millions of US citizens that have estates exceeding one million dollars

With the estate tax uncertainty that we face, it is important to know whether you may be affected by a return to the $1million estate tax exclusion.  The best way to do determine this is by developing a simple Net Worth statement.

On the left side of your Net Worth statement, list all of your assets.  Assets would include the value of your house, the value of any vacation property that you own, the value of your cars, the value of your personal belongings, the value of any retirement plans that you have such as 401(k)s and IRAs, the value of your business and the value of any other savings or investments.  On the right side of the Net Worth statement, list all of your liabilities.  This would include mortgages, home equity credit lines, business loans, remaining balances on car loans and any long term credit card debt.

After summing your assets and liabilities, subtract your total liabilities from you total assets to determine your Net Worth.  If you are single and your Net Worth exceeds $1 million, your estate will likely be required to pay estate taxes in 2011, if the current laws remain.

If you are married, perform the Net Worth exercise as a couple.  If your joint Net Worth is under $1 million and it is not expected to significantly increase in the future, a simple will should be sufficient.  However, if the joint Net Worth is over $1 million, but less than $2 million, with proper estate planning, the opportunity to avoid paying estate taxes exists.

When a spouse dies, the second spouse can inherit the full joint estate and pay no estate taxes.  However, if the joint estate is worth over $1 million or will likely be worth more than a million dollars in the future, the ultimate heirs may be required to pay estate taxes upon the death of the second spouse.  This may be avoided by proper estate planning, using devices such as a ‘bypass trust” that avoids all of your joint assets ending up in the surviving spouse’s estate.

For more information on estate planning, see Chapter 10 of my book, Financial Abundance Guide.  If you do not already have a copy, you may download a free copy of my book at www.financialabundanceguide.com

Hopefully Congress will modify the current law to increase the 2011 estate tax exclusion to $3.5 million, an exclusion amount that our president supports.  If so, individuals with estates less than $3.5 million and couples with estates less under $7 million can avoid the estate tax.  However, I find it impossible to predict what our government will do.  Who would have thought that Congress would give the estates of George Steinbrenner and other billionaires a “free pass” in 2010?

Unless your estate is much less than $1 million, I encourage you to call your estate planning attorney before the end of 2010 and determine if your will is written to minimize  estate taxes, even if the estate tax exclusion returns to $1 million in 2011.

The first tax is a 62% increase (from 1.45% to 2.35%) in Medicare taxes for individuals with earned income over $200K and for couples with earned income over $250K.  While a single person earning over $200K per year is highly compensated, couples need only earn more than $125K each to be engulfed by this new tax.  As usual, the minimum earnings amount is not tied to inflation.  If 1970s style inflation appears in the next few years, earnings of over $125K may become much more common.

The second Medicare tax on the “wealthy” is a 3.8% tax on investment income for singles with an Adjusted Gross Income (AGI) exceeding $200,000 and couples with an AGI exceeding $250,000.   Let’s look at a scenario in which a couple whose earnings are less than $250K could end up paying almost $75K for this new tax.

You and your spouse are 60 years old and owners of a small Sub Chapter S Corporation.  Your joint salaries total $175K.  Through diligent saving over the past 35 years and a small inheritance, you have $1 million dollars in investments to help provide for a reasonable standard of living in your retirement years.

In 2013, the economy finally begins to recover and your business booms, throwing off $75K in dividend income.  At the same time, the stock market finally recovers and you have a 15% return on your investments.

Your AGI from salary and company dividends in 2013 is $250K.  Because of this “wealth,” the $150K in investment income from your savings would be taxed at the then current income tax rate plus you would pay an additional $5,700 in Medicare taxes.

After paying these high taxes in 2013, you decide to sell your business and retire in 2014.  The business sells at the end of 2014 for $1 million.  In 2014 your salaries and dividends from the business total $200K and your investments provide an 8.7% return of $100K .

For 2014, your AGI from salary and company dividends in 2013 is $200K, while your total investment gains (including the sale of your company) are $1.1 million.  The new 3.8% Medicare tax on the “wealthy” would cost you an additional $39,900 above your already high 2014 taxes.

In 2015, you decide to downsize your house, built in 1975 at a cost of $40,000, as well as sell your ski condo that you bought in 1980 for $60K.  Living in Boulder, your house sells for $940K and your condo sells for $460K.  While you have $0 earned income, your investment portfolio increases by approximately 10%, providing $200K in investment income.  Even with the $500K capital gains exclusion for the sale of your home, your total taxable investment income in 2015 is $1 million.  Since $750K of the investment income is taxed at the additional 3.8% rate, the new Medicare tax adds $28,500 to your 2015 tax bill.

The small business owners in the above scenario would hardly be considered “wealthy.”  However, in three years, this couple could pay $74,100 in additional Medicare taxes, thanks to health care reform.

There are several ways that this couple could reduce their taxes, but they did not even know about these new Medicare taxes.  As our government needs more and more tax revenue to sustain its profligate spending, tax planning becomes even more critical.

The good news is that these new taxes do not become effective until 2013.  If you are planning on selling your business or home, tax planning now could save you thousands of dollars in taxes later.  Now, more than ever, it is important to do advanced tax planning with a financial professional who fully understands the tax system.  As our example shows, not understanding the new tax laws can be very expensive.

If the stock market continues its current sideways to negative movement, by the end of 2010, many equity mutual funds will have less value in December than they did in January.  Even if your actively managed mutual funds lose value in 2010, it is likely that you will owe taxes on these funds when you file your 2010 taxes.  Here’s why:

Before the end of each calendar year, mutual fund companies are required by law to distribute of all of the income and dividends that they received.  With the large stock market gains in the second half of 2009 and early 2010, most actively managed mutual funds will have taken profits in 2010 by selling stocks that have significantly appreciated since they bought them in 2009.  These sales have produced “realized capital gains” for the mutual fund.   If the stock was held less than one year, the gain will be a short term capital gain, treated as ordinary income to the mutual fund owner.  If your mutual fund has a high turnover rate, most of the realized gains will likely be short term capital gains.

If you own actively managed mutual funds in a taxable account, near the end of 2010 the mutual fund will make a distribution that will include all of these taxable gains.  You will be required to pay taxes on these gains, even if the fund has decreased in value since you bought it.  You may also be subject to a significant amount of short term capital gains, even if you have owned the mutual fund for over a year.

Due to the large recent gains in the stock market, many actively managed mutual funds will pay large distributions to the fund owners by the end of 2010. One way to avoid paying taxes on this distribution is to sell the mutual fund before the fund’s distribution date.

Many mutual funds already have large realized capital gains for 2010.  It is wise to avoid buying these funds in a taxable account between now and year end.  If you buy these funds between now and year end, you will pay taxes for 2010 on investments that may have been sold before you even bought the mutual fund.

There are two types of mutual funds that are safer to buy between now and the end of 2010.   The first type of fund is an indexed mutual fund, which is tied to stock market indexes, such as the S&P 500.  These mutual funds typically don’t “turn over” their stocks except when changes are made to the index that they track or when they have a significant number of people selling the mutual fund .  The other type of “safe” actively managed mutual fund is a tax-advantaged mutual fund.  The managers of tax-advantaged mutual funds carefully watch their buys and their sells to minimize the funds realized capital gains.  This approach helps to minimize the annual taxable distributions from these funds.

If you are unsure of whether your actively managed mutual fund is tax-advantaged, you may call the mutual fund company before their published distribution date to determine the approximate amount of their capital gain distribution, as well as the percentages of the distribution that will be short-term and long-term capital gains.

Actively managed equity mutual funds can be a good investment if the manager has the capability of consistently beating his target index.  However, not only must you consider operating fees, 12-b1 fess and other fees associated with mutual funds, for funds held in taxable accounts, it is important to discover the tax consequences of short and long term capital gain distributions associated with the mutual funds that you own or are considering purchasing.

If a significant amount of your family’s net worth is the value of the company that you own or stocks and stock options in a public company for whom you work, it is important to include these values in the equity portion of your investment portfolios asset allocation.  Often, business owners and corporate executives do not remember that the value of their ownership in the company for whom they work is also an equity investment.

As we have often stated, portfolio asset allocation, in which you determine the percentage of total assets to be allocated between stocks, bonds, alternatives, and cash is a critical activity required to maximize your investment returns.  To properly allocate one’s assets, the value of your ownership in the company for whom you work must also be included with the equity portion of your portfolio allocation.

As an example, let’s assume that you are a fairly aggressive investor with a desired portfolio allocation of eighty percent equities and twenty percent fixed-income and cash investments.  Let’s further assume that your current net worth is one million dollars with $500,000 being in the value in your business and $500,000 in an investment portfolio.  In this example, you should have no more than $300,000 of your investable portfolio in equity investments, since you already have $500,000 of your portfolio invested in the equity (stock) value of your small business.

If you are a more “conservative” investor, and wish to have a sixty percent equities and forty percent in fixed-income and cash positions, only $100,000 of your $500,000 investable portfolio should be put into stocks.  While this is only 20% of your investment portfolio, when combined with your company ownership, your total equity investment is 60%.

It is also important to consider size and the market space of the company for whom you work.  A well diversified portfolio has equities in Small Cap, Mid Cap, and Large Cap companies.  If you own a small company, the equity purchases in your investment portfolio should be in Large Caps and Mid Cap firms.  However, if you work for a large corporation and have a significant amount of your net worth in that company’s stock and/or stock options, your investible portfolio should have a larger percentage of equity holdings in Small Cap and Mid Cap firms.

If your company ownership is in the high-tech industry, focus your investment portfolio on stocks of companies that are in other industries.  This approach helps maintain a well-diversified portfolio, one that is not overly dominated by any industry.   Having exposure to multiple industries helps to minimize the risk that all of your stocks will decline together, since companies in the same industry often have declining stock prices at the same time.

If you work for a publicly traded company, it is important to remember that both the stock that you own and your paycheck are dependent upon the continuing success of your firm.   With so much at stake with one company, it is usually best to have no more than 10% of your liquid net worth invested in the stock of the company for whom you work.

Risk diversification is an important aspect of safely accumulating the resources required for an abundant retirement.  Often, small business owner’s and senior executives forget that the value of their ownership in the company for whom they work is an equity investment that should be included in their investment portfolio.  By honoring this important fact, your total portfolio will be better diversified.

For many years it has been well understood that a well diversified portfolio is critical to an investor’s long term success.  By including your ownership in the company for whom you work in your equity allocation, you will lower your long-term investment risk and help assure your pathway to an abundant retirement .

Let’s look at some ways to avoid the more common investment pitfalls.

1.  Always differentiate between investing and trading – Based on Benjamin Graham’s definition, buying a stock or fund to hold for a long period is typically considered an investment.  Other equity transactions are considered trading, with different rules and approaches because of their more speculative nature.  Before buying a stock or fund, always determine whether the transaction is an investment or a trade.

2.  Only use Stop/Loss orders when trading – Stop/Loss orders should only be used when trading.  If you use a Stop/Loss order with an investment, your investment could be sold at the worst possible time.  On May 6, when the DOW fell almost 1000 points before recovering, outstanding Stop/Loss orders were likely executed.  An investment portfolio, with Stop/Loss orders to sell at 15% below the opening price, would have lost 15% on May 6 instead of the 3% loss that the market suffered.

3.  Avoid redundant mutual funds – I recently reviewed a $500K investment portfolio that is being “professionally managed” by a well known discount brokerage and mutual fund company.  This portfolio contained 50 different mutual funds, with 13 US large Cap funds and nine Foreign Large Cap Funds.  A diversified fund portfolio requires no more than one fund for each Morning Star “style box” category.

4.  Avoid all sales fees with mutual funds - While most investors know to avoid front or rear end “load” mutual funds, many funds have a “hidden load” called a 12-b1 fee.  This annual fee of .25% or more can greatly reduce long term investment returns.

5.  When allocating assets, include ALL investible assets – Investors typically have several different accounts including retirement accounts, taxable investment accounts, real estate and savings accounts.  Once a proper asset allocation is determined, all assets should be included in the asset allocation.

6.  Always consider investment tax consequences – When taxable, tax deferred and tax free (Roth) accounts exist, put tax efficient investments in taxable accounts and tax inefficient investments in tax deferred and tax free accounts.  Closely follow the tax law changes that will occur, starting in 2011.  Some investments, such as stocks with high dividend yields, could change from being tax efficient to tax inefficient in 2011.

7.  Avoid making purchases based on a stock’s P/E – While the market’s overall Price/Earnings ratio can be a useful indicator of whether the market is under or overvalued, the P/E of an individual stock can be very misleading.  A low P/E for a company that is not growing may not portend a good investment, while a higher P/E on a rapidly growing company may show good value.  Price earnings growth comparisons or owner’s earnings vs price comparisons are much better indicators of a stock’s value.

8.  Avoid “Target Date” funds -  A recent “panacea” from the mutual fund industry is “target date” funds.  The concept is for the investor to pick the year in which they will begin withdrawing funds for retirement or other purposes.  The fund management will then take care of the rest.  However, different mutual fund companies have different asset allocations for funds with the same “target date.” A better approach may be to assemble your own “fund,” consisting of low cost, indexed ETFs or mutual funds.  Annually, modify the asset allocation toward more conservative investments as the “target date” approaches.

Whether managing your own investments or using an outside investment advisor, be sure that your portfolio avoids these common pitfalls.

When using an investment advisor, always ask if they have a fiduciary responsibility for both the advice that they give and the products they offer.  A fiduciary advisor is legally required to always place their client’s interests ahead of their own interests.  Many brokers and agents are held to a lower “suitability” standard, where the products and advice offered may legally allow them to place their own interests before their client’s interest.

Benjamin Graham, the father of value based investing, made a simple distinction between investing and speculation.  In Chapter 1 of his famous book, The Intelligent Investor, he states: “An investment operation is one which, upon thorough analysis promises safety of principal and an adequate return.  Operations not meeting these requirements are speculative.”

According to Graham, if your “investment” is done in any fashion that does not provide for safety of principal combined with and an adequate return, you are speculating.  Based on this definition, many mutual fund managers (especially those with high turnover rates) are speculators.  If your mutual fund manager is a “speculator,” then so are you!

Perhaps the speculative investment approach pursued by many mutual fund managers is why index based mutual funds and indexed Exchange Traded Funds have recently become so popular.  Buying an index fund that tracks the S&P 500 Index entails investing in the stocks of the 500 largest US companies.  As long as the stock market is reasonably valued (or better yet undervalued), this investment approach provides a reasonable expectation of safety of principal combined with an adequate return over time.

The analysis that must be done with index investing is determining when the stock market is undervalued and when it is over-valued.  As can be seen from the dramatic increase in stock prices over the past 14 months, the best time to buy into a market is when conditions look the bleakest.

Based on the press coverage in March 2009, it would be easy to assume that the investment world was coming to an end, with the S&P 500 trading as low as 666. In hindsight, it is now obvious that March 2009 was the best time to buy into the market, as almost all stocks were trading well below their long term valuations.

Fourteen months later, the S&P 500 is now trading at over 1150, a 70% increase from the March 2009 low.  Excepting the current European turmoil (and of course that pesky 9.9% unemployment rate), the press is now touting how well our economy has recovered.  An index fund investor, who may be considering an increase to their stock allocation, must determine if the market is still undervalued or whether there will be a better time to increase equity positions in the future.

Investors in individual common stocks must evaluate both the market and individual stocks.   As with index investing, investment principal is put at risk if the stock market is overpriced.  If the stock market is not overvalued, the investor must then analyze individual stocks to determine if they are reasonably valued.

There are many ways to analyze a stock investment.  We prefer the Owners Earnings (OE) approach, as defined by Warren Buffet.  A company’s OE provides the intrinsic value of that company.  Our initial screen is to find financially strong, high quality companies with low leverage and increasing dividends.  From this screen, we look for stocks whose prices are more than 30% below their Owner’s Earnings valuation.  Once purchased, we hold these stocks until the stock price exceeds Owner’s Earnings or the company no longer meets our financial and quality screen.  With this approach, our stock holding period is typically measured in years.

There are many other ways to evaluate individual stocks.  As long as the analysis approach chosen will identify stocks that should retain their value (safety of principal) and provide an adequate return, the approach meets Graham’s definition of investing vs speculation..

Many of my clients, friends and relatives have tried short term trading and other speculative investment approaches.  While some people may succeed at speculating,  I have never met any “speculator” who has been consistently successful over a multiyear time period.  For me, speculation is like Las Vegas, while you sometimes win, in the long run the “house” ends up with the money.

Let’s look at some ways that you can assure yourself an abundant retirement.

1.  “Paying yourself first” helps assure adequate finances for your retirement.

“Paying yourself first” means putting your income into a retirement plan or a savings plan before using these funds for any other purpose.  If you save ten percent of your pre-tax income, throughout your working years, you will likely have more than adequate financial resources to live an abundant retirement.

2.  Use tax advantaged approaches whenever possible.

My book, Financial Abundance Guide, presents many tax favored approaches to saving for retirement, paying for a child’s college education, paying for healthcare and more.  As I demonstrate, if you are in the 25% federal tax bracket with a 5% state tax, a tax advantaged approach will provide approximately one third more to your total savings.

3.  Have a globally diversified investment portfolio.

Well diversified asset allocations and minimizing investment expenses are two of the most important investment approaches to building long-term wealth.  Since the easiest way to pay off our massive federal debt is through inflation, it is likely that our government will take the path of higher inflation and US dollar devaluation to minimize the pain of paying our federal debt.   Your investments should include some inflation protection as well as global exposure.  One easy way to ensure global exposure is to invest some of your assets in financially strong, global US companies.

4.  When investing, use logic not emotion.

Successful investing requires the investor to buy at lower prices and sell at higher prices.  With this being so obvious, why is it that the average investor’s long term returns on stock market investments are less than the total return the S&P 500.  Studies have shown that the inferior individual investor’s returns are a result of emotional vs. logical investing.  When the stock market is high priced and fully (if not more than fully) valued, many investors become overly euphoric and buy at these high prices.  When the stock market declines, investors are often filled with fear and sell at lower prices.  When investing logically, an investor will buy when stocks are below their intrinsic value.  The logical time to sell is when a stock’s price exceeds a company’s intrinsic value.  A logical approach requires unemotional discipline.

5.  Refinance your home with a low cost, fixed rate mortgage.

Within the next few years, prolific government spending will likely lead to higher inflation and higher interest rates.  Fifteen or thirty-year fixed rate mortgages, that are still available with interest rates of approximately five percent, may seem like a great bargain in the not too distant future.  Unless you plan on staying in your house less than five years, refinance any ARM mortgages with a low cost fifteen-year or thirty-year fixed rate mortgage.  A fixed-rate mortgage provides the same monthly payments throughout the life of your mortgage, regardless of the direction of future interest rates and inflation.

After working for forty or more years, the “American Dream” should include an abundant retirement.  In the private economic sector, pension plans are typically no longer available.  Social Security’s long term viability also remains an unanswered political question.   An abundant retirement in the 21st Century requires you to take control of your personal finances.  Following these steps can help you along the pathway to a financially abundant retirement.

I cannot fathom the number 16 with eleven zeros behind it.  To put the deficit in a more understandable perspective, let’s determine the average US tax payer’s portion of a $1.6 trillion yearly deficit.

According the Bureau of Labor Statistics, in March 2010 there were 138 million workers in the US labor force,.  The average weekly salary for these 138 million US employees was $764.00 per week or $39,728 per year.

At the IRS website, you can discover that the total amount of personal federal income taxes, projected to be paid in 2010, is $1.05 trillion.   By dividing $1.05 trillion by 138 million, we determine that the “average” income tax paid per worker is $7,619,.  Since the “average” pay is $39,728, federal income taxes of $7,619 represents 19% of average income.

Most workers pay at least half of their Social Security and Medicare (FICA) taxes, which, at a rate of 7.65 % of income, is $3,039 of total average income.  If we assume that the average state tax is approximately 5%, an additional $1,986 of the average income is paid in state taxes.  Thus, the current tax burden for the “average” person earning $39,728 is $12,644 or approximately 32% of their income.

If our worker is one of the 20% of US workers who are now self employed, the FICA taxes are increased to 15.3%, for a total tax burden of $15,683 or 39.5% of income.

Now that we have determined the “average” tax burden in 2010, let’s calculate the average US workers share of the 2010 $1.6 trillion budget deficit.  When we divide $1.6 trillion by 138 million US workers, we find that the “average” portion of the 2010 deficit is $11,594 per US worker.  This number represents 29% of the income for all US workers.

Combining the $1.6 trillion deficit burden with the 2010 tax burden, the total burden of US taxes and the 2010 budget deficit is equal to 61% of the total income from all 138 million workers.

Of course, we will not pay the $1.6 trillion deficit out of our current income.  However, this debt is added to our current US debt and must eventually be paid by us or our children.

Another way to look at the $1.6 trillion dollar budget deficit is that you are making “unfunded” federal government purchases, equal to 29% of your before tax income, and putting these purchases onto our nation’s credit card.  As with a real credit card, these “purchases” must someday be paid by you, your children or your grand-children.

A politically popular approach to reducing the deficit is to raise taxes on “the rich,” commonly defined as individuals earning over $200K annually.   Under our current tax code, the top 5% of US wage earners (which starts at annual income levels of approximately $170K) will pay 60% of all personal income taxes.  If tax rates increased by 50% on the top 5%, the maximum amount of additional taxes collected would be approximately $300 billion, reducing the deficit to $1.3 trillion from $1.6 trillion.  Obviously, this approach alone will not solve the budget deficit problems

There are two simple facts about government spending. The first is that 100% of the money that our government spends comes from taxes and revenues collected plus borrowed money.  The second fact is that there are only three ways to reduce our federal deficits 1) reduce federal government spending 2) increase taxes 3) implement a combination of reduced spending and increased taxes.

As the numbers demonstrate, a deficit exceeding $1 trillion annually is not sustainable.  We must decide whether our politicians should increase taxes, decrease spending or do both.  Budget deficits must be dramatically and quickly reduced before our total national debt as a country becomes unsustainable for us and our children.

Financial planning is not mysterious and does not require that you pay a “financial planner” to do it for you.  The following eight steps will provide an outline of how to begin planning your financial future:

1. Become a saver, not a consumer. Why do our media call Americans consumers?  While food, clothing, medicines, etc., are required, much of our consumption is discretionary.  Your financial plan must determine your current savings amount.  Between now and retirement, individuals should save at least 10 percent of their net income.  This saving can be accomplished through company 401K plans or a combination of tax deferred retirement plans and individual savings.  The key is to start saving now, to help ensure that you will have the financial resources required when you retire.

2. Establish a Budget. It is important that you have a budget to understand your current expenses.  I recommend a two-step budgeting process.  First, budget for items that are absolutely required for your day to day living.  The second part of this budget would be expenses that you would like to include, but are not critical to your enjoyment of an abundant life.  If the budget is not at least 10 percent less than your after-tax income, cut items from the “nice to have” list until reaching the 10 percent savings goal.

3. Pay off all non-mortgage debt. The first use of the savings generated above is to remove any non-mortgage debt.  This means to paying off credit card debt, student loan debt, or any other debts that you may have.  Other than your fixed rate mortgage, all other debt should be eliminated through the use of your savings.

4. Build an emergency fund. With unemployment at ten percent, it should be obvious why everyone needs an emergency fund.  An emergency fund provides for at least six months of required expenses.  This fund can be used  for unemployment, disabilities or unexpected medical expenses.   Keep the emergency fund in very safe investments such as money markets, short term bond funds, and CDs.

5. Save for college expenses and retirement through tax favored vehicles. With an emergency fund in place, it is time to begin saving for longer term financial goals, such as helping fund college expenses and/or saving for retirement.  Coverdell Education Savings Accounts and 529 College Savings Plans are tax-deferred ways of saving for college education.  Retirement savings can be placed in IRAs or 401(k) plans that also provide initial tax savings and longer term tax deferred investment accruals.  Use tax deferred vehicles to the maximum extent possible when saving for your retirement.

6. Invest appropriately for the goal you are trying to achieve. If your investment objective is short term (three to five years), use very safe investments, including certificates of deposit, money market funds and short term bond funds.  If your investment goal is medium term (five to ten years) riskier investments such as government backed bonds, municipal bonds, highly rated corporate bonds and some equities can be added to the investment pool.  If your investment is long term, (over 10 years) riskier investments, including emerging market stock funds, REITs, commodity funds, and other riskier investments can be added to your portfolio.  Only a small portion of your portfolio should be dedicated to the riskier investments.

7.  Stay on target. It is very easy for fear (or greed) to enter into our financial decisions.  Bubbles will continue to occur in our economy and markets will continue to rise and fall.  However, by maintaining your strategic investment approach, you can avoid making irrational, fear based decisions when conditions get uncertain.  While it may be beneficial to make well-reasoned tactical investment plan modifications, it is unwise to make emotional, reactionary decisions regarding your investment strategy.  A written plan on your investment approach will help avoid this pitfall.

8. Update your plan at least annually. Revisit all aspects of the financial plan, at least annually, to determine if circumstances have changed.  If a change has occurred, it is time for a plan update.  With an active, up to date plan, you minimize the fear of financial uncertainties and maximize your ability to live from a sense of financial abundance.

As a very wise person once said, “a rich person is not the one who has the most, but the one who needs the least”.  By honestly planning for your financial requirements, you can determine your requirements for an abundant financial life.

If you are already collecting Social Security benefits or years away from collecting your benefits, knowledge of the Social Security “do-over” could provide for significant future financial benefits.  Let’s look at how this “do-over” works.

For a single taxpayer, the “do-over” option is fairly easy to understand.  For this article, we will assume a Full Retirement Age (FRA) of 66.  We also assume that other financial resources are available, so that Social Security benefits are not required before age 70.  We also assume that there is no inflation adjustment to the benefits

Between age 62 and your FRA you should begin collecting Social Security benefits in the first year in which you do not meet or exceed the “earnings test”.  In 2010, annual earned income in of more than $14,160 exceeds the “earnings test”, which reduces benefits by one dollar for every two dollars earned above this amount.  If the “earnings test” is always exceeded, begin taking your Social Security benefits at your FRA, when the “earnings test” is no longer applied.

Depending upon when Social Security benefits begin, you will receive between 75 percent and 100 percent of your “full” Social Security benefits until you reached age 70.  It is recommended that all of the Social Security benefits received be saved and put into very safe investments such as CDs.   At age 70, if you are in good health and expecting to live at least 10 or more years, you would revisit the Social Security offices to execute your “mulligan.”

The “mulligan” allows you to revisit the social security administration and repay all of the Social Security income that you have received.  Only the amount of income received must be repaid.   The interest or investment gain from these benefits is yours to keep.

When Social Security benefits are re-filed at age 70, the monthly benefit increases to 132% of the FRA amount for the rest of your life.  If you are in poor health at age 70, you would not pay back any Social Security benefits and would continue to collect the current amount for the rest of your life.

To maximize the “mulligan” approach, keep track of your taxes every year in which you take social security benefits before age 70.  Run an alternate tax return scenario showing what taxes would have been without receiving any Social Security benefits.  When you turn 70 and repay the benefits, file a tax Form 1341.  This provides a tax credit for the amount of additional taxes paid in the years before turning age 70.

If you are married, the “mulligan” option exists for each spouse.  If one spouse has significantly higher Social Security benefits than the other spouse, it is especially important for the higher earning spouse to consider this option.  Not only will the higher earning spouse receive 132% of FRA benefits for the rest of their lives, if this spouse predeceases the lower earning spouse, the survivor can claim the increased benefit for the rest of their lives.  This approach assures that 132% of the FRA amount of the higher earning spouse will be available for both spouses lifetimes.

As there are so many benefit options available for  couples, consult your local Social Security office or a financial planner, who is well versed on the complexities of Social Security, to determine the best approach for you and your spouse.

There are few “mulligans” in our financial lives with no downside.  If you are age 62 or older and your earnings do not exceed the “earnings test,” consider beginning Social Security benefits now.  If you are at your Full Retirement Age and have not begun taking Social Security, why not?  Based on your health and expected longevity at age 70, you can determine whether to maintain your current payments or to repay the payments made and switch to significantly higher payments for the rest of your (and possibly your spouse’s) life.