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MANAGING YOUR MONEY : PREPARE YOURSELF : Forming a Savings Strategy : With college costs skyrocketing, inflation rearing its ugly head and a recession of uncertain temperament brewing, prudent financial planning for the future is more important than ever. The best plans vary according to age, marital status and personal goals. Here are some suggestions from the experts about how best to plan if you are under the age of 40; between the ages of 40 and 55; and for those who are now 55 and older. : The Middle Years


John Echeveste's goal is to have $20,000 to give to each of his two children when they graduate from high school. But because of a wide array of other expenses, Echeveste says this is a dream that may never be realized, even though his children are still just toddlers.

Echeveste, a 40-year-old public relations specialist, is not unique. Individuals in his age group have often been called the "triple-squeezed" generation: people in their 40s and 50s who must grapple with sending a child to college, saving for retirement and, possibly, supporting an aging parent--all at the same time.

Although many are two-income families earning enough to be called "affluent," some say their incomes just don't seem to stretch as far as their expenses.

Because of all their financial worries, this is also the group that must be most concerned about having a coherent financial plan, experts say. Middle-age Americans often have homes and other assets that need to be protected. Many have children who need to be supported. And they are approaching retirement at a time when it's become plainly obvious that Social Security is just not enough.

These individuals should look at financial planning as a two-step process, said Mitchell Kauffman, a Pasadena-based certified financial planner. The first step is an "adversity plan," which protects assets and provides for the wage earners and their survivors in the event of death or disability.

The second step is a savings and investment plan that should be adequate to provide for life's major expenses, such as college, weddings and retirement--and give the investor the opportunity to accumulate some wealth.

What is an "adversity plan?" For most people, this amounts to having a will or living trust, and adequate insurance coverage.

For example, if you are married and have young children, many financial planners recommend that you have enough life insurance to pay off the mortgage and provide for living and college expenses. Insurance should be re-evaluated frequently, though. Coverage should be decreased significantly once the children are out of school but increased when the size of the mortgage grows or when there are additional dependents and higher continuing monthly expenses.

Disability insurance may be even more important, because it is far more probable that a 40-year-old will be disabled than die. The working spouse is not the only one who should be insured. If the stay-at-home parent is unable to care for small children, for example, the family would probably need to pay for child care. The cost can be provided for with insurance.

People with considerable assets also need adequate car and homeowners insurance, Kauffman said. The reason: If they are sued because of a car accident or an incident on their property, they could lose everything in the event of a steep damage award.

Savings is the second part of a well-balanced financial plan for middle-aged taxpayers, with retirement a primary goal.

One of the best savings vehicles for retirement is an employer-sponsored 401(k) plan, which has a wide array of advantages, including tax benefits. Many companies also provide matching contributions to these plans, which makes the investment return too good to pass up.

But even without matching contributions, the return on a 401(k) plan can be gratifying because contributions are made before taxes and the interest earned is allowed to accrue tax-free until the money is withdrawn at retirement.

What does that mean in dollars and cents? Consider an example of two workers, who each earn $40,000 annually. One contributes $100 a month to a taxable investment; the other contributes $100 a month to a 401(k) plan. In this example, the employer does not contribute to the 401(k) plan.

Assuming a 10% rate of interest, after 10 years the worker with the 401(k) has saved $20,484, while the other worker, who has had to pay tax on contributions and on investment earnings each year, only has $10,494. Of course, when the worker with the 401(k) plan begins to withdraw his money at retirement, he will have to pay taxes. But in the interim, he's earned interest on money that would otherwise have been paid to the IRS.

Many couples with children are also interested in saving for a child's education. One good way to do this is to transfer a part of your income each year to your child. That allows any earnings of that income to be taxed at your child's lower rate. The only caveat: Once the child begins generating more than $1,000 annually in dividend and interest income, the excess will be taxed at the parent's marginal rate. At this point, advisers recommend that the child's investments be shifted to tax-free instruments, such as municipal bonds.


* Evaluate your insurance needs. You may need more life and disability insurance to provide for your family in the event of death or injury.

* Transfer a part of your income each year to your child. That allows any earnings of that income to be taxed at your child's lower rate.

* Contribute to a 401 (k) plan, if your company offers one.

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