Kiplingers Personal Finance Jul 2013

JULY 2013
PERSONAL
FINANCE
OUR MIDYEAR INVESTING FORECAST
Advice From
Warren Bufett p 41
Travel Secrets
From the Pros p 62
Cut Next Years
Tax Bill Today p 44
Morgan Stanley
strategist
Adam Parker likes
dividend-paying
stocks. p 28
PLUS
Savvy strategies
to maximize your
returns and minimize
your risks. p 26
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07/2013 KIPLINGERS PERSONAL FINANCE
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CONTENTS
VOL. 67
NO. 7
AHEAD
11
Topic A: Uncle Sam could put a lid on
your retirement savings . . . Good buys
on overseas stocks . . . Tweet your way
to a new job . . . Knight Kiplinger on
money and ethics. PLUS: July money
calendar.
18 OPENING SHOT Keep the faith
and cash in, by james k. glassman.
22 GAME PLAN Financial aid for
adult students, by sandra block.
23 YOUR MIND AND YOUR
MONEY Foiled by the winners curse,
by anne kates smith.
INVESTING
26
26 WHERE TO PUT YOUR MONEY
NOW The stock market blew past
analysts expectationsand oursin
the first quarter. We tell you how much
longer this bull will continue to run.
PLUS: Six savvy market moves.
41 GREETINGS FROM OMAHA
Our intrepid reporter attends the
love-fest that is Berkshire Hathaways
annual meeting and files a report,
including investing pearls of wisdom
from Warren Buffett himself.
36 CASH IN HAND Juice up your
dividends, by jeffrey r. kosnett.
38 PROMISED LAND News flash:
Airlines soar, by andrew feinberg.
40 PRACTICAL INVESTING
Coping with a moody market,
by kathy kristof.
34 MORE ABOUT INVESTING
Five great growth stocks (34). News
of the Kiplinger 25 (37). Mutual fund
rankings (43).
MONEY
44
44 CUT YOUR TAXES NOW This
years tax law is a game changer. To
avoid a bigger bill for 2013 come next
April, you need to make tax planning
KIPLINGERS PERSONAL FINANCE // FOUNDED 1947
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a priority. We have 11 strategies to
soften the blow.
50 RETIREMENT SETBACKS
The road to retirement isnt always a
straight shot. Heres how to get back
on track if youve been derailed.
54 BEST OF THE REWARDS
CARDS We pick the most attractive
deals in cash-back, travel, gas
and retail, and airline rewards cards.
58 RETIREMENT COUNTDOWN
New options for health insurance,
by kimberly lankford.
59 ASK KIM Kimberly Lankford lists
the pros and cons of home generators.
49 MORE ABOUT YOUR MONEY
Penalty-free early IRA withdrawals
(49). Yields and rates (61).
LIVING
62
62 TRAVEL SECRETS Dont put
your vacation plans on hold. Our advice
will help you land bargains on airfare,
cruises, hotels and package deals.
68 TECH Getting from here to there
with GPS, by jeff bertolucci.
70 DRIVE TIME Why hybrids make
sense, by jessica anderson.
71 THE LOWDOWN What you
need to know about investing in gold,
by nellie s. huang.
72 3 SIMPLE STEPS Secure your
smart phone.
IN EVERY ISSUE
6 FROM THE EDITOR Our skewed
tax system.
9 LETTERS
ON THE COVER: Photograph by Alberto
Oviedo. Groomer: Francisca Saavedra
CONTENTS
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6
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UPFRONT
Our Skewed Tax System
A
young newlywed couple I know
were in shock when they filed
their tax returns earlier this
year and found that they owed
several thousand dollars. Paying taxes
was one thing, but what really hurt
was having to dip into the hard-won
savings they had been diligently put-
ting aside. They also learned some
painful lessons about how our tax sys-
tem works. Once they married, having
a second income, even a modest one,
pushed them into a higher tax bracket.
Because they dont yet own a house or
have a family, they had few deductions
to cushion the blow. They qualify for
a deduction for the interest on their
graduate-school loans. But instead
of deducting $2,500 each as single tax-
payers, the total deduction was re-
duced to less than $2,500 for a couple
with their combined income.
Their situation is a perfect example
of the skewed incentives in our cur-
rent system. You can be penalized
for getting married, especially if you
go to grad school to advance your
career. You also have a disincentive
to earn a second income. But you
are rewarded if you can rack up de-
ductions for things such as mortgage
interesteven if youre not ready to
buy a home.
When I heard this story, I couldnt
help thinking that, all other things be-
ing equal, a lot of these distortions
could be erased with some form of flat
tax that would be simpler and more
straightforward. Earnings would be
taxed at a steady rate, so there would
be no perceived penalty for working
harder. And, assuming the rate was
reasonable, thered be no incentive
to make lifestyle decisions solely for
the purpose of cutting your tax bill.
Of course, all other things arent
equal. Tax reform is a scorching-hot
issue, and politicians cant even act on
what many observers agree would be
one solution to the current convoluted
system: a broader tax base with fewer
deductions and fewer, and lower, rates.
Some people are trying. In a revised
version of their deficit-reduction plan,
for example, former Sen. Alan Simpson
and Clinton White House chief of staff
Erskine Bowles include a more stream-
lined system with a top tax rate of 28%,
paid for by repealing many itemized
deductions and limiting others. Sen.
Max Baucus (D-Mont.) has announced
that hell forgo his reelection bid to
focus on tax reform. But dont hold
your breath. Kiplinger doesnt foresee
any action until at least 2014.
Timely advice. In the meantime, you,
like our newlyweds, have to deal with
the current tax system. In her story on
page 44, senior associate editor Sandra
Block notes, Most of us treat our tax
returns like inflatable Santas: Once
the season is over, we shove them into
the back of a closet until next year.
But nows the time to focus on lower-
ing your 2013 tax bill. Not only is there
a new, 39.6% marginal rate for taxpay-
ers with taxable income of more than
$400,000 ($450,000 for married cou-
ples), but people with lower incomes
will be hit, too. Taxpayers with ad-
justed gross income of $250,000 or
more ($300,000 for married couples)
will effectively pay higher marginal
rates because of phaseouts for deduc-
tions and personal exemptions. And
its possible that deductions and other
tax breaks could be squeezed even fur-
ther (see Ahead, on page 11). Sandy
tells you how to ease the pain, includ-
ing, among other things, how to make
your investments tax-efficient.
Meanwhile, my newlywed friends
have taken steps to keep from being
socked with a tax bill next year by
electing to increase their withholding.
Now the money will come out of their
paychecks instead of their savings
account. Its small comfort, but tax
time should come as less of a shock.
Janet Bodnar
FROM THE EDITOR
janet bodnar, editor
follow janets updates at www.twitter
.com/janetbodnar.
One solution: a
broader tax base with
fewer deductions and
lower rates.
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A Warning to
Our Readers!
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EDITORIAL
EDITOR IN CHIEF Knight A. Kiplinger
EDITOR Janet Bodnar
EXECUTIVE EDITOR Manuel Schiffres SENIOR EDITOR, MONEY/LIVING Mark K. Solheim
MANAGING EDITOR Barbara Hoch Marcus
SENIOR EDITORS Jane Bennett Clark, Jeffrey R. Kosnett, Anne Kates Smith
SENIOR ASSOCIATE EDITORS Sandra Block, Nellie S. Huang, Marc A. Wojno (research)
ASSOCIATE EDITORS Jessica L. Anderson, Patricia Mertz Esswein, Lisa Gerstner
STAFF WRITER Susannah Snider
CONTRIBUTING EDITORS Andrew Feinberg, James K. Glassman,
Steven T. Goldberg, Kathy Kristof, Kimberly Lankford, Elizabeth Ody, Jeremy J. Siegel
OFFICE MANAGER Glen Mayers
COPY AND RESEARCH
COPY CHIEF Frederic Fane Wolfer
COPY EDITORS Rachel McVearry, Denise E. Mitchell, Elizabeth Whitehouse
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ART
ART DIRECTOR Stacie A. Harrison
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PERSONAL
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LETTERS
Your advice on buying long-
term-care coverage for Dad
notes that the average cost
of a private room in a nurs-
ing home is more than
$90,000 a year (Ask Kim,
May). Thats $7,500 per
month, which is roughly
what my mother-in-law is
charged for assisted living
in a facility in New Jersey.
So far, so good. But then you
describe one policy with a
$3,500 monthly benefit
and another with a $4,000
monthly payout. That would
leave your reader at least
$42,000 short on an annual
basis. If you can afford the
premiums, I think buying
coverage for $7,500 per
month with an inflation
cause there is no place else
to earn any kind of return
(How to Learn to Love
[Stocks] Again, April). In
my parents day, investing
in stocks was safer because
there were no hedge funds
manipulating the market
and fewer liars on Wall
Street. Investing in stocks
today is a crapshoot.
K.B.M.
Marthas Vineyard, Mass.
Changing of the guard. I agree
with Knight Kiplinger that
older workers have no ethi-
cal obligation to step aside
(Ahead, May). But seniors
who have the financial
means should give the next
generation opportunities for
promotion. We baby-boom-
ers have done our fair share
of creating the mess were
in, and weve been more
concerned about maintain-
ing Social Sec urity and
Medicare for ourselves than
reforming those programs
for sustainability. Lets not
also deprive the next gener-
ation of the opportunity to
make things better.
Catherine Schmitt
Bloomfield Hills, Mich.
Revocable trusts. People con-
sidering a revocable trust as
part of their estate planning
should know that when there
are five or fewer beneficia-
ries, your maximum Federal
Deposit Insurance Corp.
coverage is $250,000 multi-
plied by the number of ben-
eficiaries (Check Your
Bank Account Coverage,
May). A trust naming three
beneficiaries, for example,
would receive an insurance
total of $750,000.
Ron Gish
Haifa, Israel
rider is still the way to go.
Matthew P. OMalley
Morristown, N.J.
Still spooked. The only reason
to invest in stocks is be-
Insurance Shortfall
c
t
(
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m
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KNIGHT KIPLINGERS
comments on when older
executives should retire
struck a nerve (Ahead, May):
Which is it? Do we work
until we drop dead, or do we
make way for the younger
generation? Companies have
spent the past 30 years gut-
ting pensions and telling us
that 401(k)s are better.
I was let go from my com-
pany and now work for half
pay because no one wants
to hire an older worker.
I think its naive to just get
rid of the skilled workers and
promote ones who have not
learned anything.
Nobody has an ethical obli-
gation to surrender his career
to someone else. That said,
if a company is better served
by replacing old workers with
younger ones, it should be
able to do so. Presently, it
often cannot due to age-
discrimination laws, which
prevent the legitimate eval-
uation of workers whose
performance is declining.
ONLINE
CHATTER
CORRECTION
The Buick Verano Premium
gets 30 miles per gallon on
the highway (2013 Buyers
Guide, March).

LETTERS TO
THE EDITOR
Letters to the editor may be
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to feedback@kiplinger.com.
Please include your name,
address and daytime tele-
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Which credit
card rewards
do you prefer?
READER
POLL
Q
To learn more about our favorite
rewards credit cards, turn to page 54.
Rewards
points
Airline
miles
13%
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Cash
back
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11
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MOST OF US SAVE FOR
retirement because we want
to enjoy our golden years
without putting a burden
on our kids. A lower tax bill
isnt our chief motivation,
but it sure doesnt hurt.
Now, diligent savers face
the possibility that theyll
lose tax breaks designed to
encourage virtuous behav-
ior. President Obamas 2014
budget proposes capping
tax-preferred retirement
plansincluding individual
retirement accounts and
401(k) plansat $3.4 million
per person. It isnt the first
time tax-preferred retire-
ment savings plans have
been targeted. President
Obamas deficit-reduction
commission suggested lim-
iting annual contributions
to tax-preferred accounts to
$20,000, or 20% of income,
whichever is lower.
Retirement savings
plans offer a potentially
rich source of tax revenue.
The Joint Committee on
Taxation estimates that
excluding contributions
and earnings from taxes
will cost $515 billion for the
five-year period ending in
2014. Only the exclusion for
employer-provided health
insurance costs more.
Supporters of limits on
tax-preferred retirement
plans argue that they would
primarily affect affluent
taxpayers. Two-thirds
of U.S. households have
saved less than $50,000
for retirement, reports the
Employee Benefit Research
Institute. Critics counter
that taxes on 401(k) plans
and traditional IRAs are
merely deferred, and that
the money will be taxed
when its withdrawn. They
also argue that proposals to
limit tax-preferred savings
would indirectly affect
middle-income savers, too.
President Obamas
$3.4 million cap is based
UNCLE SAM IS EYEING
YOUR NEST EGG
He wants to limit the amount you can
put in tax-favored retirement savings.
BY ANNE KATES SMITH
TOPIC A
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KIPLINGERS PERSONAL FINANCE 07/2013 013
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on the amount of money
a retiree would need to
buy an annuity that pro-
duces $205,000 a year.
But record-low interest
rates have increased the
cost of buying an annuity,
artificially inflating the
size of that lump sum;
even a modest increase in
interest rates could lower
the savings cap to $2.2 mil-
lion, according to EBRI.
Workers whose savings
are nowhere near the cap
could be affected if the
change causes small-busi-
ness owners to scrap retire-
ment savings plans for
their employees, says Jack
VanDerhei, research direc-
tor for EBRI. Small-busi-
ness owners may contrib-
ute up to $56,500 to a tax-
deferred account in 2013,
but federal rules require
them to make their plan
available to employees. If
contributions are capped,
business owners may decide
to terminate their 401(k)
plans in favor of tax-effi-
cient investments available
to high-income investors,
VanDerhei says.
These proposals are
a long way from becoming
law. In the meantime, dont
use them as an excuse to
stop saving. If anything,
says Michael Kitces, a certi-
fied financial planner in
Columbia, Md., you should
save more. He notes that
you would be prevented
from making contributions
once you hit the threshold,
but there would be no limit
on tax-preferred investment
growth. To get the most out
of your tax-deferred invest-
ments, he says, you want to
hit the cap as soon as you
can. SANDRA BLOCK
Sarah Ketterer, an investor
who often ventures where
others fear to tread, co-man-
ages Causeway International
Value, a mutual fund based
in California.
Why invest overseas these days?
About half of the worlds
publicly traded companies
are based outside the U.S.
So the opportunities to find
bargain-priced stocks ex-
pand by 100% when you
invest globally. Investors
have been right to invest in
stocks that pay dividends,
and in health care and con-
sumer-oriented stocks, but
they could overstay their
welcome. We think that
people can make money
in cheaper segments of
the market, including
economically sensi-
tive stocks such
as energy and
industrials.
Where are you
investing now?
Were finding
good value in
the oil and
gas, engineer-
ing, and con-
struction
industries.
We would
have an all-
energy port-
folio if we
could, but
clients depend on us for
diversification. We arent
keen to invest directly in
the economies of developed
Europe. Rather, we focus
on stocks trading at cheap
prices with global earnings.
TOTAL (SYMBOL TOT), an oil
and gas company, is based
in France. But its
fortunes
depend on
energy
prices
and the
success
of exploration efforts in
Africa and the Middle East.
We also like SIEMENS (SI),
a German conglomerate.
Should investors be nervous
about China? Growth is slow-
ing, but China is still grow-
ing at a faster rate than the
developed world. The Chi-
nese government has the
wherewithal to stimulate
the economy, but it is shift-
ing its focus to consumer
spending instead of infra-
structure. During that tran-
sition, investors may want
to stay away, or be cautious.
What about emerging markets?
We trimmed our holdings
in emerging markets in
2012. But with prices so
low, were thinking about
building up our exposure
again. We like Turkey,
Poland, India, Thailand
and South Korea has gone
on sale completely. We see
fewer opportunities in
Brazil and China.
The Japanese stock
market has had a
torrid run this year.
Is it hard to find good
buys? Most of what
we own in Japan
has not partici-
pated in the big
run-up. Take, for
example, JGC (JGCCY),
a fantastically well-
managed company
that builds energy-
related facilities.
This is the sort of
stock that hasnt
yet fully participated
in the global bull
market and is well
positioned for the
next wave of buying.
NELLIE S. HUANG
INTERVIEW
LOOK OVERSEAS
FOR CHEAP STOCKS
The best bargains are in energy
companies with a global reach.
13
13 3
Q: My husband and I disagree about whether we
should continue donating to charities that are
doing things we dont approve of. For example,
our college alma maters invite ideologues to
give commencement speeches, spend too much
on sports and have added lightweight courses to
the curriculum. The local theater companys idea
of entertainment now includes X-rated plays. I
think we should send a strong message by with-
drawing our support. My husband says we
should consider the value of the organizations
broad mission. What do you think?
Nonprofits have a hard time pleasing everyone in their various
constituent groups, and even the most thoughtfully managed
are going to irritate someone from time to timemaybe often.
As a longtime friend and donor, you have a perfect rightindeed,
obligationto express your views in a variety of ways, including
through letters to trustees, volunteer activism and, as a last
resort, a suspension of financial support. Maybe others in an orga-
nizations leadership feel as you do and will help effect change.
But please dont make a knee-jerk response to every issue.
Determine whether the charity is remaining true to its core mis-
sion and principles in its overall activities, and whether you still
view the breadth of its programs to be socially useful. If so, I
would suggest that you express your disapproval of particular
incidents as they arise but not withdraw your support unless you
feel that the charity has, in your opinion, lost its way and isnt
likely to find its way back.
Even then, rather than going away mad forever, tell the institu-
tion that you are suspending your support for a period of time
(and for what reason) while you reassess the situation. And then
do just that: Keep abreast of its activities to see whether you
might feel differently later. In the meantime, look around
for other nonprofits whose activities are better aligned with
your personal values.
MONEY & ETHICS
KNIGHT KIPLINGER
Should I
cut off
support for
my charity?
HAVE A MONEY-AND-ETHICS QUESTION YOUD LIKE ANSWERED IN THIS COLUMN?
WRITE TO EDITOR IN CHIEF KNIGHT KIPLINGER AT ETHICS@KIPLINGER.COM.
Keep an eye on electricity prices as tough environmental regs force
power generators to cut back on coal use in favor of natural gas.
A number of coal plants are slated to close in 2015, making utilities
more reliant on gas. Dramatic hikes arent in the cards, but modestly
higher rates are a good bet. Expect an average of 11 cents per kilo-
watt-hour by 2016, following a long period of stability with prices
stuck at 9.8 cents or 9.9 cents. (kiplingerbiz.com/ahead/ratehikes)
ELECTRIC RATES CREEP UP

From The Kiplinger Letter
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IF YOU ARE TRAVELING
overseas, you may want
to take along a card with
a smart chipa built-in
microprocessor that pro-
vides an extra layer of secu-
rity. Chip cards are more
widely accepted in Europe
than those with only a mag-
netic strip. Several U.S.
issuers are adapting their
cards to the dual technol-
ogy. The cards below come
with both a chip and a strip.
Existing cardholders may
request a free upgrade.
BANKAMERICARD TRAVEL
REWARDS VISA (www.bankof
america.com; 0% interest
rate for the first 12 months,
then 14.99% to 22.99%)
has no annual fee and no
foreign-transaction fee;
cardholders can get 24-hour
MAKE THE SWITCH
TO A CHIP CARD
Upgrade to more travel-friendly plastic
before you take your European vacation.
CREDIT
travel assistance. CITI THANK-
YOU PREFERRED (www.citi
.com; 0% interest rate for
the first 12 months, then
12.99% to 22.99%) also has
no annual fee but charges
a 3% foreign-transaction
fee; cardholders get $3,000
in lost-luggage coverage.
CITI GOLD/AADVANTAGE VISA
SIGNATURE ($50 annual fee;
15.24% interest rate; 3%
foreign-transaction fee)
lets you earn miles from
American Airlines. CHASE
HYATT VISA SIGNATURE (www
.chase.com; $75 annual
fee; 15.24% interest rate;
no foreign-transaction fee)
gets you two free nights at
any Hyatt hotel or resort
after you spend $1,000
within the first three
months. ANJELICA TAN
14
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A NEW TWIST ON TWITTER:
Use it to pitch yourself to
a potential employer. Even
recruiters in traditionally
conservative fields, such
as health care and financial
services, see Twitter as
a way to reach candidates
without spending a lot on
advertising.
The advantage for job
seekers is the chance to
interact directly with re-
cruitersand even company
executivesinstead of firing
messages to generic e-mail
accounts. John Burke, 22,
leveraged that access when
looking for a job last sum-
mer. As an avid follower of
JetBlue, Burke would tweet
feedback about his flights
or comment on airline news.
He posted a question about
working for the company,
which was passed on to the
CEO. He used that opening
I GOT MY JOB
ON TWITTER
Job hunters are using the social media
site to attract company recruiters.
CAREERS

App-titude
PRICE YOUR
HOME MAKEOVER
Use Zillow Digs, a new free
app for the iPad, to get in-
spiration for a remodeling
project. Find 400,000 project
photos plus cost
estimates for la-
bor, components
and materials
for nearly 8,500
kitchens and
bathroomsso far.
You can sort the images by
room, style and cost (bud-
get, midrange and luxury).
Or search by keywords, such
as quartz. Save your favor-
ites to a board, or e-mail
them to your spouse or con-
tractor with a note that says
I want this! PATRICIA
MERTZ ESSWEIN
JETBLUE
NOTICED
JOHN
BURKES
TWEETS.
to explain why he loved the
airline. The exchange led
to an informational meeting
with the vice-president of
talent, who hired him for
an internship. The intern-
ship transitioned into a job
in human resources earlier
this year. I didnt just pop
up on Twitter and ask the
CEO for a job, says Burke.
I think it was clear I had
a passion for the company.
Asking for a job right off
the bat wont fly, and dont
bother opening a separate
account to create a profes-
sional persona. To build
rapport, make intelligent
comments, share relevant
content and show enthusi-
asm for the company. Aim
for a genuine relationship
before respectfully solicit-
ing advice or requesting
a face-to-face meeting.
MIRIAM CROSS
actions are processed and
confirmed between PCs. You
use conventional currency,
such as dollars or euros, to
buy them at an exchange
(such as BitInstant.com or
MtGox.com), and you store
them on your computer. You
spend your bitcoins at mer-
chants that will accept
themand dozens do. Some
sites, such as Bitcoinstore
.com and Bitcoinin.com,
even aggregate goods you
can buy with the currency.
One site, Bitspend.net, will
help you spend your bit-
coins anywherefor a fee
even if the merchant doesnt
accept them.
How much is a bitcoin
worth? Good question.
Speculators are driving the
value. A bitcoin was worth
just over $20 in January.
The value surged to $230 in
April, then plunged to $68 a
week later.
Still, virtual currencies
are not going away any-
time soon, says Aleia Van
Dyke, an analyst at Jave-
lin Strategy & Research.
The government is start-
ing to take notice. The U.S.
Treasury Departments
Financial Crimes Enforce-
ment Network recently
issued guidelines that bring
those that issue or ex-
change virtual currencies,
including bitcoins, under its
regulations. NELLIE S. HUANG
CALL IT CURRENCY FOR THE
digital age. With a bitcoin,
theres no paper or hard
metal to change hands. So
why is this virtual coinage
receiving so much atten-
tion? Because in early May,
11 million bitcoins worth
$1.3 billion were in circula-
tion (the maximum that can
be created is 21 million bit-
coins). Every hour, an aver-
age of 2,000 transactions
take place and roughly
33,000 bitcoins trade hands.
Bitcoins are created, or
mined, using complex
computer codes, and trans-
BETTING ON A
VIRTUAL CURRENCY
More merchants are accepting bitcoins,
and speculators are having a field day.
WHATS THE DEAL?
LOOKING FOR DIVERSIFICATION?
GOLD REFINERS ARE STANDING BY.
Investors may know that gold can diversify
a portfolio. What they probably dont know
is that few investments are designed to track
the price of this precious metal.
When you invest in SPDR
Gold Shares, you

get a precise way to add gold to your portfolio
because its not an index or derivative. With
GLD, all of your shares are backed 100% by
physical gold.
Fortunately, as an investor you wont have
to brave 1,947
o
F heat for your gold. Simply
scan the QR code with your smartphone or
visit spdrs.com/GLD for details.
Important Information Relating to SPDR Gold Trust:
The SPDR Gold Trust (GLD) has filed a registration statement
(including a prospectus) with the Securities and Exchange Commission
(SEC") for the oering to which this couuunication relates. efore
you invest, you should read the prospectus in that registration stateuent and other docuuents 0L has led with the SEC for uore couplete
inforuation about 0L and this oering. You uay get these docuuents for free by visiting E0AF on the SEC website at www.sec.gov or
by visiting www.spdrgoldshares.cou. Alternatively, the Trust or any authorited participant will arrange to send you the prospectus if you
request it by calling 1-8-320-1053.
ETF's trade like stocks, are subject to investuent risk, uctuate in uarket value and uay trade at prices above or below the ETF's net asset value. rokerage coumissions and
0L expenses will reduce returns.
iversication does not assure a prot and uay not protect against investuent loss.
+PXGUVKPIKPEQOOQFKVKGUGPVCKNUUKIPKECPVTKUMCPFKUPQVCRRTQRTKCVGHQTCNNKPXGUVQTU
SFF" is a registered tradeuark of Standard & Foor's Financial Services LLC (S&F") and has been licensed for use by State Street Corporation. No nancial product
oered by State Street Corporation or its a liates is sponsored, endorsed, sold or prouoted by S&F or its a liates, and S&F and its a liates uake no representation, warranty or
condition regarding the advisability of buying, selling or holding units/shares in such products. Further liuitations that could aect investors' rights uay be found in 0L's prospectus.
For uore inforuation. State Street 0lobal Markets, LLC, 0ne Lincoln Street, oston, MA, 02111 8.320.1053 www.spdrgoldshares.cou.
0QV(&+%+PUWTGFs0Q$CPM)WCTCPVGGs/C[.QUG8CNWG
l0-539
MAKE SURE THE MOST
STRESSFUL PART OF YOUR
VACATION IS PACKING.
SAVE UP WITH A HARDWORKING
ALLY CD OR SAVINGS ACCOUNT.
Your money needs an Ally.
SM
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THURSDAY, JULY 4
Independence Day. Last year,
Americans spent $2.4 billion on
groceries for patriotic cookouts, or
an average of $59.14 per person.
SATURDAY, JULY 6
What DIY projects are on your list?
Home Depot offers free workshops
for adults and kids; Lowes has
classes for kids. For
schedules and
registration,
go to http://
workshops
.homedepot.com or
www.lowesbuildandgrow.com.
THURSDAY, JULY 11
More than 700,000 vehicles are
stolen annually and only about half
are recovered. Theft rates spike in
July and August. Check your policy
for theft coverage, and find out
how to protect your car at www
.nhtsa.gov/theft.
MONDAY, JULY 15
College-bound students:
licy
t
w
Check online for information on
housing and meal plans and
to see if course out-
lines have been
posted. Start
shopping for text-
books using a site such as
www.campusbooks.com.
FRIDAY, JULY 19
Concert season is in full swing. Many
cities offer free outdoor perform-
ances. Search StubHub.com and
RazorGator.com for discount tickets
to mega events. KAITLIN PITSKER
If youre ready to update
a room with a new sofa,
table or other furniture,
look for sales of 10% to
50% off as stores clear
showroom space for new
models arriving in August.
*
DEAL OF THE MONTH
CALENDAR
07/2013
2009-2013 Ally Financial Inc.
Consistently among the
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in the country
No monthly maintenance fees
Live, helpful customer
service day or night
allybank.com | 1-877-247-ALLY
Make sure your
money has an
Ally every day
of the year.
18
JAMES K. GLASSMAN > Opening Shot
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Keep the Faith and Cash In
N
early a half-century ago, Eugene
Fama, a University of Chicago econ-
omist, laid out the hypothesis that
markets are efficientthat is, at any
given moment, the price of a stock reflects
all the information the public knows. The
current price of, say, APPLE (SYMBOL AAPL) is
the consensus view of thousands or even
millions of investors who have weighed
everything they could possibly glean that
would affect the company: its past and cur-
rent earnings, balance sheet, product pros-
pects, global monetary policy, the chance
of war with Iran, and on and on. The effi-
cient-market hypothesis, or EMH, asserts
that todays price is the right price and
that tomorrows price will reflect informa-
tion that is unknown today.
The EMH is generally considered a
strong justification for buying index funds.
By owning a large number of stocks, such
as those found in VANGUARD 500 INDEX (VFINX),
you reduce volatility through diversifica-
tion, pay rock-bottom fees (0.17% of assets
annually) and get returns that mimic the
market. Over the long run, those returns
wont be much lower or higher than what
youd get by picking stocks on your own
or through a mutual fund managed by
an actual human being. (Stocks and funds
in boldface are those I recommend.)
But while you probably cant gain an edge
on the market through superior information
or analysis, you can benefit from the EMH
in a different way. A stocks current price is
based on all available information. So why
not take a guess that the unknowable future
will turn out to be a good one? Yes, a guess,
but a guess that is based on a strategy.
For example, concede that you dont know
what Apples next great product will be, but
take a guess that something big will come
along. Or, in the case of a company that is
struggling, as International Business Ma-
chines (IBM) was in the early 1990s, take
a guess that someone great will turn the com-
pany around. Because neither you nor any
other investor knows what that something
or someone will be, the information is not
currently reflected in the stock price. The
way you get an edge is through your belief
that things will get better than other inves-
tors think.
This is what I call faith-based investing.
It is not a religious concept, but neither
is it the agnostic act of throwing darts
at a newspaper stock table (if you can find
one these days). To profit from the ap-
proach, you need to find companies that
have four attributes: a great brand, a solid
balance sheet, a long-term history of growth
and an undervalued stock.
Betting on laggards. The object is to find
companies that are currently faltering but
that have a high likelihood of doing better.
Their brands are so valuable that their
owners wont let them languish or die,
and their record of profitability proves
that they have a competitive advantage
and can be resuscitated.
Buying IBM in the 1990s may be the
best example of successful faith-based
investing. From 1987 to 1993, the stock
price fell from $44 to $11 (adjusted for
subsequent splits). No one knew that Lou
Gerstner, who was not a tech maven, would
rescue the company. And hardly anyone
could have guessed that he would do it by
selling off the personal computer business
and concentrating on services. Six years
later, IBM was trading above $130.
Or, more recently, consider NETFLIX (NFLX),
the firm that utterly disrupted the movie-
rental business. Netflix shares fell from
$305 to $62 in just four months when the
company launched a new pricing scheme
that caused many consumers to grumble.
But I kept the faith. I wasnt sure how
Net flix would thrive, but I knew it would.
Netflix is built for the long run, I wrote
here a year ago. The stock now trades at
$213 (prices are as of May 3).
Apple is a potential faith-based winner.
A great brand? No doubt. Solid balance
sheet? Yes, with $143 billion in cash and
Faith-based
investing
is about
finding
companies
that are
currently
faltering
but that
have a high
likelihood of
doing better.
V A N E C K S E C U R I T I E S C O R P O R A T I O N , D I S T R I B U T O R 3 3 5 M A D I S O N A V E N U E N E W Y O R K , N Y 1 0 0 1 7
Market Vectors
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Choices along the yield curve and credit spectrum.
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SMB Short Municipal Index ETF
HYD High-Yield Municipal Index ETF
PRB Pre-Refunded Municipal Index ETF
XMPT CEF Municipal Income ETF
marketvectorsetfs.com
888.MKT.VCTR
* The Funds distributions may be subject to state and local income taxes. Some portions of the distributions from HYD and XMPT may be subject to
the Alternative Minimum Tax (AMT).
There are risks involved with investing in ETFs, including possible loss of money. Shares are not actively managed and are subject to risks similar to those of
stocks, including those regarding short selling and margin maintenance requirements. Ordinary brokerage commissions apply. Debt securities carry interest rate
and credit risk. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa. Credit risk is the risk of loss on an investment
due to the deterioration of an issuers nancial health. High-yield and municipal securities have additional risks. The Funds underlying securities may be subject
to call risk, which may result in the Funds having to reinvest the proceeds at lower interest rates, resulting in a decline in the Funds income.
Fund shares are not individually redeemable and will be issued and redeemed at their NAV only through certain authorized broker-dealers in large, specied
blocks of shares called creation units and otherwise can be bought and sold only through exchange trading. Creation units are issued and redeemed principally
in kind. Shares may trade at a premium or discount to their NAV in the secondary market.
Investing involves substantial risk and high volatility, including possible loss of principal. Bonds and bond funds will decrease in value as interest
rates rise. An investor should consider the investment objective, risks, charges and expenses of the Fund carefully before investing. To obtain a
prospectus and summary prospectus, which contain this and other information, call 888.MKT.VCTR or visit marketvectorsetfs.com. Please read the
prospectus and summary prospectus carefully before investing.
Learn more about Market Vectors Muni ETFs.
Market Vectors offers a suite of municipal income ETFs
with competitive yields free from federal taxes.*
FEELING TAXED BY TAXES?
20
Look for
companies
that have a
great brand,
a solid
balance
sheet and an
undervalued
stock.
securities and no debt. History of growth?
Yes, earnings increased every year from
2003 to 2012, and revenues over that time
have gone from $6 billion to an expected
$181 billion for the fiscal year that ends this
September. Cheap? The shares, at $450,
are down 36% from their 2012 high and
trade at 11 times estimated earnings for
the current fiscal year. After results for the
JanuaryMarch quarter were announced
on April 23, analysts at numerous Wall
Street firms cut their price targets on Apples
stock. Clearly, analysts have little faith in
Apple today, despite CEO Tim Cooks an-
nouncement that the company will spend
an additional $100 billion for dividends
and stock buybacks through the end of 2015.
Apples profits have soared 50-fold in
a decade on the strength of the iPod, the
iPhone and the iPad. Whats next? Theres
talk of an iWatch, but frankly I havent the
foggiest idea what Cook is cooking up. If
I did, thousands of others would know, too,
and Apples price would reflect that knowl-
edge. What I do know is that Apple is going
through a tough time, competition is rising,
faith in its future is falling. It meets the
tests for a good faith-based investment.
Another example is MERCK (MRK). The
drug maker has been languishing for three
years now. Its earnings have barely budged,
and the stock is lower than it was in 2001.
In 2012, Singulair, an asthma medicine that
had $3 billion in annual sales, became the
companys latest blockbuster drug to lose
patent protection. Still, Merck is one of
the strongest consumer brands in the
world, trades at 13 times estimated earn-
ings, gets the Value Line Investment Sur-
veys top rating for financial strength (A++)
and yields a lovely 3.8%. So if you have
faith, you can collect a hefty dividend while
waiting for a saviorthat is, a product, per-
son or change in strategy.
Fund for the faithful. No mutual fund employs
a true faith-based strategy. (What manager
would admit to guessing?) But one, ING
CORPORATE LEADERS TRUST (LEXCX), comes close,
though inadvertently. It was launched in
1935 with the idea of selecting 30 firms that
would survive and grow for decades. The
portfolio changes only with bankruptcies,
mergers and spinoffs. Just 22 stocks
remain, and nearly all of them meet the
faith-based tests of great brand, strong bal-
ance sheet and solid earnings growth.
Some, at times, are unloved as well.
The results have been superb. Over the
past ten years, Corporate Leaders gained
11.2% annualized, beating Standard &
Poors 500-stock index by an average of 3.4
percentage points per year and placing the
fund in the top 1% of funds that invest in
big companies with a blend of growth and
value attributes.
Among the funds holdings with all four
faith-based attributes are CHEVRON (CVX), the
energy behemoth, with a price-earnings
ratio of just 10 and a yield of 3.2%; GENERAL
ELECTRIC (GE), with a P/E of 14, a yield of 3.4%
and a price thats down by half since 2007;
and chemical giant DUPONT (DD), which is
benefiting from low natural gas prices,
trades for 15 times earnings and yields 3.3%.
Faith-based investing should not be con-
fused with bottom-fishing. For instance,
shares of Gannett (GCI), once one of the
great media companies, have fallen 77%
since 2003, but it is not a faith-based stock.
The brand is good (though not on the level
of IBM or DuPont) and so is the price (9 times
estimated earnings). But growth is lacking
(earnings have risen in only two of the past
eight years), and the balance sheet is medi-
ocre. Faith can supplant some analy sis, but
you need to use judgment, too.
JAMES K. GLASSMAN IS FOUNDING EXECUTIVE DIRECTOR OF THE GEORGE
W. BUSH INSTITUTE, WHOSE RECENT BOOK ON ECONOMIC POLICY IS TITLED
THE 4% SOLUTION. HE OWNS NONE OF THE STOCKS MENTIONED.
AHEAD // OPENING SHOT
PUT YOUR TRUST IN THESE SIX STOCKS
Faith-Based Picks
In Glassmans version of faith-based investing, you essentially bet that the unknow-
able future will turn out better than most people expect. Netflixs high estimated
growth rate reflects both optimistic expectations and low current profits.
Company Symbol
Recent
price
Market
value
(billions)
Price-
earnings
ratio*
Est. 3-yr.
earnings
growth rate Yield
Apple AAPL $450 $422.4 11 3.9% 2.7%
Chevron CVX 123 239.9 10 1.2 3.2
DuPont DD 54 49.6 15 5.4 3.3
General Electric GE 23 234.1 14 3.0 3.4
Merck MRK 46 138.0 13 1.4 3.8
Netflix NFLX 213 12.0 NM 164.6 0
As of May 3. *Based on estimated earnings for 2013. NM Not meaningful. SOURCES: Thomson Reuters, Yahoo.
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22
D
A
V
E

U
R
B
A
N
EVEN IF YOU HAVENT TOSSED
a Frisbee in years, you may
qualify for scholarships and
financial aid, including fed-
eral student loans. You can
also take advantage of fed-
eral tax breaks to help with
college expenses.
Financial aid. Most federal
and campus-based aid pro-
grams have no age restric-
tions and are open to both
full- and part-time students.
Federal Pell grants, for ex-
ample, are available on a
prorated basis to part-time
students, depending on the
number of credit hours they
take. To determine your eli-
gibility, fill out a Free Appli-
cation for Federal Student
Aid (www.fafsa.ed.gov). Most
college scholarships arent
age-limited, either, and some
are specifically targeted at
nontraditional students,
says Mark Kantrowitz, pub-
lisher of Edvisors Network
(www.edvisors.com). Fast-
webs database (www.fast
web.com) includes more
than 50 scholarships for
students age 30 and older.
Federal Stafford loans
are open to college students
of all ages, usually at more
favorable terms than private
loans. Because Mom and
Dad arent paying your bills,
you can borrow more than
a dependent studentup to
$20,500 this year if youre
a graduate or professional
student, and up to $12,500 if
youre an undergrad. Unlike
a 21-year-old, though, you
wont have decades to repay
the loans, so dont borrow
more than you can pay off
in ten years or before you
retire, Kantrowitz says. If
you borrow the maximum
for two years as a graduate
student, your monthly pay-
ments will be about $472,
based on a ten-year repay-
ment term.
Help from Uncle Sam. Adults
can take advantage of 529
college-savings plans for
themselves. Contributions
arent deductible from your
federal taxes, but two-thirds
of states offer state tax de-
ductions (usually you have
to contribute to your own
states plan to qualify, but
not always). Earnings on
your savings are tax-free as
long as the money is used for
qualified college expenses.
Dont overlook unused
money in a childs 529 plan.
If your son or daughter re-
ceived a full ride (or decided
to skip college and join a
rock band), you can name
yourself the beneficiary and
use the money for your edu-
cation, says Joseph Hurley,
chief executive of Saving
forCollege.com.
You can also take advan-
tage of other tax breaks to
lower your costs. The Life-
time Learning credit is
available to offset up to 20%
of your tuition and fees, for
a maximum of $2,000. Un-
like some other college tax
credits, this one may be used
for graduate school. You can
also claim it for courses to
improve your job skills, even
if youre not working toward
a degree, as long as the
courses are offered by an
eligible educational institu-
tion. To claim the maximum
credit, your modified ad-
justed gross income must be
less than $62,000 if youre
single or $124,000 if youre
married and file jointly.
(You cant claim the Life-
time Learning credit for the
same expenses paid for with
money from your 529 plan.)
If your company provides
tuition assistance, you can
exclude up to $5,250 of the
money from your taxable
income. And if your educa-
tion is work-related, you
may be able to deduct some
of your expenses. Your
education expenses, com-
bined with all other miscel-
laneous expenses, must
exceed 2% of your adjusted
gross income before you
can claim them. In addition,
your coursework must be
required by your employer
or improve your work skills.
Expenses paid with tax-
free grants, scholarships
or employer-provided edu-
cational assistance are not
tax-deductible. SANDRA BLOCK
Im going back to school. What kind of financial
help can I get?
GAME PLAN
?
23
AHEAD
L
I
S
E

M
E
T
Z
G
E
R
Foiled by the Winners Curse
W
hat do Major League Baseball
teams, todays red-hot real estate
market and the worlds biggest
stocks have in common? They
can all fall victim to the winners curse,
an economic anomaly that occurs when the
winning bid for an item exceeds its intrin-
sic value. According to the winners curse,
bidders who overestimate an items value
the most wind up winning the auction.
Subsequently, they either lose money on the
deal or dont make as much as they expect.
The concept dates back to the oil boom
of the 1970s. Engineers realized that, given
the difficulty of estimating the amount
of oil that might be recovered from a parcel,
the company with the highest estimates
wound up paying the most for drilling
rights. That often resulted in disappointing
profits. If everyone had complete informa-
tion and all bidders were rational, then no
one would suffer from the winners curse.
If you dont buy this theory, try an exper-
iment: Auction off your coin jar after
counting the money in it. The average bid
will be less than the value of the cash (be-
cause people are naturally risk-averse), but
the winning bid will invariably be higher.
Real-life lessons. Economist Richard Thaler,
of the University of Chicago, wrote about
the phenomenon in The Winners Curse:
Paradoxes and Anomalies of Economic Life.
It seems especially relevant today, as home
buyers in hot markets are enticed into bid-
ding wars. Even if you plan to stay put for
a long time, the winners curse could jeop-
ardize your financing (if you cant substan-
tiate the homes value with comparable
sales) or limit your options in the future.
In the stock market, the winners curse
most often comes up in the context of cor-
porate takeovers or initial public offerings.
But Rob Arnott, CEO of investment firm
Research Affiliates, thinks he sees the win-
ners curse at work in a big way in the mar-
kets biggest stocks. The largest stocks by
market capitalization (price times shares
outstanding)or top dogs, as Arnott
calls them in a study he coauthoredare
usually priced to reflect a view that they
will remain on top, but they often dont.
Top dog to underdog. Arnott has studied top
dogs going back 60 years. He found that
once a stock becomes the largest in its in-
dustry, it goes on to lag its peers over the
next one-, five- and ten-year periods, roughly
by an average of four percentage points
per year in each of the time frames. The
lone exception: ExxonMobil (and its pre-
decessor companies), which Arnott found
outscored its peers over rolling ten-year
periods by an average of 0.3 point per year.
Overall winners can turn into even bigger
losers. The biggest stock in the U.S. market
has trailed an index of 1,000 large stocks by
an average of 5.4 points a year over subse-
quent ten-year periods. (Weve had eight
top dogs in the past 61 years, including
AT&T and Microsoft; Apple became the
biggest U.S. stock ever in August 2012, and
has since tumbled more than 30%. This year,
it has jockeyed for the top spot with Exxon.)
The biggest foreign stocks suffer the
same fate. Arnotts takeaway: Avoid top
dogs. A portfolio of 488 stocks (the S&P
500 minus 12 industry top dogs) would
have beaten the S&P by one percentage
point a year over the course of the study.
Fans might find the winners curse play-
ing out with Major League Baseballs free
agentsthose veteran players who on occa-
sion are up for grabs to the highest-paying
team. Theres a tendency to think a player
has reached a new plateau of performance
because he was good last year, and that
produces the winners curse, says Stephen
Walters, an economics professor at Loyola
University (Maryland) who has studied the
curse in baseball and advises the Baltimore
Orioles. Something to ponder as we watch
the All-Star game this month, tour open
houses or trade glamour stocks.
ANNE KATES SMITH > Your Mind and Your Money
ANNE KATES SMITH IS A SENIOR EDITOR OF KIPLINGERS
PERSONAL FINANCE MAGAZINE.
The largest
stocks are
usually priced
to reflect the
view that
they will
remain on
top, but they
often dont.
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INVESTING
Where to
Put Your
Money Now
IF LAST YEARS BULL MARKET WAS A

stealth rally that many investors didnt
even know existed, this years advance has
been impossible to miss. But its a tale of
two markets, all bullish on the outside, full
of skepticism within. The market, measured
by Standard & Poors 500-stock index, has
returned 14% so far this year, smashing
records in the process. But as market in-
dexes scaled new heights, second-guessers
wondered whether it was time to get out
before many sidelined investors had even
gotten in. // We think the bull market has
life left in it. Thats especially true for long-
term investors who can weather the inevita-
ble pullbacks and pauses. The U.S. stock
With the economy
improving, stocks are
still the place to be.
BY ANNE KATES SMITH
ILLUSTRATIONS BY BROCK DAVIS
26
market, and in particular large-company
stocks, remains compelling. (For a view
of the outlook for foreign markets, see
Ahead, on page 11.) The market has rea-
sonably sound economic underpinnings.
Despite trading at all-time highsthe Dow
Jones industrial average recently blew past
15,000stocks do not seem overpriced.
And with interest rates low and virtually
guaranteed by the Federal Reserve to
remain so through year-end and into 2014,
stocks face little competition from bonds
or savings accounts. From here to the end
of the year, the market will go up enough
that stocks are the right place to be versus
alternatives, says Bob Doll, chief stock
27
28 28
INVESTING // COVER
absolute sense, but its hard to argue
that it has not improved.
A heated topic of discussion these
days is whether the market will col-
lapse when the Fed backs off its low-
rate, easy-money policy. The bulls
argue that such a bump-up in interest
rates would both confirm stronger eco-
nomic growth and accelerate a rota-
tion of investment assets from bonds
into stocks, since bond prices gener-
ally fall when rates rise. Besides, says
Paulsen, for stocks to prosper in the
long term, the Fed must make clear its
resolve to fight inflation by returning
expects gross domestic product growth
as low as 1.75% this year, clipped by
the forced government spending cuts
that took effect in the spring, and 2.9%
in 2014. But consumers have remained
remarkably resilient, the housing mar-
ket is picking up steam, and the most
recent report showed that the unem-
ployment rate fell to 7.5% in April, the
lowest level since December 2008.
Markets dont move on absolutes of
good and bad, says Richard Bern-
stein, CEO of Richard Bernstein Advi-
sors. They move on better or worse.
The economy might not be good in an
strategist at Nuveen Investments.
But the pace of gains will be notice-
ably slower. (Returns, prices and
yields in this article and the ones on
pages 30 through 32 are as of May 3.)
MORE GAINS COMING
The markets breathtaking advance
has surpassed many peoples expecta-
tionsincluding ours. In our January
outlook we predicted that the S&P
could return 9% this year, which it
accomplished by the end of the first
quarter. We now think stocks will
end the year with percentage returns
in the mid to high teens, which means
theyll manage to hang on to what
theyve logged so far, with some ups
and downs likely along the way, and
maybe tack on more.
Investors are proving themselves
willing to pay more for every dollar of
corporate profits, even if profit growth
itself is moderating. Now, its not
about earnings, but about the value
you place on those earnings, says Jim
Paulsen, chief market strategist at
Wells Capital Management. In a shaky
economic recovery, investors are re-
luctant to pay up for profits when its
unclear how fast, or if, they can grow.
Coming into 2013, says Paulsen, people
started to believe that economic
growth looked sustainable. Not fast,
but sustainable. Thats a big deal for
the valuation of stocks, he says.
Stocks are trading at just under 15
times estimated 2013 earnings, com-
pared with just 13 times a year ago.
Is the higher price-earnings ratio jus-
tified? Consider: At market peaks in
2000 and 2007 (levels close to where
the S&P 500 recently traded), stocks
sold at 25 and 15 times estimated earn-
ings, respectively. Corporate profits,
however, are higher today, and com-
panies are paying out more of those
profits as dividends; inflation and cor-
porate debt in relation to asset levels
are lower. Also, interest rates on com-
peting bond and savings investments
were higher at the previous peaks.
Signs of economic growth have been
encouraging, but spotty. Kiplinger
Our Advice to Clients:
Lean Toward Stocks and Cash
Adam Parker is the chief U.S. equity
strategist for Morgan Stanley.
You started out 2013 with a cautious
market view, but then became more
bullish. Why? To get the market right,
you have to get earnings growth
rightbut you have to get the price-
earnings ratio right as well. We
raised our view of the market mul-
tiple a couple of months back. We
think that earnings growth will
slowly improve and that the Federal
Reserves accommodative monetary
policy will continue, with the effect
of keeping bond yields low and
stocks more attractive. That will
elevate the P/E. Our forecast went
from a market P/E of 13 times esti-
mated earnings to 14.5 times. We
think stocks in Standard & Poors
500-stock index will earn $110 a
share in 2013, so our target went
from 1430 to 1600.
The market has exceeded your target.
What now? Our call has been that the
market will do finewe call it a hall
passas long as growth is better
later in the year and the Fed contin-
ues to be accommodative. But the
rubber hits the road in the second
half. Either we do get improvement
in economic growth and earnings,
or the improvement turns out to
be more muted than people think,
which could cause a market sell-off.
The risk is on the downside.
Whats your take on the economy? The
call from our economics team is for
a better economy in the second half
as the government resolves its fiscal
issues. The risk is that companies
dont hire people or spend to build
factories. Managers need to believe
in sustained demand for their prod-
ucts, but CEO confidence is not
very high.
Should investors pocket their gains and
go home? If the S&P rises well above
1600 and were not confident that
earnings will improve, well tell
people to sell. Were not making that
call now; were still constructive.
Is it too late for investors to get in?
Our advice to clients is to be over-
weighted in stocks and cash. In our
three- to five-year view, were more
sanguine about stocks and more
worried about bonds. The six-month
view is a tougher call. You could
Q&A WITH ADAM PARKER
A
L
B
E
R
T
O

O
V
I
E
D
O
to a more normal monetary policy.
Still, skepticism about the prospects
for the current bull market, now in its
fifth year, has been one of its hall-
marks, and naysayers abound. A recent
survey by AAII (the American Associ-
ation of Individual Investors) found
that 31% of investors were bullish on
stocksup from the last survey but be-
low the 39% historical norm. Some
36% were bearish, compared with
a long-term average of 30.5%. Wall
Street strategists are no more san-
guine, recently recommending on av-
erage that investors allocate 49.6% of
assets to stocks, according to a survey
by Bank of America Merrill Lynch.
Thats up from a low of 43.9% last July,
but far from the average long-term
suggested allocation of 60% to 65%.
Sentiment measures are contrary
indicatorsthe more bears there are,
the better the prospects for stocks and
vice versa. When Wall Streets recom-
mended stock allocation is below 50%,
stock returns have been positive over
the next 12 months 100% of the time,
says BofA, which began tracking the
indicator in the 1980s.
Investors whove shunned the stock
market, forgoing a 160% return since
the March 2009 bottom, rightly won-
der whether its too late to invest. The
economic recovery recently surpassed
the average length of expansions over
the past 80 years, says market watcher
Jim Stack, of InvesTech Research. And
bull markets have lasted an average of
less than four years. But, Stack says,
economiesand bull marketsrarely
die of old age alone. His conclusion:
Never second-guess a bull market.
To see where to put your money now,
and to spot warning signs that could
mean trouble for the bull, read on.
have a hiccup in stocks. Its
all about your holding period.
Where do you see opportunity? Within
the U.S. stock market, we see three
interesting themes. We like U.S.
companies that have exposure to
growth in China. Right now, senti-
ment about China is low. But the
growth rate there is much higher
than in the economies in developed
countries, even if its weak versus
expectations. Industrials and tech
get a decent percentage of earnings
from China. Two such companies
are UNITED TECHNOLOGIES (SYMBOL UTX)
and AGILENT TECHNOLOGIES (A).
Whats the second theme? Dividends
and dividend growth. We think
bond yields will stay low and there
will continue to be a huge demand
for income from stocks. The average
yield on stocks in the S&P is above
the yield on ten-year Treasuries.
More management teams are paying
themselves with stock, which al-
lows them to benefit from divi-
dends, instead of with stock options,
which emphasize capital apprecia-
tion. Corporate payout ratios (the
percentage of earnings paid out in
dividends) are low. The long-term
average is about half. Now its just
over one-third, so companies have
room to increase dividends. A
good example of this theme is PHILIP
MORRIS INTERNATIONAL (PM).
And the third theme? We like large,
high-quality companies. Large-
company stocks are cheaper than
stocks of small-to-medium-size
companies and have better balance
sheets. Earnings estimates for
small-company stocks are optimis-
tic. If the economy doesnt improve
as much as people think it will,
small caps will miss earnings
estimates more often than large
caps will. We also think that stock
pickers dont need to gamble on
risky stocks. Stick with higher-
quality names, such as CAPITAL ONE
FINANCIAL (COF), CARDINAL HEALTH (CAH)
and COSTCO WHOLESALE (COST), and
youll do fine.
What industries do you favor? Were
most bullish on health care. Spend-
ing on research and development
has been poor for a long time,
but its improving nowwere
starting to cure some diseases.
That will reward biotech and
pharmaceutical stocks, such as
PFIZER (PFE). We also like industrials,
such as HONEYWELL INTERNATIONAL
(HON), which are benefiting as
the economy moves into daylight.
Lastly, we like technology. Security-
software firms, such as SYMANTEC
(SYMC), are the least economically
sensitive because security is
something that chief technology
officers are most committed to
paying for.
30
INVESTING // COVER
STAY
DEFENSIVE
The best offense in the market this year
has been to play defense. Investors are
starting to believe in the bull. But just
in case, theyre appeasing their inner
skeptic by favoring defensive stocks
those with above-average dividend
yields, below-average volatility and rel-
1
GET IN
THE GAME
After a blistering 20% run since last
November, the market is due for
a pullbackand its the time of year
when we often get one. Still, those
whove been waiting for a big decline
to commit to stocks have so far been
disappointed. If dips lure investors
from the sidelines (or from the bond
market) into stocks, then corrections
could be short-lived and shallow.
So dont wait. The advice from Scott
Wren, a strategist at Wells Fargo Advi-
sors, is to put one-third of any money
you have earmarked for stocks in the
market now. Deploy the rest at regular
intervals, a technique known as dol-
lar-cost averaging. The strategy makes
it easier to stick to your plan when the
market experiences one of its periodic
hiccups. Youll also buy fewer shares
when theyre expensive and more
when prices are downwhich will
work to your advantage during the in-
creasing volatility that Wren predicts
over the remainder of the year.
If youve already reaped sizable pa-
per gains, dont be afraid to take them,
says Ron Florance, managing director
of investment strategy at Wells Fargo
Private Bank, which serves wealthy
clients. You should rebalance your
portfolio to bring it back into align-
ment with your desired mix of stocks,
bonds, cash and perhaps other catego-
ries. Selling winning asset classes to
invest in laggards is a discipline that
Florance admits feels strange but is
necessary to manage portfolio risk.
So many investors have a momentum
mind-set, and rebalancing may seem
counterintuitive, says Florance. Try
rebalancing by datethe first of the
year, say, or the first of the quarter
not by what goes on in the market.
atively little sensitivity to the vagaries
of the economy. So far this year, health
care stocks have risen 19%, on average;
companies that make consumer staples
(the goods that stock our pantries,
laundry rooms and bathroom shelves)
are up 18%; and utilities are up 17%.
Will the trend continue? Bull mar-
kets are often led by stocks that thrive
when the economy is ready to hum,
SIX SAVVY MARKET
2
STAY TAY
DEFENSIV DEFENS
The best offense in The best off
has been to play de has been
starting to believe startin
in case, theyre app in c
skeptic by favoring skeptic by favoring
those with above-a those with above-a
yields, below-avera yields, below-avera
irector
Fargo Fargo
althy lthy
our r
ign-
stocks,
catego-
ses to
e that
ut is
risk.
mentumm
seem m
e. Try . Try
f the f the
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31
3
such as those in the technology, man-
ufacturing and raw-materials sec-
tors. Its not too early to keep an eye
on these groups, but for now, a con-
servative stance still makes sense.
After all, the stock market has
exceeded the expectations of many
pros this year. And anyone whos
been in the market the past three
summers knows that the span from
May through October is fraught with
danger. The challenging six-month
period brought declines in Standard
& Poors 500-stock index of 16% in
2010, 19% in 2011 and 10% last year.
Defensive stocks can provide cover
during market pullbacks. Since 1990,
health care and staples stocks have
beaten the S&P 500 through the
dicey MayOctober period. Nervous
investors can bolster their defense
with exchange-traded funds de-
signed to dampen market swings,
such as POWERSHARES S&P 500 LOW VOLA-
TILITY (SYMBOL SPLV). Such investments
let you still go to the amusement
park, but ride the merry-go-round in-
stead of the roller coaster, says S&P
Capital IQ strategist Sam Stovall.
STICK WITH
DIVIDENDS
Whats not to like about the darlings
of the stock market? Historically, div-
idends account for some 40% of stock
returns, and theyre 70% less volatile
than corporate earnings. From 1972
through the end of 2012, companies
that initiated and increased their
dividends returned 9.5% annualized,
compared with 1.6% for stocks that
paid nothing, says a report from J.P.
Morgan Asset Management.
Dividend investors earn moreand
keep more, too. The dividend yield on
the S&P 500 index, at 2.1%, eclipses
4
the 1.8% rate on ten-year Treasuries.
And dividends, which Uncle Sam taxes
at a top 23.8% rate, have an advantage
over interest income, which is taxed
at a top federal rate of 39.6%.
Corporate America is on the band-
wagon. The number of companies ini-
tiating dividends reached an 18-year
high in 2012, says J.P. Morgan. And yet
dividends have room to grow. Despite
cash-rich balance sheets, the share
of corporate income paid out in divi-
dends is well below historical norms.
Still, dividend investors need to be
choosyand careful. Investors are
starting to do wacky things to stretch
for yield, says Richard Bernstein,
of Richard Bernstein Advisors. They
have this notion that investing for div-
idends is riskless. The stocks could
stumble when interest rates finally
rise. Many dividend favorites, particu-
larly among utilities (see Cash in
Hand, on page 36) and consumer-
goods companies, are becoming ex-
pensive. Better to hunt for companies
that are boosting payouts, rather than
the ones with the highest yields. Youll
find plenty in VANGUARD DIVIDEND GROWTH
(VDIGX), a member of the Kiplinger 25.
SIZE UP THESE
SECTORS
Health care stocks offer investors
a triple advantage, says Mary Ann
Bartels, a strategist at Bank of Amer-
ica Merrill Lynch. Many offer attrac-
tive yields; theyre defensive holdings
in an uncertain market; and the case
for long-term growth is the best it has
been in years. Drug companies have
weathered a slew of patent expira-
tions, and their pipelines are filling
with potential blockbusters. Morning-
star analyst Damien Conover recom-
mends SANOFI (SNY, $56), a Paris-based
global giant that he says is well posi-
tioned in the diabetes market.
James Swanson, chief strategist at
MFS Investment Management, thinks
technology stocks are a bargain. Its
striking that good companies in this
sector are trading at lower price-earn-
ings ratios than utilities in Ohio selling
the same electricity they sold 60 years
MOVES
4 Warning Signs for Stocks
When a bull market is this long in the tooth, investors should be on the lookout for signs
of waning strength. Watch for these four red flags.
1. THE MARKETS ADVANCE/DECLINE LINE. As investors become more selective at
the top of a bull market, the difference between the number of stocks advancing in the
market each day and the number of those declining will shrink.
2. MARKET SENTIMENT. At market tops, bulls far outnumber bears. At the markets peak
in 2000, 66% of investors surveyed by AAII were bullish, and only 20% were bearish. In
2007, 55% of respondents were bulls; 26% were bears.
3. LEADING INDICATORS. Before the economy slips into recession, the Conference
Boards Leading Economic Index, a gauge that tracks unemployment-insurance applica-
tions, manufacturing hours worked and new building permits, among other things, will
turn downward. The lead time for every recession since 1970 has been nine months or
moreand the stock market will typically begin to fall before a recession arrives.
4. INVERTED YIELD CURVE. Federal Reserve tightening doesnt kill markets, too much
Fed tightening does. When the yield curve invertsthat is, when short-term Treasury debt
yields more than long-term government bondsits a sign that the Fed has gone too far,
too fast, choking economic growth and risking recession.
Red Flags
SOURCES: InvesTech Research, Richard Bernstein Advisors.
32
INVESTING // COVER
6
5
ago, he says. At the peak of the tech
bubble in 2000, the sector supplied 15%
of the S&P 500s earnings but accounted
for more than one-third of the indexs
value. Today, it supplies 19% of the
earnings but accounts for less than one-
fifth of the value. Another change: Tech
stocks are less volatile than the market.
Prospects are bright. Businesses
are ramping up spending on hardware,
software and networking systems after
years of deferral, and companies are
moving massive amounts of data to
the cloud. Stocks addressing those
themes include CISCO SYSTEMS (CSCO, $21)
and MICROSOFT (MSFT, $33).
PICK STOCKS
WITH A STORY
Investors have been frustrated in
recent years as stocks have moved
in lock step, regardless of the story
behind each individual company. Bad
news from Europe, bickering lawmak-
ers here or a disappointing economic
indicator could pull the market down
high-cost debt. Lower interest ex-
pense could add $1 a share to earnings
over the next 18 months, says Malik.
Signals are green for railroads.
Housing-related cargo, at 6% of rail
volume, is half the historical average
and should grow with the housing
recovery. Meanwhile, shipping prices
should rise as railroads close the gap
between what they charge and truck-
ers higher costs. Malik favors UNION
PACIFIC (UNP, $149). It should benefit from
more crude-oil shipping.
TAME INTEREST-
RATE RISK
For now, the Federal Reserve Board
is signaling a continuation of rock-bot-
tom rates for the rest of the year and
into 2014. But when yields rise, as they
eventually will, income investors will
take a hit because bond prices move in
the opposite direction of interest rates.
Managers at METROPOLITAN WEST UN-
CONSTRAINED BOND (MWCRX), a member of
the Kiplinger 25, have built a portfolio
to protect against rising rates. The
fund yields 2.5% and carries an ultra-
low average duration of 1.4 years. That
means the fund would lose roughly
1.4% if rates rose one percentage point.
Investors seeking higher yields can
still find them in riskier issues. Until
you have to worry about the health
of corporate America, low-quality debt
looks good, says strategist Alec
Young, of S&P Capital IQ. Now is not
the time to worry, Young says, with
the default rate on high-yield bonds
just 2.5%, well below the 4% average.
SPDR BARCLAYS SHORT TERM HIGH YIELD BOND
ETF (SJNK, $31), which holds mostly
short-term, junk-rated debt, yields
4.0%. (For other suggestions on how
to pump up your income, see 45 Ideas
for Getting More Yield, June.)
Income investors who abandon
the low-yielding bond market for fear
of rising rates are risking another
port folio calamity. Bondsespecially
high-quality bonds, such as Treasur-
iesare the best way to balance the
risk of a bear market in stocks.
en masse. But thats changing. Its
more of a stock pickers market, says
Saira Malik, head of global stock
research at TIAA-CREF. You can
do your homework and put together
a portfolio of stocks that trade on
their own fundamentals, rather than
trying to figure out how macroeco-
nomic events will move markets.
Malik looks for companies that are
gaining market share, are able to raise
prices or are creating efficiencies that
will boost profit margins regardless
of where they trade. Take BAYER AG
(BAYRY, $107), the German pharmaceuti-
cal giant. Despite the challenges of the
European economy, Bayer, which does
business all over the globe, could enjoy
double-digit earnings growth, Malik
predicts. Plus, the company is return-
ing cash to shareholders via dividends.
Malik also recommends REALOGY
(RLGY, $50), which owns Century 21,
Coldwell Banker and other real estate
firms. The company is a play on the
U.S. housing recovery, but is also im-
proving its finances by paying down
t
f
l
m
1
s
y
o
l
Y
t
t
j
S
E
s
4
t
f
t
o
p
h
i
r
THE STOCK MARKETS LONG RECOVERY
As of May 3. *Average of strategists and analysts estimates. SOURCES: Thomson Reuters, Yahoo.
Share Prices Versus Earnings
Over the long term, stock prices track corporate profits. But in 2012 and so far in 2013, stocks
have advanced smartly despite modest earnings growth. One explanation: Investors are
becoming confident about the future and are willing to pay more for each dollar of earnings.
$100
80
60
1600
1400
1200
1000
800
S&P 500 operating
earnings per share
S&P 500 index
weekly closes
$60.80
$85.28
$97.82
$103.80
$109.95*
2008 2009 2010 2011 2012 2013 2007
$85.12
$65.47
We could show
you a photo of someone
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POINT IS: Your Regions Wealth Advisor wants to get to know the
real you first.
REGIONS PRIVATE WEALTH MANAGEMENT
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INSIGHTS
34
earnings forecast that wasnt quite
as rosy as some analysts had expected.
As a result, the stock is now in bargain
territory, selling for 14 times estimated
earnings for the fiscal year that ends
in September.
Search star GOOGLE (GOOG) is another
giant with sizzling revenues and prof-
its. The undisputed leader in Internet
advertising promotes innovation by
giving its employees the equivalent
of one day a week to work on their pet
projects, some of which the Mountain
View, Cal., firm turns into new prod-
ucts and services. As a result, Google
is now into everything from e-mail
and maps to cars that drive themselves
and eyeglasses that double as mobile
computers.
But Google has never become so
distracted by new ventures that it
ignores its core business of Web search
and advertising. Googles first-quarter
THE COMPANIES YOURE ABOUT TO READ
about appear to have little in common.
Some are huge, some small. They oper-
ate in fields as diverse as security and
content creation. But what connects
them all is that they are using technol-
ogy to spur blistering sales growth.
Why is that important? Because after
zealously trimming fat in recent years,
companies are limited in how much
they can boost earnings by slashing
costs. So one sure way to identify
firms with brisk profit growth is to
identify those that can generate rising
revenues in good times and bad.
To be sure, some of the five stocks
described below look pricey by tradi-
tional measures. That shouldnt be
surprising, says Russ Koesterich, Black-
Rocks chief investment strategist.
When you see companies growing
rapidly in a slow economy, you know
that they are in an attractive niche
Five Great
Growth Stocks
Even in a sluggish economy, theyre piling up sales.
BY KATHY KRISTOF
market or they are gaining market
share, he says. Either way, com-
panies with rapid top-line growth
are worth a premium price.
Consider QUALCOMM (SYMBOL QCOM),
which was founded in the mid 1980s
with a mission to make it easier to com-
municate in remote areas. Qualcomm
developed a satellite communications
system, initially to help truckers track
their fleets, and started patenting its
technology. That technology is now
a cornerstone of wireless communica-
tions. The San Diego company earns
royalties from wireless-phone makers
all over the world. Qualcomm is
platform-agnostic, says analyst James
Ragan, of Crowell, Weedon & Co.
You dont have to care who wins the
cell-phone wars; it makes chips for all
the operating systems.
Qualcomms shares stumbled in late
April, after the company issued an
INVESTING // STOCKS
35
S
T
E
P
H
E
N

S
W
I
N
T
E
K
must invest heavily to develop new
technologies to maintain its competi-
tive edge. But in the quarter that
ended January 31, the Sunnyvale, Cal.,
company earned 4 cents per share,
and analysts expect rapid earnings
gains in the future. The stock trades
at a lofty 27 times estimated 2013
earnings, but Ghai considers the price
reasonable given Arubas prospects.
Cybersecurity has long been a hot
topic in government circles, and it has
become a Main Street topic as major
corporations increasingly see malicious
hackers attack their Web sites. Thats
created opportunity for SOURCEFIRE
(FIRE), a 12-year-old cybersecurity firm
that got its start protecting the gov-
ernment from electronic intruders.
Sourcefire develops complex algo-
rithms that try to determine if a Web
visitor is malicious. Suspicious traffic
is then blocked or sidelined to areas
where it cant do damage. The Colum-
bia, Md., companys strong relation-
ship with the open-source commu-
nitya loosely linked cadre of tech
wizards who help each other find
program glitches and solutionsalso
gives it a jump on its more secretive
competitors, says William Blair & Co.
analyst Jonathan Ho. T he stock sells
for a sky-high 56 times projected 2013
earnings. However, with both reve-
nues and profits expected to grow
by more than 20% annually over the
next few years, the stock should still
outperform the market, says Ho.
introduce the service to the roughly
30 million households that are seen as
potential paid subscribers to the site,
which already boasts some two mil-
lion clients. Raymond James analyst
Aaron Kessler thinks the number of
memberships could easily triple over
the next few years, feeding a virtuous
cycle. Subscribers become reviewers of
the people they hire. As the site accu-
mulates more reviews, it becomes more
valuable to both subscribers and paid
adver tisers. Unlike Yelp, where adver-
tisers complain of too many tire-kick-
ers, Angies members are serious buy-
ers, Kessler adds. That has led to
dramatic growth in the number of
contractors willing to buy ads and
helped fuel stunning revenue growth,
from just $90 million in 2011 to an es-
timated $247 million this year. The
company is losing money, but analysts
expect Angie to earn 31 cents a share
next year and 89 cents in 2015.
Like Qualcomm, ARUBA NETWORKS
(ARUN) is all about keeping people con-
nected. However, Arubas goal is to
help companies keep their workers
connected with their colleagues on a
variety of devicessuch as computers,
phones and tabletseven when theyre
on the go or using a personal device.
Arubas products are designed to do
that without sacrificing connection
speed or the employers companywide
security. Thats a tall order, but analyst
Rajesh Ghai, at Craig-Hallum Capital
Group, thinks Aruba does it better
than even such big,
well-known rivals
as Cisco Systems
and Hewlett-Pack-
ard. Aruba contin-
ues to gain market
share in a rapidly
growing business.
That has fueled
double-digit reve-
nue growth, includ-
ing a 22% gain in
the first half of the
fiscal year that
ends in July 2013.
Profits have often
been elusive, partly
because Aruba
revenues soared 31% from the same
period in 2012, and profits jumped
16%the vast majority coming from
Web ads. The stock sells for 18 times
projected 2013 earnings, a reasonable
price-earnings ratio for a company
thats expected to produce earnings
growth of 15% annually over the next
few years. UBS analyst Eric Sheridan
thinks the stock will hit $945 in a year.
At the other end of the size and
profitability spectrum is ANGIES LIST
(ANGI), the vetted listing of service-
provider reviews launched by an Ohio
woman who was frustrated in her
search for a good contractor. Angie
Hicks ramped up national expansion
after offering shares to the public
in November 2011. Now based in
Indianapolis, Angies List has spent
a fortune on advertising to get a firm
foothold in major markets around the
country. The outlay is necessary to
n
RINGING UP REVENUES
Key Numbers
One thing that separates the giants on the list from the small fry is
price. Google and Qualcomm carry moderate price-earnings ratios,
but the P/Es of the other three stocks are sky-high (see story).
Company Symbol
Recent
price
Market
value
(billions)
Last
12 mos.
revenue
(millions)
Est. 3-yr.
revenue
growth rate
Qualcomm QCOM $64 $110.2 $20,458 13%
Google GOOG 846 280.6 50,175 16
Angie's List ANGI 23 1.4 156 39
Aruba Networks ARUN 22 2.5 571 17
Sourcefire FIRE 54 1.6 223 20
As of May 3. SOURCES: Thomson Reuters, Yahoo.
36
L
I
S
E

M
E
T
Z
G
E
R
INVESTING // STOCKS / MUTUAL FUNDS

If you want
a 4% yield
and a minimal
number of
shocks, you
will find that
electric
utilities shine
brightly.
T
he last time I wrote about regulated
electric utilities, in November 2011,
I assailed Wall Street for habitually
dissing the stocks. Granted, utilities
didnt excel in 2012, but their weakness
owed mainly to the fear that Congress
might enact a massive tax increase on
dividends. That didnt happen, though,
and the sector has been on a tear since late
November 2012. Longer-term results are
also impressive. Tee up multiyear price
charts of your favorite power companies.
If you exclude such troubled utilities as
Exelon and Public Service Enterprise
Group, and ignore the blips caused by Hur-
ricane Sandy for otherwise solid perform-
ers such as Consolidated Edison, youll
see terrific trajectories.
Traditional utilities are critical invest-
ments for income-seeking investors, and
Im deliberately saying this at the start
of the summer storm season. Somewhere,
a utility (or several of them) will suffer
hundreds of millions of dollars in wind
and water damage. A stock will sink 10%,
and a company will come under pressure
to cut or suspend dividends, no matter how
quickly it restores service. Regulators now
incorporate disaster preparedness and cus-
tomer service into their rate decisions. That
means they can require utilities to spend
additional revenues from higher rates on
everyone and everything except investors.
Perhaps thats as it should be. But because
regulatory matters are subjective, many
Wall Street analysts say its difficult to
determine whether a utility will earn its
allowable profit margin. So for many, their
attitude toward the stocks they follow tends
to be negative, and their reports tend to
include a disproportionate percentage (by
Wall Street standards) of sell, reduce
and underweight recommendations.
But if you want a 4% dividend yield, a lit-
tle growth and a minimal number of shocks,
you will find that electric utilities shine
brightly. For starters, everyone needs power.
With the economy growing, demand for
electricity should continue to rise, albeit
modestly. Coal and natural gas, which are
used to generate electricity, are cheap; dis-
ruptive technological developments, such as
a vast expansion of off-the-grid solar power,
are many years off. Dividend growth may
be slowingpayouts are likely to rise less
than 5% this year, after climbing 6.6% in
2012but widespread cuts and omissions
are in the past. And although mergers cre-
ate little value in some industries, such
hookups in the electric sector can effec-
tively cut redundant costs.
Back to basics. Ten years ago, utility exe-
cutives thought it was essential to enter
unregulated and nontraditional businesses,
such as power trading. But the adventurers
wisely retreated after Enron collapsed and
Dynegy found itself in Chapter 11. (Dynegy
emerged from reorganization last October,
but Dynegys pre-bankruptcy shareholders
got only 1% of the new company.) The
resulting back-to-basics movement is a
winner for risk-averse utility shareholders,
who prefer dividends, safety and quality
to pizazz.
If youre not interested in picking stocks,
look no further than VANGUARD UTILITIES ETF
(SYMBOL VPU, $88, 3.4%). The exchange-traded
fund holds 78 stocks, with 86% of its assets
in pure electrics and diversified utilities.
And it charges just 0.14% of assets per year
(prices are as of May 2).
There are dozens of worthy choices
among individual issues. Look for those
that sell at or below the industry average
of 1.7 times book value (assets minus lia-
bilities). Our exemplar is AMERICAN ELECTRIC
POWER (AEP, $51, 3.7%), which sells for 1.6 times
book value. The company serves five mil-
lion customers in 11 states and says 95%
of its earnings are from regulated power
sales. DUKE ENERGY (DUK, $75, 4.1%) is also in fine
shape. It sells for 1.3 times book value, and
90% of its earnings are regulated.
Juice Up Your Dividends
JEFFREY R. KOSNETT > Cash in Hand
JEFF KOSNETT IS A SENIOR EDITOR AT KIPLINGERS PERSONAL FINANCE.
37
bonds. The remaining 3%?
That sat in stocks sold short
(a bet on falling prices).
Sometimes Romick will
juxtapose a short sale with
a business he likes. Take
CVS, the drugstore chain.
Its one of Crescents best
performers over the past
year (up 29%). Romick liked
CVS because of the firms
drug-benefits unit, Care-
mark. To hedge his bet, he
sold short shares of Express
Scripts, a Caremark rival.
Lately, Romick has shown
an activist streak, taking
on the board of directors
at Occidental Petroleum. He
objected to the boards plan
to replace CEO Stephen
Chazen. Under pressure
from Romick and other Oxy
shareholders, the board re-
versed course and agreed to
let Chazen stay on until the
end of 2014. NELLIE S. HUANG
REACH YOUR GOALS: TO SEE PORTFOLIOS
USING THESE FUNDS, GO TO KIPLINGER
.COM/LINKS/PORTFOLIOS.
And it has done so with 35%
less volatility than the index
(results are through May 3).
Part of the problem, says
Romick: Nothings really
attractive, so weve been
on the sidelines. He is not
afraid to let cash build in
the fund. At last report,
about 32% of the funds
assets sat in cash and other
short-term investments.
But Romick hasnt been
completely idle. He added to
some existing holdings (in-
cluding medical-equipment
maker Thermo Fisher Scien-
tific) and trimmed others
(Wal-Mart Stores). And hes
finding attractive opportu-
nities overseas, such as Nor-
wegian food company Orkla.
But, he says, the changes
were nothing substantial.
Hedging some bets. Besides
the cash hoard, Crescent re-
cently had 62% of its assets
in stocks, 2% in corporate
bonds and 1% in mortgage
Crescents large exposure
to assets other than stocks,
means the fund will occa-
sionally lag the broad stock
market, especially when
the market is roaring. Over
the past year, for instance,
Crescent trailed Standard
& Poors 500-stock index
by 4.3 percentage points.
(By contrast, it beat the
average balanced fund by
2.1 points.) But over the long
haul, Crescent has shone:
Since its 1993 launch, it
has earned 11.0% annual-
ized, outpacing the S&P
500 by an average of 2.4
percentage points per year.
AT FPA CRESCENT, MANAGER
Steven Romick can invest
almost anywhere in the
world and in nearly any
kind of asset. That includes
the standard farestocks,
bonds and cashand some
not-so-typical investments,
including currencies and
subprime home loans.
But the funds unre-
strained mandate doesnt
mean Romick takes undue
risks. Hes a value investor
who invests with a long
view. We seek the unloved,
the out-of-favor or the mis-
understood, he says. His
contrarian strategy, plus
FPA Crescent
Loads Up on Cash
Through May 3. *Three-, five- and ten-year returns are annualized. Not available; fund not in existence for the entire period. Tracks high-grade U.S. bonds. SOURCE: 2013 Morningstar Inc.
Specialized/Go-Anywhere Funds Symbol
Total return*
1 yr. 3 yrs. 5 yrs. 10 yrs.
FPA Crescent FPACX 14.2% 10.2% 6.8% 9.7%
Merger Fund MERFX 2.8 2.7 3.3 4.1
Bond Funds Symbol
Total return*
DoubleLine Total Return N DLTNX 7.2% 10.9%
Fidelity Intermed Muni Income FLTMX 3.9 4.9 5.1% 4.4%
Fidelity New Markets Income FNMIX 11.6 11.2 10.9 11.0
Harbor Bond Institutional HABDX 6.5 6.3 7.1 6.1
Met West Unconstrained Bond M MWCRX 10.6
Osterweis Strategic Income OSTIX 9.1 7.6 8.5 7.9
Vanguard Short-Term Inv-Grade VFSTX 3.2 3.2 4.0 3.8
Indexes
Total return*
S&P 500-STOCK INDEX 18.7% 12.7% 5.0% 7.8%
RUSSELL 2000 INDEX 20.1 10.7 7.1 10.3
MSCI EAFE INDEX 20.7 8.1 0.7 9.6
MSCI EMERGING MARKETS INDEX 4.8 3.9 0.2 16.5
BofA ML US BROAD MARKET INDEX 3.6 5.6 5.7 5.1
THE KIPLINGER 25 UPDATE
U.S. Stock Funds Symbol
Total return*
Akre Focus Retail AKREX 20.4% 18.1%
Artisan Value ARTLX 17.1 12.3 4.9%
Baron Small Cap Retail BSCFX 17.9 12.9 7.4 10.6%
Dodge & Cox Stock DODGX 26.4 11.7 3.4 8.5
Fidelity Contrafund FCNTX 14.4 12.8 5.6 10.6
Fidelity Low-Priced Stock FLPSX 21.3 13.6 8.1 12.3
Homestead Small Company Stock HSCSX 19.6 14.2 11.6 12.3
Mairs & Power Growth MPGFX 22.0 12.9 7.8 9.4
T. Rowe Price Small-Cap Value PRSVX 19.4 11.6 8.1 11.7
Vanguard Dividend Growth VDIGX 18.8 13.8 7.4 10.1
Vanguard Selected Value VASVX 23.4 12.4 8.6 11.5
Wells Fargo Advantage Discovery Inv STDIX 13.3 15.6 8.8 12.0
International Stock Funds Symbol
Total return*
Dodge & Cox International Stock DODFX 22.0% 7.1% 0.4% 12.6%
Harbor International Inv HIINX 13.5 8.3 0.3 12.1
Harding Loevner Emerging Mkts HLEMX 9.8 6.0 0.3 16.5
Matthews Asia Dividend Inv MAPIX 23.1 11.3 10.1
38
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INVESTING // STOCKS
COLUMNIST ANDREW FEINBERG MANAGES A NEW YORK CITY

BASED HEDGE FUND CALLED CJA PARTNERS.
I have just
violated the
most sacred
of Warren
Buffetts
rules, the
one that
says you
should never
invest in
anything
that flies.
ANDREW FEINBERG > Promised Land
F
asten your seat belts. Its going
to be a bumpy night, said
Bette Davis in All About Eve,
the classic 1950 film about the
theater. I think I know what she meant. As
a new investor in the airline industry, I am
prepared for turbulence.
And abuse. After all, I have just violated
the most sacred of Warren Buffetts rules,
the one that says you should never invest
in anything that flies. Or as the master put
it: The worst sort of business is one that
grows rapidly, requires significant capital
to engender the growth, and then earns
little or no money. Think airlines. Here
a durable competitive advantage has
proven elusive ever since the days of the
Wright Brothers. Indeed, if a farsighted
capitalist had been present at Kitty Hawk,
he would have done his successors a huge
favor by shooting Orville down.
As a newly minted member of the Spare
Orville Club, I acknowledge that the busi-
ness was awful in 1989, when Mr. Buffett
invested in USAir. But it really is different
now. Consolidation and bankruptcies have
transformed the U.S. airline industry into
exactly the kind of business that Buffett
likes: an oligopoly. After US Airways com-
pletes its acquisition of American Airlines,
three carriersDELTA AIR LINES (SYMBOL DAL,
$18), UNITED CONTINENTAL (UAL, $33) and US AIR-
WAYS (LCC, $17)will control 70% of the U.S.
airline business (prices are as of May 3).
These three have been making money
for the past three years and may achieve
record profits in 2013. Some wise investors
have noticed. At the end of 2012, David
Tepper, of Appaloosa Management, had
huge positions in each of the three stocks,
and George Soros owned two of them.
If you didnt know their past and just
looked at the numbers, youd find airlines
appetizing. Alas, they make many investors
reach for an airsickness bag. Most pros con-
sider the industry untouchable because the
airlines have historically operated irration-
ally and have always been at the mercy of
oil prices, unions and new competition.
All of those past problems spell opportu-
nity, and thats why Delta, United and US
Airways now account for 7.5% of my hedge
fund. Airline analyst Helane Becker, of
Cowen Securities, sums up the bullish case
when she cites the four Cs that should pro-
pel industry returns: Consolidation, Capac-
ity discipline, Charging for everything and
returning Capital to shareholders.
Becker doubts many investors know that
Delta is more profitable than FedEx. Deltas
operating profit margin (profits from oper-
ations divided by revenues) is 10%, or twice
that of FedEx. Becker estimates that Delta
will generate $1 billion in free cash flow
(the money left for dividends, buybacks
and acquisitions) in 2013; she forecasts
$400 million for the much larger FedEx.
Bargain prices. If you think all of this is
reflected in price-earnings ratios, youre
wrong. FedEx trades at 13 times estimated
2014 earnings, Delta at just 6 times 2014
estimates. United and US Airways are also
tantalizingly cheap, and Becker says US Air-
ways shares could rise dramatically after
its merger with American becomes effective.
Interestingly, some investment shops
ignored their own quantitative models be-
cause airlines seemed so toxic. Our data
said the group was attractive in March
2012, says Leuthold Weeden analyst Kris-
ten Hendrickson, but we didnt buy until
last November. We were still a little skepti-
cal of the group. Today we rank it fourth
out of 120 groups on attractiveness.
Clark Hodges, of Hodges Capital, says
airlines remind him of the railroads. For
20 to 25 years, the railroads didnt earn
their cost of capital. Then things gradually
changed, and Burlington Northern became
our largest holding. And then Warren Buffett
bought Burlington Northern. Will Buffett
swoop in to snatch an airline out of the sky?
Probably not. But maybe he should.
News Flash: Airlines Soar
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f youve been paying attention lately, you
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Actual size
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20
20
40
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Coping With a Moody Market
KATHY KRISTOF > Practical Investing
INVESTING // STOCKS

I took a
cursory look
at my 18 stocks
and decided
to focus on the
outliers: my
biggest winner
and biggest
loser.
A
s a buy-and-hold investor, I would
be much more relaxed if the stock
market behaved like a rational
adultnot always perfect or under-
standing, but mostly calm and reasonable.
Instead, its acting like a kid in middle
school: moody, volatile, likely to implode
at the first cross tweet (as it did for a couple
of minutes one day this spring).
Is it any wonder that investors are
scared of stocks? Much as when my kids
went through such irrational stages, with
this market I wonder three things: Where
did I go wrong? How can I fix it? Will it
ever stop? But then, as now, I really just
wanted a peaceful place to hide and wait
out this ugly phase.
Of course, when my kids went through
difficult stretches, I didnt sit idly by.
I spied on them openly. At one point, I told
my son that Id hired a private detective
to watch him and his friends. I was actually
monitoring their electronic messages,
but telling the whole truth would have
made the spying less effective. Besides,
it was great comedy to watch them specu-
late about where my private eye was hiding.
I figured that knowing I was watching
would help keep them out of trouble. Maybe
theyd even open up to me and help me fig-
ure out what was going on and how to fix it.
Thankfully, unlike prepubescents, public
companies are required to disclose plenty
of information. So keeping tabs on my port-
folio is as simple as reading through annual
and quarterly reports, proxy statements,
and other corporate documents. But when
you own more than a dozen stocks, keeping
track of them is time-consuming. So a
reasonable person has to prioritize. I took
a cursory look at all 18 of my stocks and
decided to focus on the outliers.
That meant concentrating on my biggest
winner, SPIRIT AIRLINES (SYMBOL SAVE, $28), up
99% since I bought it in October 2011, and
my biggest loser, SCHNITZER STEEL (SCHN, $26),
down 42% since January 2012 (prices
are as of May 3).
Reading through Spirits reports lifted
my spirits. The proxy showed that the
companys directors are an impressive
group, with a lot of experience in aviation,
cargo and finance. Theyre modestly
compensated, and most own Spirit shares.
(The one director who doesnt own stock
is an executive at Oaktree Capital, a money-
management firm that holds 18% of the
airlines shares.) Top executives are paid
less than industry averages, too, with
Spirit CEO Ben Baldanza earning just over
$1 millionabout one-fourth the pay of
Southwests CEO. Nice. Another good sign:
Spirits monthly traffic reports show that
while the numbers of flights and routes have
been increasing rapidly, the company has
not sacrificed loads (the number of pas-
sengers on each plane) as it expands.
Unpredictable business. What makes me
uneasy is Spirits share price. The stock
now sells for 13 times projected 2013 prof-
its. Thats in line with Spirits top rivals,
Southwest (LUV) and JetBlue (JBLU).
Moreover, Spirit is growing faster than the
others, so the stock doesnt scream over-
valued. Still, the airline business is notor-
iously fickle, and Spirit is not the bargain
it was when I bought it. So Ive taken some
profits off the table by selling about half
my stake. I continue to own 383 shares.
Im less impressed with Schnitzers
board. Directors own little stock, and a
former Schnitzer CEO earns a whopping
$1.1 million a year to serve as chairman
of the board. But Schnitzers results for
the quarter that ended February 28 were
encouraging, thanks partly to cost-cutting.
Im holding the stock now but will likely
trim my position in the coming months .
KATHY KRISTOF IS A CONTRIBUTING EDITOR TO KIPLINGERS PERSONAL
FINANCE AND AUTHOR OF THE BOOK INVESTING 101. YOU CAN SEE HER
PORTFOLIO AT KIPLINGER.COM/LINKS/PRACTICALPORTFOLIO.
41
IT WAS AN UNSEASONABLY
cold and drizzly Saturday
in Omaha. But that didnt
dampen the spirits of the
tens of thousands of under-
dressed out-of-towners who
shivered through the early-
morning security lines for
the novelty of being part of
Berkshire Hathaways an-
nual shareholder meeting.
Indeed, the mood was
festive at the CenturyLink
Center, the site of the annual
love-fest thats come to be
known as Woodstock for
Capitalists. Shareholders
gleefully snapped up rubber
ducks crafted in the like-
ness of CEO Warren Buffett
and Charlie Munger, the con-
glomerates vice-chairman.
Fruit of the Loom boxer
shorts featuring the visages
of the two octogenarians
sold out faster than you can
say proxy statement. A
scrum of fans mobbed the
Oracle of Omaha and Micro-
soft co-founder Bill Gates
(a Berkshire director) as the
pair competed in a newspa-
per-tossing contest.
But it wasnt all silliness.
There was plenty of sub-
stance, too. Buffett and
Munger answered questions
for five hours on topics such
as Berkshire business lines
and what the company
will look like once Buffett
isnt around. Here are
a few highlights:
Buy what you know. Buffett
has proffered this advice
many times before. But it
was illuminating to hear
how he put this tenet into
action. For example, he
hinted he wouldnt consider
an investment in the auto
sector. We dont know
which auto company will
be knocking the ball out of
the park in five or ten years,
or which will be hanging
on by its fingernails,
he said. However, were
virtually 100% con-
fident about the
long-term pros-
pects of the Burl-
ington Northern
railroad
and insurer
Geico, both
Berkshire
properties.
Ignore economic forecasts. No
one really knows what path
the economy will take, Buf-
fett said, so it doesnt make
sense to base investment
decisions on forecasts.
Charlie and I dont pay at-
tention to macro forecasts.
Weve worked together now
for 54 years, and I cant
think of a time when we
made a decision on a stock
or on a company that was
influenced by a particular
viewpoint on the broader
economy. If investors try
to time their purchases
according to economic fore-
casts and trade when those
forecasts change, theyll
make a lot of money for
their brokers, but not much
for themselves, said Buffett.
Invest in businesses, not stocks.
It is crucial, Buffett and
Munger stressed, to consider
any stock investment as if
you were buying the entire
company rather than a few
shares. Were buying busi-
nesses whether were buy-
ing 100 shares or the whole
company, Buffett said. Fi-
nancial ratios are useful but
will never tell the whole
story. Whats more impor-
tant is to have a deep under-
standing of how a company
operates and the dynamics
of its industry. I dont
know how I would manage
money if I was just trying to
do it by the numbers, Buf-
fett said. Neither he nor
Munger uses computer
screens to sift out at-
tractive stocks.
Its not like we sit
there and say,
We want to look
at things that
have low P/Es,
said Buffett.
Greetings From Omaha
Once you get past the hoopla, you can learn a lot from the Oracle by
attending his companys annual meeting. BY ELIZABETH ODY
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KIPLINGERS PERSONAL FINANCE 07/2013 SONAL FINANCE 07/2013
INVESTING // STOCKS
more often the result of luck
than of skill, he said.
Shun trendy themes. In re-
sponse to a question on
whether hes interested in
emerging-markets stocks,
Buffett said he doesnt start
his search by looking at par-
ticular regions. It isnt like
Charlie and I talk in the
morning and we say, Its
a particularly good idea to
invest in Brazil or China.
Rather, he reiterated that
they focus on finding good
businesses first. When we
Consider an index fund. Few
investors, Buffett said, have
the time and the tempera-
ment to study companies
and industries thoroughly
enough to become expert
stock pickers. Most would
be better off buying low-
cost index funds. Such
funds let you buy into
American business in a
diversified way, over a long
period of time. Moreover,
Buffett said, you shouldnt
always be impressed with
the records of top-perform-
ing fund managers. Theyre
Buy These Three Companies Before Buffett Does
WARREN BUFFETT IS ON THE HUNT. AS HE NOTED
in his annual letter to shareholders, Berkshire
Hathaway has plenty of cash, and that money
could serve investors better if it were used to
finance an acquisition. For Buffett, a good fit
means a midsize to large company with strong
competitive advantages, at an attractive price.
And Buffett only pursues friendly takeovers.
If Berkshires recent stock purchases offer
any clues, DAVITA HEALTHCARE PARTNERS
(SYMBOL DVA) may be
one name on Buffetts
list. Berkshire is DaVitas
largest shareholder,
and it recently agreed
not to buy more than
25% of the company,
which accounts for
about one-third of the
U.S. dialysis market.
Some analysts believe
the agreement could be
an overture to acquisi-
tion talks.
Berkshires DaVita
purchases are likely
being driven by Ted
Weschler, a Berkshire
newbie. Weschler is one
of two investors, along
with former hedge-fund manager Todd Combs,
who are being groomed to take over manage-
ment of Berkshires $87 billion stock portfolio
(each currently controls $6 billion). Weschler
held a large stake in DaVita at the hedge fund
he ran before joining Berkshire. At $129, DaVita
trades for 17 times estimated 2013 earnings
(share prices are as of May 8).
If there is one industry Buffett loves, it is
insurance. Berkshire Hathaway already sells
insurance through Geico,
General Re and other sub-
sidiaries. One reason Buf-
fett is such a big fan of the
industry is that insurers get
to invest the cash they col-
lect on premiums before
having to pay claims.
One natural addition
to Berkshires insurance
empire might be AFLAC
(AFL), says Bill Smead,
manager of the Smead
Value Fund. Aflac sells
supplemental insurance
to individuals and busi-
nesses in the U.S. and
Japan. In Japan, which ac-
counts for 77% of Aflacs
revenues, the company
sells health insurance plans that are designed
to offset costs the countrys national health
care system doesnt cover. That business model
has caught on as Japan has raised deductibles
to combat rising health care costs. Smead be-
lieves that rising costs in the U.S. are setting
the stage for Aflacs business model to catch on
here, too. Besides, Smead says, Buffett loves
brands, and that duck is priceless. At $56, Aflac
trades for just 9 times estimated 2013 earnings.
Buffett has said publicly that he would be
interested in acquiring a consumer-products
company if the price was right. We think he
would find CAMPBELL SOUP (CPB) a tasty mor-
sel. Campbell is the worlds largest soup maker,
and it has the kind of brand-name recognition
that Buffett savors (the company owns Pep-
peridge Farm baked goods, Prego pasta sauces
and other brands).
A Campbell purchase could be structured in
a manner similar to Buffetts recent deal to buy
half of H.J. Heinz. Buffett is acquiring the ketchup
maker in partnership with private-equity firm
3G Capital, which will oversee operations of the
business and is expected to improve efficiency
by cutting costs. Campbell has posted disap-
pointing results recently, so it might also be a
good candidate for cost cutting. At $47, the
stock trades for 17 times forecasted profits for
the fiscal year that ends in July 2014.
Our Picks for Berkshire
hear somebody talking con-
cepts of any sort, including
country-by-country con-
cepts, we tend to think
theyre going to do better
at selling than investing.
Similarly, he said that
most exotic investment
products, such as hedge
funds and private-equity
investments, arent worth
the high fees they charge.
Anything Wall Street can
sell, it will sell, said Buffett.

Buy Berkshire. Over the course
of the meeting, Buffett made
a convincing case that he
has thought through the is-
sue of his eventual depar-
ture with as much or more
care than any investing
problem hes ever tackled,
and that he truly believes
Berkshire will stay Berk-
shire after hes gone. Or, as
Munger more pithily put it,
Dont be so stupid as to sell
these shares. Berkshires
Class B shares (symbol
BRK-B) closed at $111 on
May 8, up 34% since we rec-
ommended them in Load
Up on Buffett (Sept. 2012).
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EXPLANATION OF TERMS
Total return assumes reinvestment of all dividends
and capital gains; three- and five-year returns are
annualized. Returns reflect ongoing expenses but
not sales charges.
Maximum sales charge A figure without a footnote
means the commission is deducted from the money
you send to the fund. A figure with an r is the max-
imum redemption fee charged when you sell shares.
Funds that charge both sales and redemption fees
are footnoted with an s next to the front-end load.
Expense ratio is the percentage of assets claimed
annually for operating a fund.
RETURNS FOR
3,OOO+ FUNDS
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To use this tool, go to kiplinger.com/
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Skeptical of
Stocks? Try
Convertibles
This fund delivers stocklike
gains with below-average risk.
MORE THAN FOUR YEARS INTO A STRONG
bull market, there are signs that in-
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If youre skeptical of stocks and an-
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bonds, consider convertibles, hybrids
that give you a piece of both asset
classes. Convertibles are part common
stock and part bond or preferred stock
(a security that behaves much like
a bond). They offer you the chance
to participate in stock-market gains
but with less risk than stocks. They
also throw off more income than com-
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less than a companys regular bonds.
One of the stars in this group is
ALLIANZGI CONVERTIBLE. Although the
funds no-load Class D shares have
been available for only three years,
its institutional class is tops in the cat-
egory over the past ten years, with an
annualized return of 10.7%. The fund
has been in the top 30% of its category
in eight of the past ten calendar years.
The $1.5 billion fund normally keeps
about 90% of its assets in converts. Be-
having much like stock pickers, man-
agers Justin Kass and Douglas Forsyth
look for firms that they think can beat
analysts sales and profit forecasts.
Two big holdings, Gilead Sciences and
Bank of America convertibles, helped
propel returns over the past year. The
managers dont set a price target when
they buy. We like to let our winners
run, says Kass. ANJELICA TAN
FUND SPOTLIGHT
20 LARGEST STOCK MUTUAL FUNDS Ranked by size
Rank/Name Symbol 1 yr. 3 yrs. 5 yrs.
Assets

(in billions)
Max.
sales
charge
Toll-free
number
Total return
through May 3*
*Annualized for three and five years. NA Not available.
@
Rankings exclude share classes of this fund with different fee structures or higher minimum
initial investments. **Closed to new investors. For all share classes combined.
s
Front-end load; redemption fee may apply. MSCI EAFE is an index of
developed foreign stock markets. SOURCE: 2013 Morningstar Inc.
1. Vanguard Total Stck Mkt Idx Inv
@
VTSMX $248.4 18.8% 12.6% 5.6% none 800-635-1511
2. Vanguard 500 Index Inv
@
VFINX 135.8 18.5 12.6 4.9 none 800-635-1511
3. American Gro Fund of America A
@
AGTHX 119.7 19.1 10.9 3.8 5.75% 800-421-0180
4. American EuroPacific Gro A
@
AEPGX 107.5 15.3 6.7 0.6 5.75 800-421-0180
5. Vanguard Total Intl Stock Idx Inv
@
VGTSX 95.5 16.3 6.3 1.2 none 800-635-1511
6. Fidelity Contrafund
@
FCNTX 93.7 14.4 12.8 5.6 none 800-544-9797
7. American Cptl Inc Builder A
@
CAIBX 82.7 15.8 10.6 3.6 5.75 800-421-0180
8. American Inc Fund of America A
@
AMECX 80.0 16.9 11.7 5.8 5.75 800-421-0180
9. Franklin Income A
@
FKINX 75.5 16.7 10.4 5.8 4.25 800-632-2301
10. American Cptl Wrld Gro & Inc A
@
CWGIX 74.7 20.4 9.6 1.9 5.75 800-421-0180
11. Vanguard Emerging Mkts Stock Idx
@
VEIEX 74.4 5.3 3.3 0.8 none 800-635-1511
12. Vanguard Wellington
@
VWELX 72.5 15.4 10.7 6.3 none 800-635-1511
13. American Balanced A
@
ABALX 60.5 15.7 11.6 6.3 5.75 800-421-0180
14. American Invstmt Co of America A
@
AIVSX 60.3 19.3 10.8 4.4 5.75 800-421-0180
15. American Washington Mutual A
@
AWSHX 59.8 18.4 13.4 4.9 5.75 800-421-0180
16. American Fundamental Inv A
@
ANCFX 56.7 19.7 11.7 4.0 5.75 800-421-0180
17. Fidelity Spartan 500 Index Inv FUSEX 56.7 18.6 12.6 5.0 none 800-544-9797
18. BlackRock Global Allocation A
@
MDLOX 56.2 11.0 6.7 3.6 5.25 800-441-7762
19. American New Perspective A
@
ANWPX 47.1 18.2 10.7 4.1 5.75 800-421-0180
20. Fidelity Growth Company
@
FDGRX 45.7 13.1 13.9 7.0 none 800-544-9797
S&P 500 WITH DIVIDENDS 18.7% 12.7% 5.0%
MSCI EAFE 20.7% 8.1% 0.7%
CONVERTIBLE FUNDS Ranked by one-year return
Rank/Name Symbol 1 yr. 3 yrs. 5 yrs.
Max.
sales
charge
Exp.
ratio
Toll-free
number
Total return
through May 3*
1. Fidelity Convertible Securities FCVSX 17.5% 9.2% 3.9% NA none 0.76% 800-544-9797
2. Putnam Convertible Securities A
@
PCONX 17.1 8.9 5.4 1.5% 5.75%
s
1.11 800-225-1581
3. AllianzGI Convertible D
@
ANZDX 16.4 10.5 0.5 none 1.06 800-498-5413
4. Invesco Convertible Securities A
@
CNSAX 15.8 9.0 7.7 1.3 5.50 0.93 800-959-4246
5. Columbia Convertible Securities A
@
PACIX 15.7 9.7 5.0 2.3 5.75 1.12 800-345-6611
6. Vanguard Convertible Securities VCVSX 15.3 8.6 6.6 2.3 none 0.52 800-635-1511
7. Lord Abbett Convertible A
@
LACFX 15.0 6.9 4.2 1.0 2.25 1.07 888-522-2388
8. Franklin Convertible A
@
FISCX 14.9 8.9 6.0 1.8 5.75 0.90 800-632-2301
9. MainStay Convertible A
@
MCOAX 12.0 7.3 5.1 0.3 5.50 1.00 800-624-6782
10. Calamos Convertible A
@
** CCVIX 11.9 5.8 4.4 0.5 4.75 1.10 800-582-6959
CATEGORY AVERAGE 13.7% 7.6% 4.5%
30-day
SEC
yield
44
MONEY
M
Cut Your
Taxes Now
Smart planning could save you big bucks
when you do your 2013 return. BY SANDRA BLOCK
MOST OF US TREAT OUR TAX RETURNS LIKE INFLATABLE
Santas: Once the season is over, we shove them into the back
of a closet until next year.
But shelving your taxes until next spring could cost
you money, especially this year. The tax law passed earlier
in the year as part of the deal to avert the fiscal cliff imposes
a new 39.6% marginal rate on taxable income over $400,000
($450,000 for married couples). Taxpayers in this bracket
will pay 23.8% on dividends and long-term capital gains
not the 15% rate that applies to most investors.
Other changes reach down the income chain. Taxpayers
with adjusted gross income of $250,000 or more ($300,000
for married couples) will effectively pay higher marginal
rates because Congress resurrected phaseouts of itemized
deductions and personal exemptions. And taxpayers with
modified adjusted gross income of $200,000 or more
($250,000 for married couples) face a new 3.8% surtax
on net investment income.
PHOTOGRAPH BY POON WATCHARA-AMPHAIWAN
45
MIKE AND
LAVERNA LEACH
COULD GET HIT
BY HIGHER
RATES ON THEIR
INVESTMENT
INCOME.
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(
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planning to sell appreciated invest-
ments this year, ditching some of your
losers will help you lower or eliminate
taxes on the gains.
Take advantage of tax-deferred accounts.
The new tax rates and phaseouts are
tied either to adjusted gross income or
to taxable income. (AGI is the amount
before subtracting the value of exemp-
tions and deductions; taxable income
is the amount thats actually taxed.)
So its more important than ever to
look for ways to hold down both fig-
ures. One of the most effective strate-
gies is to max out your contributions
to tax-deferred retirement plans.
In 2013, employees younger than
age 50 may contribute up to $17,500
to a 401(k) plan; workers 50 and older
may contribute an additional $5,500.
Contributing to a health savings
account will reduce both AGI and
taxable income; the money grows tax-
deferred, and it can be withdrawn
tax-free for qualified medical expenses.
To be eligible for an HSA, you must
a lot of taxes, such as taxable bonds,
real estate investment trusts and high-
turnover mutual funds, in their tax-
deferred accounts; they keep index
funds and other tax-efficient invest-
ments in their taxable accounts.
Higher tax rates make that even
more important.
If you need income from your
taxable account, consider municipal
bonds, suggests Greg Womack, a
certified financial planner with
Womack Investment Advisers, in
Edmond, Okla. Interest on muni bonds
is exempt from federal taxes and, in
most cases, from income taxes of the
state in which the bonds were issued.
In addition, munis are exempt from
the 3.8% investment surtax, which
makes them even more attractive,
Womack says. Keep in mind, though,
that in terest from some types of muni
bonds is subject to the alternative
minimum tax.
It is also a good time to review your
portfolio for potential losses you could
use to offset capital gains. If you were
That tax could hit people like Mike
and LaVerna Leach of Virginia Beach,
Va. Mike is a retired Marine helicopter
pilot who receives about half of his re-
tirement income from his investment
portfolio; LaVerna is a watercolor art-
ist who owns her own business. Mike
says they sold some property last year
to beat the tax increase and will prob-
ably check in with their tax adviser,
Cynthia Jeanguenat, before year-end
to see whether they need to do any-
thing else.
There are ways to mitigate these
tax hikes, especially if you act now.
Make your investment portfolio more tax-
efficient. Mike says he doesnt expect
to make major changes to his portfolio
because he doesnt want to let the tax
tail wag the investment dog. Thats
good advice. But its important to pay
close attention to the types of invest-
ments in taxable accounts and the
types in tax-deferred accounts , such
as your 401(k) plan. Savvy investors
often keep investments that generate
MONEY // TAXES
Reasons to review your taxes midyear
YOU GET INCOME
FROM YOUR
INVESTMENTS
High-income
investors facing new
taxes could save with
a more tax-efficient
portfolio.
YOUR CHILD IS
STARTING COLLEGE
THIS FALL
The American
Opportunity credit
could help you pay
the bills.
YOURE GETTING
MARRIED OR
DIVORCED
You may need
to adjust your
withholding to
reflect your new
marital status.
YOU NEED TO
TAKE AN IRA
DISTRIBUTION
A direct transfer to
charity could lower
your tax bill.
YOURE GOING
INTO BUSINESS
FOR YOURSELF
Youll be eligible
for a lot of
deductions, but if
you dont track your
expenses, you could
be out of luck.
47
be covered by a high-deductible health
insurance policy, either through your
employer or on your own. In 2013,
a high-deductible plan is one with
a deductible of at least $1,250 for indi-
vidual coverage or $2,500 for a family.
You may contribute $3,250 to an
HSA this year for individual coverage
or $6,450 for a family; if youre 55 or
older, you can kick in an additional
$1,000. Thats considerably more than
the $2,500 maximum you can put in
a medical flexible spending account,
another tax-favored way to pay health
care expenses. And unlike flex plans,
which come with a use-it-or-lose-it
proviso, HSAs let you roll over unused
funds for future years.
Give appreciated assets to your adult chil-
dren. Are your kids struggling to pay
off student loans? If youre willing
and able to help, give them appreci-
ated stocks or mutual funds instead
of cash. When they sell, they may
pay lower taxes on the gain than
you would owe. The long-term capital
gains rate for taxpayers in the 10%
or 15% tax bracket (with taxable
income up to $36,250 for singles
or $72,500 for married couples) is 0%.
Giving appreciated securities to
family members is a way to diversify
across tax brackets, says Greg Rosica,
a tax partner with Ernst & Young. You
can give securities valued at $14,000
per person in 2013 without filing a gift
tax return; if youre married, you and
your spouse can give $28,000 to any
number of people.
To qualify for the special rate for
long-term gains, the securities must
have been held for more than 12
months. For gift securities, however,
the holding period includes the time
that you owned the assets, so your
children dont have to wait a year to
sell their stocks or funds, Rosica says.
But if your children are younger than
age 19 or full-time students younger
than age 24, note that they will be sub-
ject to the kiddie tax, which means
investment income exceeding $2,000
will be taxed at your tax rate.
Give appreciated securities to charity.
Donating appreciated stocks or mutual
funds to charity has always been
a smart strategy for high-income tax-
payers, and it makes even more sense
now. By giving appreciated assets, you
avoid taxes on the gains and still get to
deduct the full value of the securities.
Now that the top long-term capital
gains rate is 23.8%, pushing the gain
off to charity is even more important,
says Tim Steffen, director of financial
planning for Robert W. Baird. The
charity doesnt have to pay taxes on
the profits when it sells the securities.
Donor-advised funds are another
avenue: You get the write-off in the
year you donate, but you can decide
later which charities will benefit from
your philanthropy.
Make charitable gifts from your IRA. Con-
gress extended through 2013 a provi-
sion that allows seniors age 70 and
older to transfer up to $100,000 from
traditional IRAs directly to charity.
Such contributions can count toward
required minimum distributions for
the year.
Your contribution wont be deduct-
ible, but it will lower your AGI. As in
the past, that could qualify you for tax
breaks and reduce or even eliminate
taxes on Social Security benefits; now,
it could also help you avoid new tax
hits, such as the phaseout of other
deductions, Rosica says.
Check your withholding. Starting this
year, taxpayers will owe an additional
0.9% Medicare tax on earned income
of more than $200,000 for single filers
or $250,000 for married couples who
file jointly. For example, if youre sin-
gle and earn $225,000 this year, your
employer will be required to withhold
1.45% on the first $200,000 and 2.35%
on the next $25,000.
Suppose, though, that youre married
and you each earn $150,000. Your
employers wont withhold the extra
0.9% payroll tax because your individ-
ual earnings are under the threshold.
But youll still owe the additional levy
39.6%
The new bracket applies
to taxable income over
$400,000 on a single return and over
$450,000 on a joint return. For other tax-
payers, the 10%, 15%, 25%, 28%, 33% and
35% brackets are similar to last years.
20.0%
The increased rate
for long-term capital
gains and qualified dividends starts at the
same $400,000/$450,000 levels as the
new top income-tax bracket. Lower-income
investors will continue to pay either 0% or
15% on their profits and dividends.
3.8%
This new surtax applies
to net investment income
of investors with modified adjusted gross
income exceeding $200,000 on single
returns or $250,000 on joint returns. For
top-bracket taxpayers, this makes the rate
on short-term gains, interest and rental
income 43.4% and the rate on long-term
gains and dividends 23.8%. (AGI is before
subtracting exemptions and deductions;
modified AGI is AGI increased by certain
deductions and exclusions, such as tax-free
foreign-earned income. Taxable income is
the lower figure that is actually taxed.)
0.9%
This added Medicare tax
applies to wages and
self-employment income of workers with
adjusted gross income above the same
thresholds that trigger the 3.8% tax.
THE NEW TAX RATES
on $50,000 of your joint income, notes
Heidi Tribunella, associate professor
of accounting at the Simon School of
Business at the University of Rochester.
That alone wont trigger an under-
payment penalty. But you could run
into problems if you also have invest-
ment income thats subject to the 3.8%
surtax, says Stephen DeFilippis, an
enrolled agent in Wheaton, Ill. To
avoid penalties, you may need to adjust
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MONEY // TAXES
ALTHOUGH TAX DAY THANKFULLY OCCURS ONLY ONCE A YEAR, TAX-CHANGING
events, such as marriage, divorce and the birth of a child, happen year-round.
Any of these events could call for a midyear adjustment in the number of allow-
ances you claim on your Form W-4. You should also start keeping track of
expenses that will help you qualify for family-friendly credits, including:

Adoption tax credit. For 2013, this credit is worth up to $12,970 in adoption-
related expenses per eligible child. A credit is more valuable than a deduction
because it delivers a dollar-for-dollar reduction in your tax bill. The credit is no
longer refundable, so if it exceeds the amount of your tax liability, you wont get
a check for the extra amount. You can, however, carry over unused credits for up
to five years.
If youre in the process of adopting, keep a scrupulous record. Not only will it
ensure you can claim the maximum credit youre due, it will also help you answer
questions from the IRS. Because this credit is so large, it tends to attract extra scrutiny, so be prepared
to substantiate all of your expenses.

Child- and dependent-care credit. You may qualify for this credit to help defray the cost of paying
someone to care for children under age 13 while you work or look for a job. The credit is worth up to
$3,000 for the care of one child or $6,000 for two or more children. The credit is a percentage of the
amount spent on child care and gradually decreases as income increases. Families that earn more than
$43,000 can claim only 20% of deductible costs.

American Opportunity credit. Will your child be attending college this fall? This credit is worth
up to $2,500 per student for each of the first four years of college. The credit was scheduled to expire
at the end of 2012, but the new tax law extended it through 2017.
To qualify, your AGI must be less than $90,000 if youre single or $180,000 if youre married. The
credit phases out between $80,000 and $90,000 for single taxpayers and $160,000 and $180,000
for couples. This welcome tax break for parents struggling to pay for college is rarely discussed in
financial aid packages, says John Sheeley, an enrolled agent in Goshen, N.Y. If youre eligible, you can
look forward to a big refund next spring. Better yet, adjust your withholding now and give yourself a
much-needed raise.
of premiums for long-term-care insur-
ance. Also deductible: travel costs for
medical services.
Reconsider the home-office deduction.
New IRS rules make it easier for self-
employed taxpayers to deduct the cost
of their home offices. In the past,
claiming this money-saving tax break
required filling out a 43-line tax form
itemizing expenses, such as the per-
centage of utilities consumed by the
home office. The hassle, plus the fact
that this write-off was widely viewed
as an invitation to an IRS audit, appar-
ently persuaded some self-employed
workers to skip a break they deserved.
The streamlined rule allows you
to deduct $5 per square foot, up to
a maximum of 300 square feet, or
$1,500. The requirements for deduct-
ing a home office havent changed: It
must be used regularly and exclusively
for your business. And you should still
keep a record of the costs of your home
office because, in some instances, the
itemizing method could deliver a big-
ger tax break.
Finally, as you plan your tax strate-
gies for 2013, keep an eye on Washing-
ton. President Obama has proposed
capping itemized deductions at their
value for taxpayers in the 28% bracket.
That means the tax-saving power of
itemized deductions would be reduced
for taxpayers in the 33%, 35% and
39.6% brackets. The Presidents 2014
budget also proposed capping the
amount that taxpayers can contribute
to tax-favored retirement savings ac-
counts when they reach $3.4 million
(see Ahead, on page 11).
Neither plan will be enacted this
year. But as lawmakers continue to
look for ways to lower the deficit, pro-
posals to limit deductions have got a
lot of people concerned, says Steffen,
of Robert W. Baird. If it appears that
Congress will cap deductions next
year, he says, high-income taxpayers
may want to consider accelerating
some of their deductible expenses,
such as charitable contributions, so
that they occur in 2013.
your withholding. If youre self-
employed, you may need to adjust
your quarterly estimated tax payments
to cover the new tax.
Plan ahead for medical deductions.
Deducting medical expenses will be
more difficult this year. To qualify for
a write-off, your unreimbursed medi-
cal expenses must exceed 10% of your
adjusted gross income, up from 7.5%
in the past. For taxpayers 65 and older,
the threshold remains at 7.5% through
2016. And remember, you can deduct
only expenses that exceed the 7.5% or
10% threshold.
The change will put the deduction
out of reach for even more taxpayers.
But you may have a better shot if you
schedule elective procedures, such
as braces for the kids, in the same year
that you have other high medical
costs, Tribunella says. Some married
couples can boost their chances of
claiming the deduction by filing sepa-
rate tax returns, particularly if one
spouse has a lower income and high
medical expenses. Be aware, though,
that you give up other money-saving
tax breaks when you file separately.
Make sure you keep track of all
qualifying expenses. In addition
to items such as hearing aids and
eyeglasses, you can deduct a portion
Kid-Friendly Tax Breaks
*
KipTip
49
07/2013 KIPLINGERS PERSONAL FINANCE 13 07/201
you need. (The IRS allows a
one-time switch from amor-
tization or annuitization to
the distribution method.)
Say you choose the amor-
tization method, which
often provides the highest
payout. The balance of your
IRA is amortized over your
life expectancy, based on
IRS life-span tables. The
IRS limits the size of with-
drawals by using an interest
rate that assumes that earn-
ings inside the IRA wont
grow faster than 120% of
the midterm applicable
federal rate. However,
you can choose
the best rate
available
during
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disadvantage of 72(t) is
inflexibility, says Mike
Piershale, a financial ad-
viser in Crystal Lake, Ill.
Calculating withdrawals. The
IRS provides three meth-
ods to calculate 72(t) pay-
ments. The annuitization
and amortization methods
are similar: You must take
out the same amount every
year. Payments using the
distribution method may
vary each year and tend to
be smaller. Use the calcula-
tor at www.72t.net to run
the numbers for all three
methods to see
which one
provides the
amount
IF YOU HAVE A TRADITIONAL
IRA, withdrawing the
money before retirement
is rarely a good idea. Besides
losing out on tax-deferred
growth, youll owe a 10%
early-withdrawal penalty
if youre younger than 59.
But if you really need the
cashsay, youre suddenly
unemployedyou can avoid
the penalty if you follow
a set of complex rules.
With the 72(t) strategy,
named for the section of
the tax code that sets out
exceptions to the early-
withdrawal penalty, the
IRS allows you to escape
the penalty if you agree to
take out substantially
equal periodic payments,
or SEPPs, from your tradi-
tional IRA. The payments
must be withdrawn for a
minimum of five years or
until you turn 59, which-
ever comes later. For exam-
ple, if youre 50, you must
take payments for at least
nine and a half years; a
58-year-old would have
to take payments until at
least age 63.
Distributions will be
taxed at your ordinary in-
come tax rate. But once you
start taking distributions,
youre locked in. You cant
make new contributions to
the IRA or take additional
withdrawals while you are
taking SEPP distributions.
If you violate any of the
rules, you could be charged
big penalties. The biggest
Tap Your IRA Early, Penalty
-
Free
Use an often-overlooked strategy to pry your money loose. BY RACHEL L. SHEEDY
the two months before the
month you start payouts
(a higher rate gives you a
larger payout). So a 50-year-
old with, say, a $400,000
IRA who uses an interest
rate of 1.31% would take a
$14,586 payout each year.
If the projected payouts
are greater than you need
because your account bal-
ance is large, you can do
a reverse calculation at
www.72t.net. Decide how
much money you want each
year, then calculate the size
of the IRA that provides
that payout. You can split
that amount into a second
IRA and take the 72(t) pay-
outs from that account.
To set up 72(t) payments,
notify your IRA custodian.
At tax time, make sure the
Form 1099-R you receive
has code 2 in box 7, which
tells the IRS that the distri-
bution is taxable but not
subject to the penalty.
But before committing
to at least five years of pay-
ments, see whether youre
eligible for another excep-
tion to the early-withdrawal
penaltysay, because you
have a disability or high
medical expenses. Or con-
sider other income sources.
Perhaps you can tap a home-
equity line of credit. Or, if
you leave your job in the
year you turn 55 or later,
you can take money from
your employer 401(k) ac-
count without paying a 10%
early-withdrawal penalty.
50
MONEY // RETIREMENT
mentum going. Say youre 25, you earn
$40,000 a year and contribute 13% of
your salary annually, including the
company match. At that pace, you
would accumulate a stash of almost
$500,000 (in todays dollars) by age 65,
according to an example by T. Rowe
Price (the calculation assumes a 3%
annual raise and a 7% annualized re-
turn, discounted by 3% annual infla-
tion). If you wait until age 30 to start
saving, you would have to set aside
17% of your salary annually to arrive
at the same amount. The longer you
wait, the higher the number becomes.
So powerful is the effect of saving
early that you could have less trouble
catching up if you take a several-year
breaksay, to pay for collegethan if
you wait until midlife to start. At that
point, says George Middleton, a finan-
cial adviser in Vancouver, Wash., the
amount of money you have to put away
can be ungodly.
Still, you can make headway, espe-
cially if your kids are grown and you
have fewer expenses. Say youre 55,
earn $80,000 a year and have nothing
saved for retirement. You put the
pedal to the metal by setting aside
$23,000 in your 401(k) each year for
the next ten years. That $23,000
combines the annual maximum for
people younger than 50 ($17,500 in
2013) plus the annual catch-up amount
for people 50 and older ($5,500). If
your employer matches 3% on the first
6% of pay and your investments earn
an annualized 7%, youd amass
$434,700 by the time you reached 65.
SHYING AWAY FROM STOCKS
Given the devastating bear market
of 200709, its no surprise that more
than half of respondents in the Ameri-
prise survey said the downturn had
negatively affected their retirement
savings. But the resounding come-
back since then means that most peo-
ple who were in the market regained
those assets if they didnt sell every-
thing off, says Suzanna de Baca,
vice-president of wealth strategies
at Ameriprise Financial.
SCENARIO 1: YOUR PATH TO
retirement is wide, gently sloped,
paved with good intentions and free
of potholesincluding market de-
clines, job loss and health problems.
Scenario 2: Your path to retirement
is steep, littered with obstacles and
fraught with perils, including procras-
tination and the temptation to raid
your accounts to finance other press-
ing priorities.
Unfortunately, scenario number two
is more likely. In a new survey by Amer-
iprise Financial of people ages 50 to 70,
virtually all of the respondents said
they had experienced at least one re-
tirement derailer, and more than half
said that it had seriously affected their
retirement savings. The average amount
lost or forgone: $117,000. A poll of Kip-
lingers readers showed similar results
(see the box on page 52).
You cant stop life from knocking you
off your feet, but you can plan for the
unexpected and move forward after
the inevitable hard knocks. How you
got to where you are to some degree
doesnt matter, says Stuart Ritter, a
financial planner and vice-president
of T. Rowe Price Investment Services.
You need to think about where you
are today and make a plan that will
get you where you need to be.
SAVING TOO LITTLE
One of the biggest threats to retire-
ment security? Skimping on the
amount you save each month. For
Retirement
Setbacks
When life takes a toll, heres how to brighten your
prospects. BY JANE BENNETT CLARK
the best chance of maintaining your
lifestyle in retirement, aim to contrib-
ute 15% of your salary, including any
employer match, to your 401(k) or
other savings account throughout your
career (see Whats Your Retirement
Number? June). Most people fall
short of that benchmark. The average
employee contribution to a 401(k) is
6% to 8%.
Ironically, your company may be
encouraging you to save small even as
it encourages you to save at all. Close
to half of employers who have 401(k)
plans automatically enroll employees
in the accounts, typically setting the
contribution level at 3%. Thats enough
to get you started but not enough to
build a big nest egg. Says Ritter: Saving
3% in a retirement account is like
going to the gym for six minutes.
Saving 15% may seem like lifting
weights at the gym for several hours.
Try it anyway, says Ritter. Kick your
contribution level up to 15% for three
months. At the end of the three months,
you can lower it, if necessary. But
rather than dipping back to single
digits, go with 10% or 12%, he says.
People find they can settle on a much
higher amount than they were con-
tributing before.
STARTING TOO LATE
Procrastination is another risk: With
each year you neglect to save, you lose
an opportunity to fuel your accounts
and to let compounding keep the mo- P
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MONEY // RETIREMENT
youll have to set the level very low so
that you wont do it again.
PUTTING COLLEGE FIRST
Amassing hundreds of thousands of
dollars for retirement is challenge
enough, but parents are also expected
to save $80,000 to $100,000 per kid to
cover the college bills. In fact, half of
parents dont save for college at all,
and the average savings among those
who do runs about $12,000, according
to a 2013 report by Sallie Mae, the
financial services institution. Faced
with a shortfall, two-thirds of families
say they would use their retirement
savings to pay for their childrens
college education, if necessary.
Parents see how hard their child
has worked and want to give him that
opportunity. The ability to say no
becomes an issue, says Fred Amrein,
a registered financial adviser in
Wynnewood, Pa., who specializes in
college and retirement planning. Dont
wait until your kid is 17 to discuss how
much youll contribute. Have a conver-
sation early about how much you can
afford to give, says Amrein.
A Roth IRA can be one way to save
for both college and retirement, al-
though it wont get you all the way
to either goal. You can contribute up
to $5,500 a year ($6,500 if youre 50
or older) in after-tax dollars, and the
money grows tax-free. You can with-
draw your contributions for any rea-
son, including college, without owing
tax on the distribution. You will pay
taxes on the earnings (unless youre
59 or older and have had the account
for at least five calendar years), but
you wont have to pay a 10% early-
withdrawal penalty if you use the
money for qualified higher-education
expenses.
Keep in mind that if you use money
from the Roth for college, there will
be less of it for your old age. Plus, the
closer you are to retirement when your
kids get out of college, the fewer years
you have to catch up. Unless youve
saved a bundle for retirement in a
401(k), which sets a much higher
shares at higher pricesan antidote to
market-driven decisions to buy when
stocks are high and sell in a panic at
market lows. Once you decide on your
mix of investments, use automatic re-
balancing to keep it that way, advises
Debbie Grose, of Lighthouse Financial
Planning, in Folsom, Cal. Rebalanc-
ing forces you to sell high and buy low.
It takes the emotion out of it.
Most financial planners recommend
that your portfolio be at least 80% in
stocks in your twenties, gradually
shifting to, say, 50% stocks and 50%
fixed-income investments as you ap-
proach retirement. But formulas dont
cure panic attacks. Set your risk at
the level youre willing to withstand
in a downturn, says Middleton. If
you freaked and sold out in 2008,
Thats a big if. For some investors,
a bad case of the jitters became a
bigger derailer than the recession
itself (see How to Learn to Love
[Stocks] Again, April ). People got
very nervous and became more
conservative, so when the market
came back up, they had less of their
port folio participating in the rally,
says de Baca. Not only did they lose
the po tential for growth, but they
stayed out too long.
If youre among those who bailed on
the market and balked at reentry, you
can get back in (and stay in) by invest-
ing in stocks or stock mutual funds in
set amounts on a regular basis. Using
this strategy, known as dollar-cost
averaging, you automatically buy
more shares at lower prices and fewer
READER POLL
Which of the following present the biggest
challenge to your retirement savings?
How have your retirement savings fared since the Great Recession?
Job loss
Paying for college
Bounced back to prerecession levels
Still below prerecession levels
Exceeded prerecession levels
Health problems
Failure to save early enough
Divorce
25.1%
32.6%
46.1%
21.4%
21.9%
24.6%
43.9%
5.9%
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be tempted by the higher-paying
single-life option if your spouse will
need the survivors benefit later.
Decisions you make in claiming
Social Security are similarly key. If
youre the higher earner (typically,
the man), you will really help your
spouse by delaying Social Security as
long as possible, says Vernon. The
benefit grows by about 6.5% to 8%
a year for each year you delay after
age 62, when you first qualify, until
you reach age 70. If you die first, your
spouse can qualify for a survivors
benefit up to the full amount you
were entitled to, depending on the
age at which she files (see kiplinger
.socialsecuritysolutions.com).
contribute to annual living expenses
and multiplying that amount by the
number of years you expect to need
it, says Steve Vernon, of Rest-of-Life
Communications, a retirement con-
sulting firm. (For advice on how to
do a more precise calculation, see
kiplinger.com/links/howmuch.)
If you have a pension, youll have the
option of choosing a single-life benefit,
which ends at your death, or the stan-
dard joint and survivors benefit,
which pays less while youre alive but
keeps paying (typically at 50% to 75%
of the benefit) for the rest of your
spouses life. Your spouse is legally
entitled to the survivors benefit and
must sign a waiver to forgo it. Dont
annual maximum for contributions
($17,500 in 2013, or $23,000 if youre
50 or older), let the money in the Roth
grow. Your savings are the number-
one way of funding retirement. Do
that first, says Ritter.
LOSING A JOB
Leaving the workforce, even tempo-
rarily, deprives you of current income
and makes it tougher than ever to save
for retirement. You might even find
yourself tapping your retirement ac-
counts to cover day-to-day expenses.
Youll owe taxes on distributions from
a traditional IRA plus a 10% penalty
if youre younger than 59.
The best way to avoid that dismal
situation is to have an emergency re-
serve that covers at least six months or
even a year of living expenses, says Jim
Holtzman, a certified financial plan-
ner in Pittsburgh. He acknowledges,
however, that thats
easy to recommend
and hard to imple-
ment. Avoid further
disaster by hanging on
to health insurance: If
you cant get coverage
through your spouse,
look into keeping your
employer-based cover-
age through COBRA.
You can extend that
coverage for up to 18
months, although
youll pay the full pre-
mium plus a small ad-
ministrative fee. As of
January 2014, youll
also have access to
coverage through state
health exchanges (see
Countdown to Re-
tirement, on page 58).
LOSING A SPOUSE
Married couples who depend on each
others earning power need life insur-
ance to cover the gaps when one
spouse dies. You can get a rough idea
of how much coverage youll need on
each life by calculating what you each
*
Up Close
REBOUNDING AFTER A CRISIS
DEAN ROBINSONS LIFE AND HIS PLANS FOR
retirement went seriously astray three years ago,
when he was laid off from his job at a small biotech
company. Robinson, of Vancouver, Wash., was
among the first group to be cut when his company
merged with another. We thought our group was
insulated from cutbacks, but we were expensive.
I never saw it coming, says Robinson, now 50.
Robinson and his wife, Gail, had an emergency
fund, but it didnt last long. With a mortgage, two
car loans and two kids (Mia, now 15, and Hanna,
now 14) at home, they turned to his IRA, withdraw-
ing money to pay off the car loans and cover living
expenses. They were in survival mode, says their
financial adviser, George Middleton. The couple
took the distributionsincurring income tax and a
10% penaltyat six-month intervals, hoping each
distribution would be the last. Thats the difficult
thing about unemployment, says Robinson. You
dont know how long it will be.
After the layoff, Robinson worked part-time for
the state liquor control board, mostly to get out of
the house. Finally, he found a full-time job at a hearing-aid company for 50% of his former
salaryIt was the happiest day of my lifeand within a year he landed a dream job at a
large pharmaceuticals firm. The couple are now plowing money into his IRA and company
401(k), and rebuilding their emergency fund to cover six months of expenses. Every dollar
is budgeted, says Robinson. As for college, we want to help, but were not taking anything
off the retirement table, he says. The best thing we can provide our children in terms of a
legacy is our financial health.
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wise noted, these cards dont impose
caps or expirations on the points
you earn.
Good rewards cards not only make
it easy to accumulate points or miles
but also are generous when its time
to redeem them. To determine the
typical annual rebate, we assumed
you would charge $20,000 each year,
based on the average spending pat-
terns outlined in the Bureau of Labor
Statistics Consumer Expenditure Sur-
vey. The rebates we calculated dont
include the sign-up bonus, nor do
they reflect the annual fee if its
waived the first year. As a general rule,
it takes 100 points to earn $1 in cash,
as a statement credit or as a gift card.
To snag the best cards, youll need
an excellent credit profile, often in-
cluding a FICO score of about 750 or
higher (though a score in the neigh-
borhood of 700 to 749 can also get you
a decent card). Wait at least six
months between applying for cards to
minimize damage to your credit score
from the inquiries on your credit
report, suggests Odysseas Papadimi-
triou, chief executive of CardHub.com.
CASH BACK
Earnings from these cards have a clear
dollar value, and you can use the cash D
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MONEY // CREDIT
The right choice for you depends on
your spending patterns and the kind of
perks you prefer. BY LISA GERSTNER
Best of the
Rewards Cards
REWARDS CARD ISSUERS ARE
stepping up their game. On top
of paying up to 6% back on certain
purchases, card issuers are luring
customers with enticing sign-up
bonuses for those who spend a certain
amounttypically between $500 and
$3,000within the first few months
of getting the card in the mail. You
can get an instant cash sign-up bonus
of $100 or $150, or as much as 50,000
miles, depending on the type of card
you choose. The BARCLAYCARD ARRIVAL
WORLD MASTERCARD (www.barclay
cardarrival.com), which has an
$89 annual fee thats waived the
first year, offers 40,000 miles if you
spend $1,000 in the first three months.
Thats worth a $400 plane ticket.
Below, weve listed top credit card
offers in a few categories, depending
on how you spend and the type of re-
wards you prefer. Among those with
annual fees, the potential return for
charging thousands of dollars each
year more than covers the fee. Plus,
you often get extra benefits, such as
discounts on certain purchases and
additional bonus points. Dont think
youll spend enough to justify the fees?
The American Express Blue Cash Pre-
ferred, Capital One Venture Rewards
and Chase Sapphire Preferred cards
all have worthy free companion cards
with skimpier rewards. Unless other-
rebate to buy whatever you like.
Redeem your rebate with a statement
credit, check or deposit into your bank
account.
AMERICAN EXPRESS BLUE CASH

PREFERRED
www.americanexpress.com
Interest rate: 0% for 12 months,
then 12.99% to 21.99%
Annual fee: $75
Sign-up bonus: Spend $1,000 in the
first three months and get $150 back
Typical annual rebate: $384
The healthy 6% you will earn on
supermarket purchases makes this a
top-notch card. After $6,000 in super-
market spending each year, earnings
on groceries drop to 1%. But if you
spend at least $105 per month at the
supermarket, youll earn back the
annual fee. The card also pays 3% on
purchases at gas stations and select
department stores and 1% on every-
thing else. Redeem your earnings
in Reward Dollars, which can go
toward statement credits, gift cards
or merchandise.
U.S. BANK CASH+ VISA SIGNATURE
www.usbank.com
Interest rate: 13.99% to 23.99%
Annual fee: None
CASH BACK
Flexibility is key to this cards appeal.
Each quarter, you choose two spending
categories for which youll earn 5% back;
the options recently included restau-
rants, hotels, department stores, chari-
ties and even cell-phone bills. Then you
pick one category that will earn 2% on
purchases; recently the choices were gas
stations, grocery stores or drugstores.
All other spending earns 1%. You can
redeem your cash anytime and in any
amount. Send it to a checking or sav-
ings account or get statement credits.
Rewards expire after three years.
CAPITAL ONE CASH

www.capitalone.com
Interest rate: 0% until May 2014,
then 12.9% to 20.9%
Annual fee: None
Sign-up bonus: $100 back if you spend
$500 in the first three months
If you prefer a straightforward cash-
back card with a decent payback, this
is your best bet. Youll effectively get
1.5% back on spending: Every pur-
chase earns 1%, with a 50% bonus
on your earnings on the anniversary
of opening your account. Redeem your
cash at any time, or get gift cards or
donate to charity with your rebate.
TRAVEL
These cards let you earn and trade in
points for things other than travel. But
the cards offer more points for travel
spending or travel-related benefits,
such as assistance with booking and
discounts on vacations. Except where
noted, the cards dont charge a foreign
transaction fee or impose blackout dates
for booking travel with points.
CAPITAL ONE VENTURE REWARDS

www.capitalone.com
Annual fee: $59 (waived the first year)
Sign-up bonus: Spend $1,000 in the first
three months to get 10,000 miles
Typical annual rebate: 40,000 miles
Earn two miles per dollar on all pur-
chases, and redeem miles for any type
55
BRITISH AIRWAYS VISA SIGNATURE
www.britishairways.com
Annual fee/Interest rate: $95/15.24%
Miles per dollar: 2.5 for British Airways
transactions; 1.25 for others
Sign-up bonus: 50,000 miles after
spending $1,000 in the first three months
Miles for a round-trip ticket: 40,000 for
New York to London
Perks: Bring a companion with you on a
rewards flight without spending
additional points on his or her ticket if
you spend $30,000 on the card annually;
no foreign transaction fee.
GOLD DELTA SKYMILES
Annual fee/Interest rate: $95 (waived
the first year)/15.24% to 19.24%
Miles per dollar: 2 for Delta transactions;
1 for others
Sign-up bonus: 30,000 miles if you
spend $500 in the first three months
Miles for a round-trip ticket: 25,000
minimum for a domestic flight
Perks: One free checked bag and priority
boarding on each flight for up to nine
travelers on your reservation; 20%
discount for onboard purchases.
UNITED MILEAGEPLUS EXPLORER
www.chase.com
the first year)/15.24%
Miles per dollar: 2 for United transac-
tions; 1 for others
Sign-up bonus: 30,000 miles after
spending $1,000 in the first three months
Perks: One free checked bag for you and
a companion on each trip; priority
boarding for travelers on your
reservation; 10,000 annual bonus miles
for spending at least $25,000.
CITI PLATINUM SELECT/
AADVANTAGE VISA SIGNATURE
www.citi.com
the first year)/15.24%
Miles per dollar: 2 for American Airlines
transactions; 1 for others
Sign-up bonus: 30,000 miles if you
spend $1,000 in the first three months
Perks: One free checked bag for you
and up to four companions on each trip;
priority boarding; 10% bonus on
redeemed miles.
SOUTHWEST AIRLINES RAPID
REWARDS PLUS
www.chase.com
Points per dollar: 2 for Southwest and
AirTran transactions; 1 for others
Sign-up bonus: 25,000 points for
spending $1,000, and up to 10,000 points
for balance transfers within the first three
months
Points for a round-trip ticket: 24,000
points for a $400 Wanna Get Away ticket
Perks: 3,000 bonus points on annual
cardmember anniversary.
US AIRWAYS PREMIER WORLD
MASTERCARD
www.barclaycardus.com
or 24.99%
Miles per dollar: 2 for US Airways
transactions; 1 for others
Sign-up bonus: 30,000 miles after first
purchase; up to 10,000 miles for balance
transfers in the first three months
minimum for a domestic ticket
Perks: First-class check-in; two annual
$99 tickets for companions; 5,000-mile
discount when redeeming rewards.
If youre loyal to a single airline, using a card affiliated with that carrier can make sense.
Some give you a free checked bag on each flight, which could quickly cover the annual
fee in savings. Rewards may expire, and you usually pay taxes and fees on reward flights.
TOP AIRLINE REWARDS CARDS
TRAVEL
gory that you spend the most on each
month: gas, groceries or airline tick-
ets. Charitable donations get three
points per dollar. All other purchases
collect one point per dollar (up to
$120,000 annually, then one point
per $2). And each year that you make
at least $24,000 in purchases on the
card, youll get an additional 3,500
points. A plane ticket worth up to
$400 (plus a $25 allowance for other
airline charges, such as baggage fees)
requires 20,000 points, or you can
cash in your points for cruises, hotel
rooms and car rentals. You can also
choose to get statement credits, mer-
chandise and gift cards. The card is
embedded with a microchip, which
is commonly used overseas, but it
charges a 3% fee for purchases in
foreign currencies. Points expire five
years from the end of the quarter in
which you earned them.
GAS AND RETAIL
You can make a variety of purchases
with these cards and reap a sizable
rebate. Youll earn 3% or 5% back in
their top gas or retail categories, at least
2% in the second earnings tier, and 1%
on other purchases.
PENFED PLATINUM REWARDS VISA
www.penfed.org
Interest rate: 9.99% through June 30,
2014
Annual fee: None
Typical annual rebate: 38,634 points
Youll receive five points per dollar
spent on gas, plus three points per dol-
56
MONEY // CREDIT
lar for grocery-store purchases and
one point per dollar on all other pur-
chases. Redeem your points for travel,
merchandise, gift cards or prepaid
cards. A $50 retailer gift card or Pen-
Fed Prepaid Visa Reward Card re-
quires 5,000 points.
TRUEEARNINGS CARD FROM
COSTCO AND AMERICAN EXPRESS
Interest rate: 0% for six months,
then 15.24%
Annual fee: None with a Costco mem-
bership (starting at $55 a year)
Available only to Costco members, this
card pays 3% on up to $4,000 annually
in purchases at gas stations (1% there-
after), including Costco gas stations
(many cards dont offer top rewards
for purchases at warehouse-store gas
stations). Youll also earn 2% for restau-
rants and travel and 1% on other pur-
chases. Earnings arrive each February
as a Reward Coupon, which you can
exchange for cash or merchandise at
Costco (you must redeem it by August
31 of the year in which you receive it).
AMAZON.COM REWARDS VISA

FROM CHASE
www.amazon.com/rewards
Annual fee: None
Sign-up bonus: $50 Amazon gift card
Frequent Amazon.com shoppers will
do well with this card, earning three
points per dollar for spending on the
site. The return on other spending is
decent, too: two points per dollar at
gas stations, restaurants, office-supply
stores and drugstores, and one point
for other purchases. One hundred
points are worth $1, and you can use
them to make partial or full payments
on Amazon purchases (you can also
use points youve earned with other
eligible Chase credit cards, including
Sapphire, to make purchases at Amazon
.com). Or redeem points for cash back,
gift cards and travel through Chase
Ultimate Rewards.
of travel spendingflights, cruises,
hotel rooms, car rentals. The formula
for the number of points youll need
for a purchase is simple: Multiply the
amount of your travel purchase by 100.
That means if you buy a $300 airline
ticket, youll need 30,000 miles.
You can book travel with your miles
through Capital Ones Rewards Cen-
ter. Or redeem miles within 90 days
of making a travel purchase with the
card for a statement credit. Miles are
also redeemable for cash, merchan-
dise, gift cards or statement credits
for nontravel purchases.
CHASE SAPPHIRE PREFERRED
www.chase.com
Interest rate: 15.24%
Sign-up bonus: 40,000 points for spend-
ing $3,000 in the first three months
A host of perks sweeten the deal on
this card. It provides two points for
each dollar spent on dining and travel,
including cab fares and tolls (three
points when you make airline and
hotel purchases through Chases Ulti-
mate Rewards shopping portal), and
one point for all other purchases.
Every year, you get a 7% bonus on
the points youve earned throughout
the year. And when you book travel
through Ultimate Rewards, youll get
a 20% discount on the priceso a $500
flight requires 40,000 points. You can
transfer the points at full value to par-
ticipating programs, such as United
MileagePlus and Marriott Rewards.
Or redeem points for cash back, gift
cards and merchandise.
U.S. BANK FLEXPERKS TRAVEL
REWARDS VISA SIGNATURE
www.usbank.com
Sign-up bonus: 17,500 points after the
first $2,500 in spending within five
months
Earn two points per dollar spent on
cell-phone bills, as well as on the cate- D
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Some investments are aggressive.
Some are slow growth. Fortunately,
it only takes 15 minutes to get
your insurance right with GEICO.
Its one investment that could
keep more of your money in your
hands.
Fortunately, it only takes 15 minutes to see how much you could
SAVE WITH GEICO.
AU T O r H O ME r R E N T E R S r MO T O R C Y C L E r R V r B OAT r P WC
Get a free quote.
1-800-947-AUTO (2886)
or call your local GEICO agent
Some discounts, coverages, payment plans and features are not available in all states or all GEICO companies. Motorcycle coverage is underwritten by GEICO Indemnity Company.
Homeowners, renters, boat and PWC coverages are written through non-afliated insurance companies and are secured through the GEICO Insurance Agency, Inc. GEICO is a registered
service mark of Government Employees Insurance Company, Washington, D.C. 20076; a Berkshire Hathaway Inc. subsidiary. GEICO Gecko image 1999-2012. 2012 GEICO
It can take years to see your money grow.
58
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ONE OF THE BIGGEST CHALLENGES EARLY
retirees face is finding affordable
health insurance until they qualify
for Medicare at age 65or finding any
coverage if they have a preexisting
condition.
The new health law changes the
rules. Starting in January 2014, insur-
ers may no longer reject
you for coverage or
charge higher rates be-
cause of your health.
The law also sets limits
on how much insurers
may charge older buyers
(for example, premiums
for a 64-year-old can be
no more than three times
as much as they are for
a 21-year-old). Knowing
you will qualify for health
insurance, no matter
what, may prompt you
to consider retiring
sooner than later.
Early retirees will still
have most of the same
coverage options they have always
hadretiree health coverage from a
former employer or coverage through
a spousealthough employers are
passing along an increasingly large
share of the cost. And most early retir-
ees can choose to keep their coverage
under COBRA for up to 18 months af-
ter they leave their job. Youll have to
pay the full premium yourself, but if
youre close to your 65th birthday, or
if youre undergoing treatment and the
new policies dont cover your current
doctors and providers, it might make
sense to keep your current coverage
under COBRA.
Come January, youll have another
option: to buy insurance through your
states exchange. Plans on the ex-
changes wont necessarily be less
expensive than todays individual
policies (especially if youre healthy)
because the plans must expand to
cover ten essential health benefits
and they cant charge extra for people
with health issues. But if you meet cer-
tain income thresholdsand a lot of
retirees willyou may qualify for tax
credits to help cover the premiums.
Compare costs. Estimate what your
income will be after you retire. You
may get a subsidy if your income is
less than 400% of the federal poverty
level, which works out to about
$46,000 for an individual. If your ad-
justed gros s income is $28,725 and you
pay $5,000 per year for premiums, for
example, you could get a credit worth
about $2,700, depending on your
age and coverage costs in your area,
according to Families USA.
The calculators for your states
exchange (youll find links at www
.healthcare.gov) will help you deter-
mine whether you qualify for a sub-
sidy. (The calculators may not be
available until open enrollment begins
on October 1; until
then, you can use
the Kaiser Family
Foundations calcu-
lator at http://
healthreform.kff
.org.) Tax credits
are available only
if you buy from your
states exchange.
Also, you generally
cant get a subsidy
if you have an offer
of insurance from
your employer, such
as retiree health
coverage.
Policies on the
exchanges must fall
into one of four categories based on
coverage levels: bronze, silver, gold or
platinum. The platinum policies will
generally cost the most and have the
highest level of coverage. Bronze and
silver plans may have high deductibles
and qualify for health savings ac-
counts, which let you save tax-free for
medical expenses. Look at the policies
premiums, out-of-pocket costs, cover-
age, and the network of doctors and
providers (especially if youre a snow-
bird). Some insurers plan to offer more
than one option within the same color
level but to charge less for a version
with a more restrictive network.
COUNTDOWN TO RETIREMENT
New Options for Health Insurance
Early retirees might get a better deal on the new exchanges starting in 2014. BY KIMBERLY LANKFORD
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Keeping the Power On
Either kind of generator will keep your
appliances running in a power outage.
Many insurers will give you a discount
of about 5% on your homeowners premium
for installing a generatoralthough to get
the discount, youll generally need to buy
an automatic standby generator. Such units
are powered by natural gas or propane and
turn on automatically after detecting a
power outagewhich not only leaves you in
the dark but also could cause your sump
pump to stop working (potentially leading
to mold if your basement floods while your
air conditioning is out, too) and your bur-
glar and fire alarms to fail.
The most common automatic standby
generator produces 17 kilowatts, which will
power 16 circuits, says Roy Cranford, presi-
dent of generator dealer CDS Emergency
Power, in Baltimore. The unit costs about
$4,000, plus about $3,500 to connect it
to your electrical system and your gas or
propane line, says Cranford.
You wont get an insurance discount for
a portable generator, but portables cost a
lot less and are your only option if you dont
have a gas or propane line. A 6.5-kilowatt
generator costs about $800 to $1,000,
says Cranford, and can supply about ten
circuitssufficient to power most of
a 2,000-square-foot house, not counting
central air conditioning.
A portable generator isnt as convenient
as an installed one. You will need to roll the
generator outside (to avoid carbon monox-
ide poisoning), fill it with gasoline, and run
extension cords from your appliances and
other electric devices to the generator. For
about $1,000 extra, you can have a manual
transfer switch installed that links the gen-
OUR ELECTRICITY WAS OFF FOR
days last summer after a big storm.
Im thinking about buying a home gen-
erator so that Im prepared this year.
Would it be better to get an automatic
backup generator or a portable unit?
W.D., Rockville, Md.
erator to your electrical panel and lets you
power everything with just one cord.
Tax break for summer camp. My 9-year-old
son is attending summer camp. Can I use
the child-care credit for summer-camp costs?
H. T., Washington, D.C.
You can take the child-care credit for
the cost of day camp (not overnight camp)
for children under age 13, as long as both
spouses work or are looking for work. You
also qualify if one spouse is a full-time stu-
dent and the other is working. For parents
who are divorced or separated, the custo-
dial parent can usually claim the credit.
In addition to day camp, the credit can
cover the cost of a nanny, a babysitter, pre-
school or day care so you can work. School
costs dont count once your child reaches
kindergarten, but before-care and after-
care costs qualify.
If you (and your spouse, if filing jointly)
report earned income, you can count up
to $3,000 in child-care expenses for one
child or up to $6,000 for two or more chil-
dren. The size of the credit gradually de-
creases as income rises. Families earning
more than $43,000 can claim a credit for
up to 20% of eligible costs, which translates
to a maximum credit of $600 if you have
one child or $1,200 for two or more.
Undoing a Roth IRA. My son got married last
month. Earlier this year, he contributed to
a Roth IRA. He and his wife just realized
that their joint income will be over the Roth
income limit. What should they do?
L.B., Orefield, Pa.
You usually have to pay a 6% penalty on con-
tributions to a Roth IRA that you make when
your income is too high to qualify ($188,000
for married couples filing jointly in 2013).
But you can avoid the penalty if you with-
draw your contributions and any earnings
on them by the tax-filing deadlinegener-
ally April 15, or October 15 if you file an
KIMBERLY LANKFORD > Ask Kim

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will give you
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of about
5% on your
homeowners
premium for
installing an
automatic
standby
generator.
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extension. You can withdraw the con-
tributions tax-free, but you must count
the earnings on those contributions as
income for the year you made them.
Or you could avoid the penalty and
current taxes if you have your IRA
administrator transfer your Roth IRA
contributions for the yearplus all the
earnings on that moneyinto a tradi-
tional IRA by October 15 of the year
after you made the contributions. (You
can keep any money you contributed
to the Roth in previous years in the
Roth account.)
Most IRA administrators make
it easy to recharacterize an IRA (thats
the official term for switching from
one type of IRA to another). If you
want to switch the Roth IRA to a
nondeductible IRA, youll need to file
Form 8606 with the IRS. For more
information, see IRS Publication 590
at www.irs.gov.
Starting a scholarship fund. Id like to
set up a scholarship in memory of a
friend who just passed away. How
much money do I need to set one up,
and whom do I call?
C.F., Greensboro, N.C.
One idea is to contact the development
office at a university. You need about
$20,000 to $25,000 to endow a schol-
arship that pays out $1,000 a year,
but each institution sets its own
rules. For instance, San Diego State
University requires $50,000 to endow
a $2,000 annual scholarship, or you
can commit to giving $5,000 a year
for three years, which finances three
one-year $5,000 scholarships. The
medical school at the University of
California, Los Angeles, requires
$100,000 to endow a $5,000 annual
scholarship, but you can name a one-
time scholarship with just $1,000.
Most community foundations
will also help you set up scholarships.
(To find a community foundation,
see www.cof.org/locator.)
GOT A QUESTION? ASK KIM AT KIPLINGER.COM/ASKKIM.
KIMBERLY LANKFORD ANSWERS MORE QUESTIONS EACH
WEEK ON KIPLINGER.COM.
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RETIREMENT
PLANNING 2013
HOW TO
RETIRE RICH
GET THE MOST
FROM YOUR 401(K)
10 GREAT CITIES
FOR SECOND ACTS
NEW WAYS TO PAY
FOR HEALTH CARE
HOW MUCH YOU NEED TO SAVE
Your guide to a secure retirement
RETIREMENT
PLANNING
2013
KIPLINGERS
KIP07
61 61
month to the account from
a separate account.
Many banks and credit
unions charge inactivity
fees, says Ken Tumin,
of DepositAccounts.com.
Contact your bank to ask
whether it levies inactivity
fees and how you can
avoid them. Generating
activity may be as simple
as calling to inquire about
the account, Tumin says.
Typically, arranging an
automatic monthly deposit
or withdrawal will do the
job. But be careful that
sidestepping one fee does
not trigger another. Some
banks charge to initiate
transfers between their
accounts and those of out-
side institutions.
Checking accounts are
susceptible to inactivity
fees, too. Even a service such
as Simple, which is designed
for banking through a mo-
bile device and generally
goes light on fees, charges
$5 a month to anyone who
lets a linked checking ac-
count sit idle for six months.
And about one-third of pre-
paid debit cards charge a
monthly inactivity fee if you
go 90 days without using
the card. LISA GERSTNER
MAYBE YOUVE OPENED A
savings or money market
deposit account to stash
cash you dont plan to deal
with oftensay, money to
tap in an emergency. Or
perhaps you put a small de-
posit in a savings account
to meet a credit unions
membership requirements.
If you leave the money un-
touched too long without
making a transaction, the
institution may slap you
with an inactivity fee.
For instance, Evantage
Banks Mega Money Market
Account pays 1.1% on up to
$35,000 (see table at right)
with no minimum balance
and no monthly mainte-
nance fee. But if your ac-
count is dormant for six
months, the bank begins
charging $10 per statement
cycle. One way to work
around the fee is to arrange
to deposit as little as $1 a
Dont Pay for
an Idle Account
RATE
UPDATES
For the latest savings yields
and loan rates, visit kiplinger
.com/nances/yields.
Kiplinger.com
1. Colorado Federal Savings Bank (Colo.) 1.00% $5,000 coloradofederalbank.com
2. Doral Bank (Fla.)
0.96 500 doralbankdirect.com

3. National Republic Bank/Chicago (Ill.) 0.95 1,000 nrbchicago.com
4. Ally Bank (Utah)
0.94 none ally.com

NATIONAL AVERAGE 0.25%
TOP-YIELDING CERTIFICATES OF DEPOSIT
Annual
yield as
of May 1
Min.
amount
Web site
(www.) 1-YEAR
Internet only. SOURCE: 2013 Bankrate.com, a publication of Bankrate Inc., 11760 US Highway 1, N. Palm Beach,
Fla. 33408 (800-327-7717, ext. 11410; www.bankrate.com/kip).
1. Nationwide Bank (Ohio)
1.60% $500 nationwide.com

2. First Internet Bank of Indiana (Ind.)
1.60 1,000 firstib.com

3. AloStar Bank of Commerce (Ala.)
1.55 1,000 alostarbank.com

4. Discover Bank (Ill.)
1.55 2,500 discoverbank.com

Annual
yield as
of May 1
Min.
amount
Web site
(www.) 5-YEAR
TOP-YIELDING MONEY MARKET ACCOUNTS
1. Invesco Tax-Ex Inv (TEIXX)* 0.09% 0.1%/0.1% $1,000 invesco.com
2. Alpine Municipal MMF (AMUXX)* 0.08 0.1/0.1 2,500 alpinefunds.com
3. Vanguard Tax-Ex MMF (VMSXX)* 0.04 0.05/0.07 3,000 vanguard.com
4. PNC Tax-Ex MMF A (PXAXX)* 0.02 0.03/0.03 1,000 pncfunds.com
NATIONAL AVERAGE 0.01% 0.01%/0.02%
30-day
yield as
of April 29
Tax. eq. yield
25%/39.6%
bracket
Web site
(www.) TAX-FREE FUNDS
Min.
invest-
ment
*Fund is waiving all or a portion of its expenses. Internet only. #Deposit accounts include money market deposit
accounts and high-yield savings accounts. SOURCES: Bankrate.com; Money Fund Report, iMoneyNet Inc., One
Research Dr., Westborough, MA 01581 (508-616-6600; www.imoneynet.com).
Annual
yield as
of May 6
Min.
amount
Web site
(www.) DEPOSIT ACCOUNTS
#
1. Evantage Bank (Okla.)
1.10% none evantagebank.com

2. EverBank (Fla.)
1.01 $1,500 everbank.com

3. Barclays Bank (Del.)
1.00 none banking.barclaysus.com

4. Sallie Mae Bank (Pa.)
0.90 none salliemae.com

1. Selected Daily Government D (SDGXX)* 0.17% $10,000 selectedfunds.com
2. Direxion US Govt MMF A (DXMXX)* 0.08 25,000 direxionfunds.com
3. Meeder Money Market Retail (FFMXX)* 0.08 2,500 meederfinancial.com
4. PNC Money Market Fund A (PEAXX)* 0.05 1,000 pncfunds.com
30-day
yield as
of April 30
Min.
invest-
ment TAXABLE FUNDS
Web site
(www.)
As of May 3. *EE savings bonds
purchased after May 1, 2005, have
a xed rate of interest.
Bonds purchased before May 1,
1995, earn a minimum of 4% or a
market-based rate from date of
purchase.
Bonds bought between May 1, 1995,
and May 1, 2005, earn a market-based
rate from date of purchase.
SOURCE FOR TREASURIES:
U.S. Treasury
YIELD BENCHMARKS Yield
Month-
ago
Year-
ago
U.S. series EE savings bonds* 0.20% 0.20% 0.60%
U.S. series I savings bonds 1.18 1.76 2.20
Six-month Treasury bills 0.08 0.10 0.15
Five-year Treasury notes 0.73 0.73 0.82
Ten-year Treasury notes 1.78 1.83 1.96
First Command Bank (P) 6.25% none $25
firstcommandbank.com
Lake Michigan Credit Union Prime (P) 6.25 none
#
25
lmcu.org
Simmons First Bank Visa (P) 7.25 none 25
simmonsfirst.com
LOW-RATE CREDIT CARDS
Issuer
Rate
as of
May 3*
Annual
fee
Late
fee
Web site
(www.)
RETAIL REBATE CARDS
Kroger 1-2-3 Rewards Visa 13.99% none 2%^/1% krogerpersonalfinance.com
Amazon Rewards Visa 14.24 none 3/1
amazon.com/rewards
Costco True Earnings Card 15.24 none
1/1
&
americanexpress.com
Issuer
Rate
as of
May 6*
Annual
fee
Rebate
earned
Store/Other
Web site
(www.)
Rates are adjustable. *If you do not qualify for this interest rate, the issuer will offer a higher-rate card. (P) Platinum
card. $35 if late more than once in six months. #Must be a credit union member. ^3 points per $1 for Kroger
company brands. 2 points at gas stations, restaurants, ofce-supply stores and drugstores; 1 point on all other
purchases. Must be a Costco member.
&
3% on gas (up to $4,000 annually; 1% thereafter); 2% on restaurants and
travel; 1% on all other purchases. SOURCE: Bankrate.com. Banks may offer lower introductory rates.
LIVING
W e asked travel insiders for
their strategies on how to get the
best values with the fewest hassles.
BY SUSANNAH SNIDER
WITH AIRFARES TO EUROPE AND ASIA SKY-HIGH
and high-seas breakdowns roiling the cruise
industry, leisure travelers have plenty of reasons
to put vacation plans on hold. But you dont have to
cancel your summer (or fall) fun. We asked industry
insiders and travel Web site editors to weigh in with
their top tips and smartest strategies for getting
good dealswithout the nightmare scenarioson
airfares, cruises, hotels and vacation packages.
Whether youre on the prowl for a luxury resort that
courts you with freebies or just want to qualify for
priority boarding, you can use this advice to claim
all the perks and conveniences typically reserved
for the savviest travelers. Bonus: We also asked
the experts for their favorite value destinations,
both in the U.S. and abroad.
PHOTOGRAPH BY C.J. BURTON
63
64
LIVING // SLUG
active map shows you how
much it costs to fly from
your hometown to dozens
of domestic and interna-
tional destinations.
CHECK YOUR IN-BOX. Keep up
with e-mail alerts or fol-
low airlines and alert sites,
such as Airfarewatchdog,
on social media. Not only
do you get first dibs on flash
sales, but you also develop
a point of reference to rec-
ognize good deals. And note
that domestic airfares are
cheapest seven weeks be-
fore departure, according
to CheapAir, an airfare
booking site.
GET A DEAL ON EXTRAS. Sev-
eral airlines have intro-
duced new ways of bundling
fees. For example, Deltas
$21 Ascend package in-
cludes in-flight Wi-Fi and
priority boarding. American
Airlines $68 Choice Essen-
tial package includes a
checked bag, a reservation
change and Group 1 board-
ing. Some bundles are more
valuable than others. Amer-
icans package is a deal if
you suspect that your itiner-
ary might change. Deltas
is more about saving a few
bucks.
and return on a Monday and
youll score a 16% discount
on your airfare, according
to Kayak.com, the travel
Web site. For weeklong in-
ternational trips, departing
on Tuesday and returning
on Wednesday of the fol-
lowing week saves 21%, on
average. If youre visiting a
touristy location, such as a
beach town, avoid weekend-
to-weekend travel. The op-
posite is true when visiting
popular convention cities.
Besides saving money, you
will often travel on less-
crowded flights and go
through shorter airport
security lines.
TWEAK TRAVEL DATES AND
DESTINATIONS. Last year,
September was the cheapest
month to fly domestically,
according to Kayak. No
matter which month you
travel, plug your
home airport and
getaway location
into www.hotwire
.com/tripstarter/
index.jsp to see the
cheapest times to
fly. Not sure where
you want to go?
Check out www
.kayak.com/
explore. The inter-
April was a cruel month for
air travelers. Air traffic con-
troller furloughs led to thou-
sands of flight delays. The
attacks at the Boston Mara-
thon likely contributed to the
postponement of new rules
that would have allowed pre-
viously banned items, such
as hockey sticks and small
knives, onboard planes. Sky-
rocketing airfares to Europe,
due to high fuel prices and
high demand, have made
travel to the Continent even
pricier. Plus, fees continue to
rise: United Airlines in-
creased its domestic change
fee to $200, and American,
Delta and US Airways fol-
lowed suit. But you
can still find good
deals and avoid the
crowds, especially
if your plans are
flexible.
AVOID PEAK TRAVEL
DAYS. If youre
taking a weeklong
domestic trip, de-
part on a Saturday
AIRFARES
Flexibility
Pays Off
ISTANBUL. Turkish Air-

lines is expanding feverishly,
putting downward pressure
on fares. Fall is a good time
to go: Airfare between
Istanbul and Washington,
D.C., decreases by about
$150 between late August
and mid September, accord-
ing to Hotwire.

LAS VEGAS. Spirit Air-
lines connects to about a
dozen airports from Las
Vegas. All that activity pres-
sures other airlines to slash
fares to stay competitive.
Las Vegas was the most
popular destination for air
travel last year, and Kayak
reports that it was also
the fifth-cheapest.

DOMINICAN REPUBLIC.
JetBlue is increasing flights
to the D.R., and new resorts
are enticing luxury travelers.
We found flights from Bos-
ton to Punta Cana starting
at $365 round-trip.
EXPERTS
PICKS
Book first and
think later.
You have 24
hours to
change your
mind and get
a refund
without paying
a penalty.
VALUE TIP
I
S
T
O
C
K
P
H
O
T
O
/
T
H
I
N
K
S
T
O
C
K
AIRFARES TO
ISTANBUL DROP
IN SEPTEMBER.
65
ers tend to include ameni-
ties, such as shore excur-
sions and gratuities, in their
prices. A luxury line might
even cover airfareoften a
good deal if youre consider-
ing a Mediterranean cruise.
Plus, youll typically have
the run of a smaller ship,
with a roomier cabin and
more one-on-one service.
AVOID LAST-MINUTE BOOKINGS.
Impulse cruise bookings
may seem wise when dreary
weather has you craving
sunny beaches and pool-
side cocktails. But with
eleventh-hour bookings,
you could find yourself
squeezed into an uncom-
fortable cabin or on a ship
where all the shore excur-
sions are booked up. That
said, veteran cruisers who
know the ins and outs of
the cruise line reservation
process may want to take
advantage of aggressive
discounts on last-minute
bookings.
USE AN AGENT. A good cruise
agent can land you solid
deals, cabin upgrades and
other extras. Find one
through a cruise lines Web
site or at www.cruise
compete.com, where more
than 300 agencies vie for
your business. Agents typi-
cally receive a commission
from the cruise line, so its
in their best inter-
est if you book a
cruise bundle that
includes airfare
and hotel. Think
twiceand re-
search flights
and hotels on
your ownbefore
purchasing one.
FOR ALL-INCLUSIVE,
GO LUXURY. Cruise
lines are starting
to nickel-and-dime
passengers. Ex-
pect to pay an extra $25 to
$35 for the fanciest onboard
restaurants and to pony up
for other extras. Luxury lin-
Not long after the Costa
Concordia fiasco, a Carnival
cruise ship became disabled
in the Gulf of Mex-
ico and had to be
towed to shore.
But when it comes
to cruise safety,
dont get too
worked up. Cruise
disasters grab
headlines but are
relatively rare.
If youre still ner-
vous, avoid the Ca-
ribbean and Gulf
of Mexico and
consider a close-
to-shore river or
Alaskan cruise instead (see
Experts Picks, at right).
DEFY HURRICANE SEASON.
June 1 to November 30 is
hurricane season in the At-
lantic Ocean, and thats
when cruise lines offer the
most enticing deals. Cruises
are rarely canceled, because
ships can circumvent storms
with creative rerouting or a
few days delay. But delays
that force you to shell out
for extra hotel nights or
itinerary changes that make
your cruise unrecognizable
from the one you booked
arent reimbursed by the
cruise company, so cover
your bases by booking travel
insurance through a third-
party provider, such as
Travel Guard. (If your
cruise is canceled, youll
receive a refund or credit
toward a future cruise.)
CRUISES
Go Off-
Season
ALASKA. Prices have

thawed on Alaskan cruises.
Recently, a ten-day Septem-
ber cruise on Gate1Travel
.com started at $939 per
person, including hotel
but not airfare.
CARIBBEAN. Cruise.com
recently advertised a seven-
day November cruise start-
ing at $499 per person.
MEDITERRANEAN. We
found a ten-day cruise on
FareCompare.com on luxury
line Oceania in November.
It starts at $2,249 per per-
son (for an inside cabin),
including airfare and $500
in onboard credit.
EXPERTS
PICKS
Check out
Cruise Critics
Hurricane
Zone, which
provides storm
updates and
links to
hurricane-
season deals
(www.cruise
critic.com/
news/
hurricane.cfm).
VALUE TIP
A LUXURY LINE
CRUISE IN THE
MEDITERRANEAN
MAY FEATURE A
SMALLER SHIP AND
BETTER SERVICE.
D
R
.

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T
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F
,

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1
3

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T
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C
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66
KIPLINGERS PERSONAL FINANCE
LIVING // TRAVEL
in the spring (after spring
break) or fall.
SWITCH HOTELS MID STAY. Say
youre booking a hotel for
a five-night stay starting on
Saturday night. If Saturday
and Sunday are more expen-
sive than Monday, Tuesday
and Wednesday, youll typi-
cally pay for all five nights
at the highest price. Con-
sider switching hotels mid-
way through your trip if you
can find a comparable hotel
for a cheaper weekday rate.
VISIT THE CONCIERGE. Youll
get the inside scoop on
discount theater tickets,
two-for-one restaurant
deals and other entertain-
ment. Or get help before you
check in. Travelocity offers
free concierge service if
you book vacation packages
through its site. Expedia
offers Local Experts to
give advice on popular
vacation destinations. And
Room 77, a hotel aggregator
start-up, offers concierge
service to help you locate
the right room at three- to
five-star hotels.
advantage of the best-rate
guarantees from hotel
chains such as Hyatt and
Starwood. If you find a bet-
ter rate on a third-party site
for the same hotel and room
type, theyll beat the lower
rate by 10% to 20%. Orbitz
will award you Orbucks
if another customer books
a room or flight at a cheaper
rate. Orbitzs tracking sys-
tem takes note and credits
you 110% of the difference,
which can trans-
late to savings of
up to $500 per
hotel booking.
GO OFF-SEASON.
One secret to
snagging cheap
lodging is to select
a destination thats
designed for large
crowds, then visit
in the off-season.
Desperate to fill rooms, ho-
tels will slash rates or throw
in perks, such as free Wi-Fi
or spa credits. For example,
consider business or con-
vention hotels after the
suits have departed for the
weekend; and beach resorts
With scores of mobile apps
pointing you to the nearest
vacancy, last-minute book-
ings can yield fabulous
results. Plus, far-flung
destinations (think
Europe or Asia) are
offering deals on
lodging that help
balance out high
airfares. We have
five-star European
hotels working
with us now that
never would have
worked with us a
few years ago,
says Clem Bason,
president of Hotwire.com.
GRAB A LAST-MINUTE DEAL.
If you book a hotel room
and the price drops, you can
get a refund of the differ-
ence. One way is to book a
room with a refundable rate
in advance, then check in a
few timesincluding a week
or so before you leaveto
see whether the price has
fallen. If it has, cancel your
reservation (be careful not
to do so within the no-
cancellation period) and
rebook at the cheaper rate.
If you reserve a Money
Back room through Tingo
.com, the site automatically
registers when the price
drops and credits the differ-
ence back to your credit
card.
GET THE PRICE GUARANTEE.
For bigger savings, take
HOTELS
Book Now,
Check
Prices Later

SPAIN. European tourists
who typically flock to Spain
are tightening their belts
and staying home, leaving
hotels vacant. A four-star
hotel in Madrid recently of-
fered a late-summer rate of
$103 per night on Travelzoo.

VANCOUVER. The 2010
Olympics left this city with
a surplus of hotel rooms.
Groupon Getaways recently
offered a three-star room at
a boutique North Vancouver
hotel for $109 per night.
Two kids stay free.

CHICAGO. Once the con-
ventioneers clear out, Chica-
gos hotels start wooing
tourists. We found a fall
deal on a four-star Michigan
Avenue hotel for $99 per
night on Travelzoo.
EXPERTS
PICKS
Hotel Tonight,
a smart-phone
app for iPhone
and Android,
lists last-
minute deals in
dozens of U.S.
and interna-
tional cities.
VALUE TIP
TOURISM
IN MADRID IS
DOWN, AND
HOTELS ARE
CUTTING
RATES. C
O
U
R
T
E
S
Y

G
R
A
N

H
O
T
E
L

C
O
N
D
E

D
U
Q
U
E
67
budget-friendly, especially
if youre traveling with chil-
dren. As the peak summer
season cools off, beach
resorts should get more
generous with their perks.
DONT GET SUCKED IN. Its
great to get restaurant
vouchers and massages at
your destination. But be
sure you really want pricey
extras before you buy a
package that includes them.
If you wouldnt pay for them
on your own, the package
probably isnt a good deal.
PRICE IT A LA CARTE. To see if
a package makes sense, re-
search prices for all of the
elements before you com-
mit. For example, a cruise
package typically charges
per person for hotel rooms at
the port of departure. See
whether you would save by
reserving a double-occu-
pancy room outside of the
package. If you can, consider
dumping the package or opt-
ing out of the hotel portion.
e-mail newsletter with its
latest vacation packages.
USE YOUR FREQUENT-FLIER
MILES. You can book bundles
directly through air carri-
ers, such as American Air-
lines (www.aavacations
.com) and Delta (www
.deltavacations.com), and
use frequent-flier miles
to pay. Even AAA offers
its own member-exclusive
travel packages at AAA
.com/AAAVacations. Or
check out packages on daily
deal sites at Groupon.com/
Getaways and LivingSocial
.com/Escapes.
Their offerings
range from
weekend trips
to guided tours.
TRAVELING WITH
KIDS? TRY ALL-
INCLUSIVE. Vaca-
tion packages
that include the
cost of lodging,
food and enter-
tainment can be
Fall is off-season in many
destinations, so travel pro-
viders are eager to fill plane
seats, hotel beds and rental
cars. Anytime after Labor
Day is a great time to book a
travel package, says Clem
Bason, of Hotwire.com.
DONT OVERLOOK SMALL
SEARCH ENGINES. Travel
giants Expedia, Orbitz and
Travelocity have tons of
vacation package
dealseverything
from simple air-
farehotel bundles
to all-inclusive re-
sorts and guided
safari tours. But
take a look at some
of the smaller
names, too. Apple
Vacations offers
sweet deals, and
Gate 1 Travel
sends a regular
PACKAGES
Think Fall

COLORADO. Cash in
on Colorados off-season.
Groupon Getaways recently
featured a three-night stay
at the Majestic Dude Ranch
in the San Juan Mountains
until mid October, including
meals, for $495 per person.

THAILAND. Gate1Travel
.com has a nine-night trip
to Thailand with departures
in September, October and
November starting at
$1,469 per person, including
food, hotels and round-trip
airfare from Los Angeles.

INDIA. Spend nine days
in the Golden Triangle from
$1,849 per person. Gate 1
Travel offers a deal between
September and the end of
the year that includes air-
fare from New York City,
meals and hotels.
Eyeing a
European
cruise? Airfare
is going to be
a killer, so you
might get a
better deal if
you purchase
a package that
rolls it into the
cruise price.
VALUE TIP
NINE-NIGHT
PACKAGES TO
THAILAND START
AT $1,469 PER
PERSON.
I
S
T
O
C
K
P
H
O
T
O
/
T
H
I
N
K
S
T
O
C
K
EXPERTS
PICKS
68
I
S
T
O
C
K
P
H
O
T
O
/
T
H
I
N
K
S
T
O
C
K
Getting From
Here to There
Navigation apps are free, but you may prefer
to pay for a dedicated GPS. BY JEFF BERTOLUCCI
MOST GPS APPS
AND DEVICES HAVE
TOUCH CONTROLS.
SOME RESPOND TO
VOICE COMMANDS.
LIVING // TECH
ROAD TRIP COMING UP?
Pack the GPS. Despite sto-
ries about bum guidance to
closed roads, for the most
part GPS devices are accu-
rate and helpful for sojourns
in and out of town.
Start by test-driving a
free phone application, such
as Google Maps, Scout or
Waze. Each is easy to use
and delivers free updates,
voice-guided navigation
and current traffic condi-
tions. The downsides: Even
large, 4-inch smart-phone
screens look awfully small
when youre trying to read
a map at 70 miles per hour.
And some smart-phone
speakers are less than ideal
for vocal directions. If you
go the app route, be sure to
invest in a car phone mount
($10 to $30) and a car char-
ger ($5 to $30).
GOOGLE MAPS comes prein-
stalled on Android phones.
Google says it updates its
maps frequently, but wont
reveal how often. Its offline
maps feature is handy for
travel in areas with poor
reception, or if you have a
limited data plan. SCOUT BY
TELENAV (for Android and
iPhone) takes voice com-
mands and shows nearby
points of interest; a pre-
mium service that offers
offline navigation, real-
time traffic updates, rerout-
ing assistance, and info
on red-light cameras and
speed traps is $25 a year.
WAZE (Android and iPhone)
takes a crowd sourcing
approach: In addition to
delivering spoken turn-by-
turn directions, it collects
information from fellow
Waze users to report on
real-time traffic conditions.
Dedicated GPS. GPS devices
cost from $100 to $400
much less than auto manu-
facturers in-dash naviga-
tion systemsmaking them
an economical alternative
if you dont have a smart
phone. Plus, dedicated GPS
devices generally have
larger displays than phones,
making their maps easier to
read. And some units accept
voice commands, providing
easier and safer navigation
than touch controls. Map
and traffic updates are typi-
cally free as long as you own
the unit, and update sched-
ules vary by manufacturer.
Magellan aims for four
updates per year; TomTom
says it regularly releases
new maps.
The GARMIN NVI 3597LMTHD
($350), is an excellent, high-
end device. Its 5-inch high-
resolution display is housed
in a solidly built aluminum
frame. Plus, the nvi offers
the same pinch-and-zoom
feature as your smart
phonehandy for zeroing
in on specific streets or
neighborhoods. A magnetic
backing makes it easy to
snap in and out. The turn-
by-turn directions and
real-time traffic updates
are accurate, and we partic-
ularly liked the nvis voice-
activated navigation. One
gripe: The units suction-cup
mount popped off a couple
of times, sending the unit
skidding across the dash.
For tighter budgets, the
TOMTOM VIA 1605 TM ($230)
is a good choice. Its crisp,
6-inch screen is easy to read
even in bright sunlight, and
its on-screen buttons and
menus are large and well
spaced. The Via mounts
to the windshield or dash.
So whats missing? The Via
doesnt include TomToms
HD Traffic service, which
provides updates every two
minutes. Theres no voice-
command option, either,
although pricier TomTom
units offer it.
The MAGELLAN SMARTGPS
($250) is an innovative hy-
brid that includes a free app
for iPhone and An-
droid. The unit stays
in your vehicle, pro-
viding driving direc-
tions and traffic
alerts. When you
leave the car, the
apps Pedestrian
Mode guides you
to your destination.
Alternatively, you
can use the app to
get driving directions
and send them to the
SmartGPS unit in
your car. Its all very
cleverperhaps a bit
too clever. The de-
vices home screen
is cluttered with too
many tiles and tool-
bars. Voice command
is not available.
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70
L
I
S
E

M
E
T
Z
G
E
R
Why Hybrids Make Sense
N
early one-fourth of consumers sur-
veyed recently by J.D. Power and
Associates say their next car will
be a hybrid, and sales have risen
steadily over the past four years. But when
you compare the cost of a hybrid with that
of a conventional model, the price premium
may give you pause. The average price of
a hybrid is about $3,700 higher than that
of its comparable gasoline-engine model.
Back-of-the-envelope calculations of sav-
ings on gas show that it would take years
to recoup that money; thats one reason
hybrids accounted for only 3% of total sales
last year. It doesnt help that Uncle Sam
ended tax credits for hybrid purchases in
2010. Plus, the Energy Information Admin-
istration has forecast lower gas prices for
the next year or two.
The whole picture. But theres more to the
calculation than just fuel savings and tax
credits. Hybrids retain more of their origi-
nal value and often have lower maintenance
costs than their nonhybrid counterparts.
Too many buyers overweight initial cost
and underweight the total cost of owner-
ship, says John Voelcker, editor of Green
Car Reports. When you take these costs
into account, the financial equation shifts.
Kelley Blue Books ownership cost
calculator (www.kbb.com/new-cars/total-
cost-of-ownership) lets you compare the
five-year costs of models on the market.
For example, the Toyota Camry Hybrid LE
(sticker price $26,935) costs $3,460 more
than the Camry LE ($23,475). But the
hybrids five-year ownership cost is $150
less than its nonhybrid siblings.
Fords Fusion SE Hybrid ($27,995) costs
$1,700 less to own over five years than the
Fusion SE gas-engine model ($24,515).
Other hybrid models that cost less or virtu-
ally break even over five years compared
with their conventional doppelgangers in-
clude the Acura ILX ($29,795), Ford C-Max
($25,995, compared with the Ford Focus
hatchback), Honda Civic Hybrid ($25,150),
Lexus ES 300h ($39,745) and Toyota Prius
Two ($24,995, compared with the Toyota
Matrix). Lincolns MKZ hybrid is the
same price as the base model ($36,820)
and costs nearly $7,000 less over five
years. The greater the initial price pre-
mium, the less likely youll recoup it, and
thats especially true with luxury vehicles.
Many hybrid owners are just as con-
cerned with the environmental benefits as
with the impact on their wallets. A hybrid
produces lower emissions than its gasoline-
engine equivalent because the less gaso-
line a car burns, the less carbon dioxide it
spews. Using less fossil fuel is also a plus.
Good news for buyers. Nearly every category
of vehicle now has a hybrid option, and
some hybrid models are making a come-
back. Hondas Accord Hybrid, last sold as
a 2007 model, will return early next year.
Nissan is expected to bring back the Altima
Hybrid after a two-year hiatus. And Ford
will likely bring back the Escape Hybrid.
Battery life has long been a concern of
potential buyers, but experts say it isnt
an issue. The only vehicles needing replace-
ments in any quantity are the first genera-
tion of Toyota Priuses, which are now 12
to 13 years old. The cost of a replacement
pack for the Prius is down from $9,800 to
$2,600, and prices are expected to decrease
further as automakers benefit from econo-
mies of scale with more hybrid sales. Most
brands hybrid component warranties are
for eight years, and Hyundai offers a life-
time warranty.
If you own a hybrid for fewer than five
years or dont drive much, youll get less
value from a hybrid model. Thanks to
stricter government fuel-economy standards,
you have more choices among gas-sipping
conventional vehicles. Among midsize
sedans, both the redesigned Nissan Altima
($22,550) and the 2014 Mazda6 ($23,290)
post 38 mpg on the highway.
JESSICA ANDERSON > Drive Time
ASK JESSICA A QUESTION AT JANDERSON@KIPLINGER.COM, OR
FOLLOW HER ON FACEBOOK OR TWITTER AT JANDERSONDRIVES.
They retain
more of
their original
value and
often
have lower
maintenance
costs
than their
nonhybrid
counterparts.
LIVING // CARS / LOWDOWN
71
LIVING
P
U
S
H
A
R
T
which tracks the price of
gold by buying bullion. Note
that the IRS considers gold
a collectible, like a piece of
art or a baseball card, and
gives it special tax treat-
ment. When you sell your
shares, your gains will be
taxed at your ordinary in-
come rate, up to a maximum
of 28%, if youve held the
shares for more than a year.
If you sell your shares
within a year of buying
them, your profits will be
taxed as ordinary income,
up to 39.6%.
6. GOLD STOCKS ARE RISKIER.
Prices of gold stocks are
often more volatile than
the price of the metal itself.
For example, over the first
four months of the year, the
price of bullion declined
16%; by contrast, an index
of the biggest U.S. gold min-
ing stocks plunged 36%.
says Alec Young, global
equity strategist at S&P
Capital IQ. Buy through a
reputable dealer, one thats
been around for 30 years
and thats listed with the
Better Business Bureau, he
says. Youll pay a premium
when you buy and sell the
pieces. But Young says you
shouldnt pay more than a
5% to 6% premium to spot-
gold prices when you buy,
and you should accept no
more than a 1% to 2% dis-
count to spot prices when
you sell. Store the coins in
a safe-deposit box at the
bank. You dont need to
buy a home safe, and you
dont need to buy insur-
ance, says Young.
5. OR INVEST IN AN EXCHANGE-
TRADED FUND. Many so-called
gold bugs have chosen to
buy shares in an ETF, such
as iShares Gold Trust (IAU),
as a hedge against inflation
during the 1970s; the price
of the metal rose to a high
of about $600 an ounce in
1980, from $35 in early 1970.
And some experts, includ-
ing John Hathaway, co-
manager of Tocqueville
Gold Fund (symbol TGLDX),
say that gold is a good de-
fense during times of defla-
tion (falling prices).
3. A LITTLE BIT GOES A LONG
WAY. Gold does nothing. It
earns nothing; it doesnt pay
a dividend, says Dan Den-
bow, co-manager of USAA
Precious Metals and Miner-
als Fund (USAGX). Even
so, many experts say a small
exposure to goldfrom 1%
to 5% of your portfoliocan
be a good long-term port-
folio diversifier whether
prices move up or down.
Thats because gold tends
to move out of sync with
stocks and bonds.
4. YOU COULD START YOUR
OWN TREASURE CHEST. Con-
sider buying the actual
metal in one-ounce coins,
such as American Eagles,
1. SOLID GOLD IS NOT ALWAYS
SOLID. The price of bullion
peaked in September 2011
at nearly $1,900 an ounce
and has fluctuated since
between $1,500 and $1,800.
But a slew of worriesmost
having to do with the pros-
pect of a global economic
slowdownsent prices fall-
ing in mid April to just be-
low $1,400 an ounce. The
price of an ounce of gold
recovered to about $1,470
in early May. But many ana-
lysts still predict that the
price will fall to $1,200 to
$1,300 by year-end. Among
the factors that could con-
tinue to weigh down gold:
a strong dollar, a surging
stock market and tepid
economic growth around
the world.
2. DEFENSE, DEFENSE. Think
of gold as a hedge against
unexpected, catastrophic
financial events. For exam-
ple, the credit downgrade
of U.S. debt and worry about
a Greek default fueled a
44% rally in gold prices in
the first nine months of
2011. Gold also worked well
What You Need
to Know About
Investing in Gold
Use the shiny metal as a hedge against
financial catastrophe. BY NELLIE S. HUANG
LOWDOWN
72
STEP 1
Open your phones security
settings and select a password,
PIN or pattern to lock the screen.
Youll enter it each time you use
your phone.
STEP 2
Set up the ability to track your
phones location online and erase
its data in case the phone is lost
or stolen. Android users can
download an app such as the free
Android Lost. The iPhone comes
with Find My iPhone, which you
must activate on the device
through iCloud. Windows Phone
owners can log in to their Micro-
soft accounts to use the built-in
Find My Phone feature.
STEP 3
Before downloading an unfamil-
iar app, search the Web for re-
views to verify that its developer
is legitimate. For online activity,
using your cellular data plan
helps keep your information safe.
If you turn on Wi-Fi through your
phones network settings, avoid
unsecured networks (youll have
to enter a password to access
secured Wi-Fi). Install software
updates as soon as you receive
notices about them. And log out
of banking apps after you use
them (as well as any others that
might include sensitive data).
THE PAYOFF
Your data stays private.
Secure Your Smart Phone
3 SIMPLE STEPS
A smart phone puts your e-mail
in-box, contact list and financial
accounts at your fingertips. But
information could easily land in
a strangers hands. Heres how
to protect your phone.
ILLUSTRATION BY PABLO LOBATO
Welcome to Merrill Edge. Its online investing, streamlined.
One log-in to see investing and banking on one page.
Transfer funds in real time between accounts.
1
Get a full range
of investment oerings. $6.95 per online equity and ETF trade.
merrilledge.com/simplied
|
1.866.548.7351
Bank with Bank of America. Invest with Merrill Edge.
1
Certain banking and brokerage accounts may be ineligible for real-time money movement, including but not limited to transfers to/from bank IRAs (CD, Money Market), 529s and Credit Cards and transfers
from IRAs, Loans (HELOC, LOC, Mortgage) and accounts held in the military bank. Merrill Edge is available through Merrill Lynch, Pierce, Fenner & Smith Incorporated (MLPF&S), and consists of the Merrill
Edge Advisory Center (investment guidance) and self-directed online investing. MLPF&S is a registered broker-dealer, Member SIPC and a wholly owned subsidiary of Bank of America Corporation. Banking
products are provided by Bank of America, N.A. and afliated banks, Members FDIC and wholly owned subsidiaries of Bank of America Corporation.
Investment products: Are Not FDIC Insured Are Not Bank Guaranteed May Lose Value 2013 Bank of America Corporation. All rights reserved. AR9C792E
a) Log in
b) See my investing
and banking on one page
c) There is no c

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JULY 2013

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