Marketplace

HSAs

Question: My employer is switching from a high-deductible health insurance plan to a traditional plan. I have accumulated enough in my HSA to be able to invest it in Wells Fargo mutual funds, which my employer provides along with the insurance. But with the switch I will no longer be able to add to the funds, and Wells Fargo will begin to charge me an account fee every month. What can I do with my HSA money? Andy, Ankeny, IA.

Answer: You're in a good financial situation. With your Health Savings Account (HSA), the contributions were made with pretax dollars. Withdrawals are tax-free as long as the money goes toward qualified medical expenses, which include everything from acupuncture to organ transplants to quit-smoking programs.

Your account remains tax sheltered. The only restriction is that you can't make new contributions. But you can always tap the account to pay for qualified medical bills that aren't covered by insurance. Better yet, if you don't need the money, it will compound in the account over time. You can then make tax-free withdrawals to help defray medical expenses in retirement. After all, Medicare pays for at most half the average retiree's health bill now, and most forecasts say that percentage will shrink.

One other point: As the sums in HSAs grow, more and more people are interested in managing the HSA for long-term growth. Instead of keeping the money parked in a low-risk bank money-market account, as is typical, some of that money is finding its way to equity mutual funds for the long haul. You could keep the money in the mutual fund accounts you have with the Wells Fargo managed HSA or you could roll it into another financial institution, too. (There can be restrictions, so check out the rules with your plan.)

Comments (0)

Reading Suggestions

Question: I'm a 33 yrs old stay-at-mom and I also work freelance a couple of hrs per week. I have 2 kids under 5 yrs old. My husband is a research scientist who works at the university. We are a household in the $100,000+ bracket. I would like to educate myself on financial planning. We don't have college funds for our kids or retirement accounts for us. We don't own a house but it's in our future plans to buy one. My husband has some stock options from his work as well as mutual funds. What book do you recommend I read to educate myself and start making the right decisions on our financial planning? Thank you in advance for your response. Maria. Santa Barbara, CA

Answer: I love books, so this is always a fun question to answer. For people in circumstances like yours, I'd recommend two very good and practical books that deserve a place on any bookshelf. The first is "The Random Walk Guide to Investing: Ten Rules for Financial Success." It's by Burton Malkiel, a finance professor at Princeton University and author of the personal finance classic, "A Random Walk Down Wall Street". The latter is a wonderful read, but it's also a commitment as Malkiel translates the key concepts of modern portfolio theory (many of them highly abstract and quantitative) into everyday language. What I like about his Ten Rules for Financial Success is that it's extremely accessible and covers all the basics well. It's a real gem of a book.

My other suggestion is Smart and Simple Financial Strategies for Busy People, by Jane Bryant Quinn. Frankly, you can't go wrong paying attention to what the Queen of Money has to say. The title says it all, and she delivers it with wit and wisdom.

Comments (0)

Questions answered on air for May 10-11

On this week's Marketplace Money, Chris and Tess talk about all kinds of investments: annuities, SIPC, Coverdale IRAs and auction-rate securities.

Listen to this week's segment

More...

Comments (1)

Payment Plan?

Question: I'm a grad student on a very tight budget. I worked for a few years before coming back to grad school, and unwisely brought some credit card debt back to school with me. I've been shopping for a new credit card to roll that high interest balance to a new account that would hopefully be 0% interest for the first year. I believe I could make a much bigger dent in the debt with zero APR.

Yesterday, my credit card company called and suggested a payoff plan. They want to direct-withdrawal money from my checking account each month, and they claim they will give me 0% interest on a 5 year pay off. Is this some sort of gimmick? What kind of questions should I ask to make sure it's legitimate? thanks! Josh. Boulder, CO

Answer: This is a new one for me. I hadn't heard of a credit card company doing this before (and I plan on checking it out some more). I wonder if this offer reflects a shift in tactics, moving from raising customer rates to working with them on a payment plan?

For the moment, let's assume everything is on the up-and-up. I would have two questions. First, is there a fee attached to the program? Secondly, and more importantly, you can do this on your own without locking your self into the credit card company's program. After all, you say you are on a tight budget, and I would imagine every once in awhile you might have to pull back from paying off the credit card debt. It's a good idea to put yourself on a payment schedule, but I would do it on my own, which is remarkably easy in an era of online banking and automatic transfers. But I would stay in control. I'd worry about giving up financial flexibility.

Comments (1)

Early Retirement and Health Insurance

Question: My husband and I are planning on retiring at age 50 (we have approx 13 years left)...meaning we hope to quit our 8-5 corporate jobs and find something more fun perhaps working part time at the local greenhouse or golf course. Many articles in magazines or stories on talk shows focus on how much to save but no one ever discusses healthcare options for those of us who want to retire early and will be without Medicare until age 65. We suspect healthcare will take a chunk of change but don't know how much or even where to find individual coverage. Can you please provide some guidance. Peggy, Minneapolis, MN.

Answer: You're right that the deal-breaker to early retirement is usually health insurance. It's expensive. Early retirement is probably out of the question for two groups of people: those who can't afford to absorb expensive annual health-insurance costs until Medicare kicks in at age 65 and anyone with a serious medical condition, such as diabetes or heart disease, that makes it next-to-impossible to get decent coverage.

Assuming you don't fall into those two categories, you should shop around and learn everything you can about deductibles, co-pays, networks, out-of-network costs, and other nuances of health-insurance policies.

I'd look into high-deductible plans. Basically, the higher the deductible, the lower the premium. The most popular high-deductible plans are those with preferred provider organizations that give price breaks for staying within a network. Still, coverage can range from bare-bones (read cheaper) to reasonably comprehensive (read expensive).

Better yet, consider a health savings account. You use these tax-advantaged savings plans in conjunction with a high-deductible policy. For a family in 2008, the catastrophic insurance policy has a minimum deductible of $2,200 and an out-of-pocket limit of $11,200. The maximum a family can contribute into the tax-sheltered account is $5,800. HSA contributions are made with pretax dollars, and any unused money in the savings account is rolled over for future use. Withdrawals are tax-free so long as the money goes toward qualified medical expenses.

You could also check out professional associations, trade groups, and even chambers of commerce offer group health plans to members, but they will probably be more expensive than an HSA or a high-deductible plan.

Comments (1)

Roth vs Pay Down Debt

Question: I'm 26 years old, and have no credit card debt, no car loans, no student loans. I max out my 401(k), and have a six-month emergency fund. Pretty good, right? But I also have a mortgage and a $40,000 second mortgage (which is structured as a home equity line of credit).

Over the past year, I've saved up about $5,000. My question is, should I put this money into paying off the home equity line of credit, or should I start a Roth IRA? I know the Roth IRA has higher returns over the long-term, but in my gut, I REALLY want to knock off that home equity line of credit. What should I do with the $5,000. Seattle, WA

Answer: First of all, I admire your financial acumen. I know that I was nowhere near as financially savvy as you are at your age. You're saving for retirement. You have a nice emergency stash. And no debt other than your mortgage and home equity line of credit. It's great.

If I were you, I would pay attention to your instincts: Go ahead and tackle that home equity line of credit. It's a smart move.

Comments (2)

Cash or Loan?

Question: Hi, I have to replace my roof (sooner then later). Should I pay cash from a money market savings account, or take out a loan? Thank you, please get back to me rather sooner then later :) Gabriele, St. Paul, MN.

Answer: This is really a money management question. The baseline answer is pay for the home improvement with cash from savings. This way, you don't take on any debt. Plus, the interest rate you're getting on your savings is probably a paltry sum anyway.

However, there may be some good financial reasons for you to hoard savings right now. If that's the case, then by all means take out a loan. The best loan is probably a home equity loan. It's ideal for a lump sum payment such as a new roof, and you're preserving the value of your home. The rate of interest is fixed, which makes it easy to plan. You could take out a home equity line of credit, but the interest rate is variable. It's a loan option best tapped for projects that are done in batches or over a long period of time.

Comments (0)

Questions answered on air for May 3-4

On this week's Marketplace Money, Chris and Tess answer questions about freeing up assets to purchase an online business, buying foreign real estate, paying Social Security taxes while self-employed and financing options for study abroad.

Listen to this week's segment

More...

Comments (0)

Mortgage Accelerator Programs?

Question: My husband & I are both retired. We have parent loans for our 3 children's college expenses. We have a $20,000 home equity loan but no other debt. Recently we were approached by a friend to look into u1stfinancial as a way of paying them off sooner and decreasing interest. Do you have any information or advice regarding this company? Carol, Pine City, NY

Answer: We've been getting a lot of questions about United First Financial and its Money Merge Account. Full disclosure: I'm not a fan of the product.

Here's how the company describes the money merge account on its website.

The Money Merge Account system is a powerful tool that enables homeowners to pay off a 30-year mortgage in as little as one-third of the time, without refinancing their existing mortgage or increasing minimum required monthly payments. The system incorporates the homeowners' checking and savings accounts with an advanced line of credit (ALOC), then helps to strategically and incrementally position their money where it provides much more financial benefit than "sitting stagnant" in a standard checking or savings account until it is otherwise needed. Complex financial details programmed into the Money Merge Account software help to better educate the homeowners and assist in some of the greatest time and interest savings possible.

Got that? There are a number of comparable products on the market. The bells and whistles may differ, but it looks like the basic idea is the same. You set up a special home equity line of credit off the value of your home (which is getting harder to do and more expensive these days, thanks to the credit crunch. As I understand it, you could use a personal line of credit or a credit card, but the latter at least sets off all kinds of alarm bells.) When you get your paycheck it goes into the line of credit, decreasing your mortgage balance and, after paying your bills from the account, the remaining money keeps your mortgage balance down. The software costs for $3500 for the Money Merge Account, and other programs also charge for their software.

Carol, as I mentioned above, I'm not a fan. In essence, I think these programs boil down to a complicated and expensive way to keep a household to a very tight budget. If that's what you want to do there are other, cheaper ways to map out and maintain a frugal lifestyle. Perhaps more important, I worry about homeowners pouring so much of their discretionary income into their home. It's nice to own your home free and clear, but it's also important to build up a well-diversified portfolio with a well-funded emergency cushion.

And if it makes sense for you to pay off your mortgage early, well, you can do it on your own without paying for special software. Just make extra payments to pay down principal. A classic approach is to make an extra monthly payment a year. By writing 13 monthly mortgage checks instead of 12 you'll pay off that loan faster. Just be sure to tell the bank in writing to put that extra payment toward principal. Last, Carol, these mortgage loan accelerator programs seem to violate a time-honored financial motto: Keep It Simple.

Comments (1)

I-Bonds

Question; I have been a long term investor in I-Bonds especially when inflation is strong since it is inflation adjusted. But just when inflation and market choppiness should push citizens to start saving more the treasury department cut the upper limit of yearly contributions to $5000 from $30000..... Do you have any idea why they would do this now? It seem counterintuitive if they are trying to help people protect their principle in an inflationary period. Thanks! Maximia, Portland, OR

Answer: I think it's a terrible move. Here's the breakdown: Savers can now buy a total of $20,000 in U.S. savings bonds. That's $5,000 each of Series EE (the traditional savings bond) and Series I savings bonds (the inflation-indexed security you mentioned) online and another $5,000 each in paper. In sharp contrast, before the turn of the year individual savers could sock away a total of $120,000 in U.S. savings bonds.

The shift is even more significant than these dollar figures suggest. The change makes it that much harder for individual investors to hedge a substantial portion of their savings against the ravages of inflation over time. Yet many finance scholars advocate that inflation-indexed bonds should be the foundation of a long-term retirement portfolio. The big attraction for individuals of the inflation-indexed savings bonds is that savings compound tax deferred until the bonds are cashed in a 30 year period. Plus, you don't pay any commission to buy and sell savings bonds.

As you found out, the Treasury has consistently denied its message is "save less." Treasury says it's trying to redefine the program toward the small investor. That may be. Still, the timing is odd. At a time when inflation is picking up, the government sees fit to reduce the attractiveness of one of the safest inflation hedges around. The only theory that makes sense to me is that Treasury and the Administration would prefer to swell the commissions and profits of Wall Street than sell a terrific inflation hedge for individual investors. Too bad.

Comments (1)

Socially responsible Investing

Question: I'd like to invest in a green mutual fund, one that develops wind and solar energies, electric cars etc. I've been looking at Winslow green growth. Any thoughts or suggestions? Kate, Sheridan, WY

Answer: I looked up the Winslow Green Growth fund on the www.morningstar.com website. As of writing this column, the fund's year-to-date return was down -22.50%. Its one-year return is -5.60% and its 5-year return annualized is 17.73%. Its net expense ratio is 1.45%, which is on the high side. (According to Morningstar fees on green funds range between 1.25% and 1.98%.)

I typically prefer index funds that cover a range of industries and charge low fees, and there are a number of "green" index funds. Once you've created a broadly diversified portfolio and you then want to place a bet on a sector or a fund or a company with a small percentage of your portfolio, well, by all means go ahead--have some fun. If you're interested in doing more research about socially responsible investing two good websites are www.socialinvest.org and www.socialfunds.com.

The biggest rap against the movement is the belief that marrying personal values to an investment portfolio cuts into returns. In other words, doing good and making money don't mix. I don't agree. A number of studies suggest there's little difference between pooling money to make money and pooling money to make money and express values. This came home to me in a series of papers by Meir Statman, a finance economist at Santa Clara University. Among his conclusions, the risk-adjusted return on socially conscious index funds is roughly comparable to the Standard & Poor's 500 index and the performance of actively managed socially responsible mutual funds is about equal to their conventional mutual fund peers. (You can read his papers on the subject at www.scu.edu/business/finance/research/sristatman.cfm.)

One note of caution: Socially responsible funds tend to have high fees that cut into returns. So while it always pays to shop around it's especially true in this industry.

Comments (2)

Coverdell College Savings

Question: I have 2 Coverdell IRA's for my 2 children, to which I contribute what I can. I've heard that the program is set to expire in 2010. 1) Is this true? 2) Does this mean I have to get the money out and close these accounts before 2010? My children are both under 10 years old. Brian, Ann Arbor, MI

Answer: You're right that a number of the college savings attractions attached to the Coverdell will end in 2010. I'm not really sure why Congress improved the 529 college savings plan in 2006 but left the Coverdell vulnerable. But it did. For instance, the Pension Protection Act of 2006 made withdrawals from 529s permanently tax free when the money goes toward qualified educational expenses, like tuition. What's more, the sums invested in 529 plans aren't considered a student asset in the financial aid formula calculation.

In sharp contrast, the Coverdell didn't get legislative protection. No, upgrade passed in 2001, such as raising the contribution limit from $500 to $2,000 and allowing tax-free withdrawals for K-12 expenses, are still slated to expire in 2010. The Coverdell will be then much less attractive choice for college savings. For instance, right now you can make tax-free withdrawals from a Coverdell to pay for college and still take advantage of the Hope or the Lifetime Learning credit. After 2010, you'll be forced to decide which benefit to take, the tax free withdrawal or the credit.

What to do? If you like your Coverdell accounts you can continue to make contributions into them. If the Coverdell bells-and-whistles do expire, you can always roll the money over into a 529. (It's a tax-free rollover.) You can gamble that Congress will get rid of the 2010 sunset date. Or you can open up a 529 plan for your children. No matter which choice you make, your savings will compound tax-deferred and your children will benefit from your thrift. I just wish Congress would stop all this nonsense about sunset provisions. It makes savings more complicated than it should be.

Comments (0)

Blending Finances

Question: Hi Chris, My girlfriend and I will be graduating from Cal's City and Regional Planning Master's program next month. We will also be moving in together.

Neither of us has lived with a partner before. We're thinking about buying a car. And we're wondering if you have suggestions for any books or resources that will help us have a harmonious financial relationship together. At this point, we're not sure whether we will be getting married but still want to thoughtfully and logically think through our communal finances. Justin, Oakland, CA

Answer: Congratulations on you and your partners thoughtful approach to money. To me, how money is handled defines one of the big differences between living together and being married. Even when married couples strive to keep their finances separate, money mingles over time. And for most newly married couples the decision to set up merged accounts is deliberate. But when you're living together it makes sense to keep money separate most of the time.

Keep the lines of money communication open. Don't let any problems or issues fester. Establish a regular money meeting for paying bills and talking over finances. And whatever system you and your friend decide on for splitting and paying the bills-- keep it simple. Now, on your specific question of a car, it's easy enough to divide insurance, maintenance, and gas bills. But what about ownership? For instance, who gets the car if you split up? And if you buy together you should have a contract that spells out obligations.

Ownership is a legal issue. A good resource for looking into the options for a car contract between unmarried couples is the Nolo.com guide Living Together: A Legal Guide for Unmarried Couples. As you can gather from the title, Nolo's book is written from a legal perspective. For insight on handling the basics of household money as a couple, I like Ruth Hayden's For Richer, Not Poorer: The Money Book for Couples. It's geared toward married couples, but there is practical advice for any couple.

Comments (1)

Questions answered on air for April 26-27

On this week's Marketplace Money, Chris and Tess answer questions about rising property values, dealing with a collection agency, transferring savings bonds and switching life insurance.

Listen to this week's segment

More...

Comments (2)

Spousal IRA

Question: I am a 30 yr old man with a 9 month old son and a stay at home mom to take care of. I have started contributing to a Roth IRA this year. I maxed out for 2007 and have contributed $3000 towards 2008. I plan to invest in low fee index funds and have invested in the Vanguard Emerging Market Index Fund and the Vanguard Balanced Index Fund. This should cover the whole world!

I have played it safe with my Roth IRA even though I consider myself more aggressive than others. I would like to trade stocks, hopefully keep them for more than a yr to escape the high taxes but in the current market situation there are times I feel like selling stocks that are not doing too well.

My question is: Can I open a Roth IRA for my wife even if she doesn't work. If I can, can I actively trade stocks in that account but opening a Roth-IRA with TDAmeritrade or any other discount broker. Will it all be tax free? Wouldn't it be a good strategy to avoid taxes if you want to actively trade? Pradeep, Chicago, IL.

Answer: Yes, assuming you file a joint tax return, your wife can open up a Roth-IRA in her name. She funds it with after-tax dollars for up to $5,000 in 2008 (the limit is $6,000 for those age 50 and above). The so-called "spousal" Roth IRA and traditional IRA is the one exception to the rule that you need earned income to contribute to an Individual Retirement Account. (Technically, there is no such thing as a spousal IRA, but the phrase is used as descriptive shorthand in the financial services business.) By the way, all the other Roth rules still apply, such as the compensation phase-outs. It doesn't read as if that's a problem for you and your wife this year. But for any couple that doesn't qualify for a Roth, a traditional IRA funded with pre-tax dollars is always an option. There are no restrictions except the amount that can be contributed with a traditional spousal IRA. It's a smart move for your wife to open a retirement account..

But we are going to part ways on trading stocks in the Roth IRA (or any IRA). To be sure, trading in the retirement account won't trigger any tax consequences. But when saving for retirement the savvy strategy is to invest in a well-diversified portfolio with minimal trading and razor-thin fees. This approach substantially increases the odds of doing well over time. That's why I like the portfolio you have in your Roth.

Now, if you want to test your stock-picking wits in the market by trading stocks, I'd do it in a taxable account not a retirement account. Yes, you'll end up paying taxes on gains, but you'll also minimize any tax hit with your losses since Uncle Sam underwrites your bets that go bad.

I would also strongly encourage your wife to manage her retirement account on her own. It's a good idea for everyone to understand how to invest money in the markets.

Canceling Credit Cards

Question: I would like to cancel some of my credit cards that I no longer use. I'm concerned about identity theft, and about fees charged on cards even if they're not used. Is there any reason I shouldn't cancel these cards? Thank you! Dennise, Santa Cruz, CA.

Answer: In the perverse world of credit scoring, closing these accounts will lower your overall score for awhile. I still think it's smart to get rid of the accounts for the reasons you mention. So, if you have a major purchase coming up in the next year, say, a home or a car, I would hold getting rid of the credit card accounts until after you've borrowed money to buy a car or home. You'll get a better interest rate this way. Once the purchase is behind you, cancel the cards. Of course, if there isn't a big borrowing in your near-term future, get rid of them right away.

Money Market Savings Accounts

Question: Chris -- You mentioned money market mutual funds a couple times on last week's show. Are money market mutual funds the same as money market savings accounts? Can you get them at banks, or just brokerages? Are they still as liquid (make deposits, withdrawals) as money market savings accounts? Thanks -- I appreciate all of your and Tess's advice. Brian, Auburn, AL

Answer: Money market mutual funds and money market savings accounts are similar in many respects, but there are critical differences between the two. A money market savings account at a bank typically pays a higher rate of interest than a regular savings account. The account usually has a higher minimum balance requirement and limitations on the number of withdrawals a month. A money market savings is insured up to $100,000 by the Federal Deposit Insurance Corporation (FDIC). In other words, if the bank goes belly up, your money is safe (assuming you're under the insurance limit).

The same isn't true with a money market mutual fund. There is no FDIC insurance backstopping the account. In return, you'll get a slightly higher interest rate with the money market mutual fund compared to the money market savings account. Still, money market mutual funds are among the safest investment options available to individual investors. There are two simple ways to reduce risk with a money market mutual fund. First, invest with a brand-name financial institution with the resources to backstop a money market fund if it gets into financial trouble. Second, choose the most conservative fund option. It's the one that is comprised of mostly short-term U.S. Treasury securities and federal agency debt. There's no reason to chase higher yields by taking greater risks with this money. You want your principal safe and earn a decent interest rate.

Saving for College

Question: On average, we save about $1000 a month. $500 of it goes to a 529 college savings plan for our son (he's about two years old). $200 goes to two Vanguard index funds (Total Stock Market and Total International) in our regular taxable account. And we put $300 in a money market fund with our bank.

The money market is now at about $7000, and we realize we don't have a good option to invest that money. We don't want to have the money sit in a money market account. Certainly not for 16 more years. Neither do I feel comfortable putting all of it in 529. Hence, I am looking for an option that (1) provides growth opportunities, (2) has low tax impact, and (3) has some mechanisms built in for age-appropriate auto-(re)balance.

In the last show, Chris mentioned tax-managed mutual funds as an option for semi-long term tax efficient investment. I looked at Vanguard's tax-managed funds. They all cost quite a bit to start, $10,000. So this doesn't seem to be a valid option.

What other options are available? I suppose that I can buy ETFs at a discount on-line brokerage as a way to boost tax efficiency and hold diversified investment stocks. I am not sure if, given the amount of dollars we are talking about here, ETF would be a good choice, e.g. the amount of saving on tax efficiency would offset other shortcomings of ETFs. I have a hard time thinking about or comparing ETFs with index funds. In addition, I will have to do age-appropriate asset re-allocation myself with the ETF funds. Because that would take time and discipline, it might not be an attractive option 10 or 15 years from now.

Another thought is to buy a Vanguard target retirement fund that sets my son's college entrance year as the retirement target year, say 2020. With this, I at least can have stochastic asset reallocation as a means to reduce portfolio risks. But I have no idea how tax efficient that fund is. And it probably is not. Thanks. Key, Cary, NC

Answer: Your question is extremely thoughtful, and just reading how you're thinking through the various options and trade-offs might help someone else decide what to do.

Fact is, I like what you're doing: a mix of a 529 plan, index funds and a money market fund. I hope that the index funds and money market fund are in your name so that if your son gets scholarship money, you can tap the savings for your retirement. I prefer the index mutual funds over ETFs because the former are ideal for adding money on a monthly or quarterly basis without paying the brokerage fees or commissions. So I would take some of the money market fund money and put it to work in the index funds.

One other thought: You could buy some I-bonds to add into the mix. The fixed 30-year rate of interest on the inflation-protected savings bond is currently 1.2% per year (plus the actual rate of inflation). But it will almost certainly fall when the rate is reset on May 1. The limit per person is $5,000 in electronic form at www.treasurydirect.gov and another $5,000 per person in paper form at banks. Still, you get a guarantee that a dollar saved today will be worth a dollar plus interest 16 years from now when your child goes to college. And the money compounds tax-deferred until you cash it in.

Green Cards and Social Security

Question: I have 2 questions: 1: Is it true only US Citizens can collect SS when they retire; Green card holders do not qualify?

2: I have a Net Worth of about $300K, making up of Cash (60%), Stocks (25%), real estate (10%) and 401K(5%). Should I have a personal financial planner to handle my finances? If so, do you have any recommendations, and how much would it cost? Thank you. Ed, Seattle, WA

Answer: Green Card or Permanent Resident Card holders pay Social Security taxes, and receive Social Security benefits when they retire (as long as they've worked for 10 years before retiring). Immigrants can get more information at the Social Security Administration's website.

Your second question is a much bigger one. Briefly, my bias is no, you don't need to hire a financial planner. That is, not until you can do the basics of financial planning on your own. No matter what, you'll need to educate yourself first. Here's why: Over the years, one of the biggest mistakes I've seen people make is turning their money over to a professional and assume they'll do all the work. That's a recipe for trouble. And it takes time to find a good planner that you'll want to work with.

However, if you'd like a quick check up that focuses mostly on your portfolio (rather than the whole estate), Ive become a fan of the financial planning services offered by several of the major mutual fund companies. The fees are minimal, and the ones I have looked at are steeped in modern portfolio theory and sound personal finance practice. For instance, they won't try and get you to heavily trade stocks and bonds. You do have to be comfortable working over the phone and by email. The advice is limited, so I'd take it with a grain of skepticism. But it's also a nice way to check your assumptions and preferences.

Comments (3)

Remodel Home?

Question: We are currently faced with a dilemma. My wife and I bought a home years back with the eventual assumption that we would outgrow it and have to move into a larger place. Since that time, we have had two kids and fallen in love with the neighborhood. Our kitchen is outdated, with buckling countertops, our furnace is over 30 years old, and we've got no room to store clutter that comes along with kids. (Legos can be particularly painful to bare feet.) We'd really like to stay put and get an addition and replace the dated things that need replacing, and have a place for storing everything. Our worry is now the best time to do these things? The economic down turn... or recession has us concerned. We have very little debt, other than the current mortgage. We are able to pay our bills and save a little for retirement and college for the kids. Are we making the right decision to add on to the house? Rob, Bel Air, MD.

Answer: Whew, I can relate to the pain of walking on Legos. I think the current housing turmoil means more people in circumstances like yours will pick remodeling over moving. (Plus, as you say, you love the neighborhood.) The remodeling industry boomed along with the surge in real estate prices, according to Harvard University's Joint Center for Housing Studies. The remodeling market in 2007 breached $290 billion, up from an annualized $85.3 billion in the final quarter of 1997. It's during these boom years that remodeling horror stories became common currency among homeowners, from contractors doing shoddy work to walking away from incomplete jobs. Although the remodeling market has held up well compared to the housing market, activity will slacken if history is any guide. While the cost of drywall, composites, and other materials is up, labor is plentiful and many contractors are eager to keep their crews working. There is more room to negotiate than before, but I think the real gain is better work for the price paid.

That said, if you do go the remodeling route remember that it will only "pay" as a long-term investment. You'll lose moeny if you end up moving soon. The general rule on renovations is that you will only recover about 40% of the cost of any work done, with kitchens and bathrooms having the highest return on your money and luxuries like swimming pools the least. I'm sure you've already gone over the details with your contractor, but you can check out the numbers at Remodeling Online . Again, it's clear you don't want to end up with too much debt, so prioritize the project and figure out what you might want to do later. So, assuming you stay conservative with your finances, owning a remodeled home in a neighborhood you love will add to the quality of your family's life. And that's worth a lot.

Comments (1)

Switching Life Insurance Plans?

Question: I am a single, 40 year old woman, no dependents. I got a New England Life Insurance policy about 13 years ago - not for a payout if I die prematurely, but as a way to save money for retirement. I have someone who has been helping me invest my money for these past 13 yrs. but recently sought a second opinion. This second opinion wants to take my money out of my current company and put it with Northwestern Mutual Life. I will lose $286 in a transfer fee, which isn't a big deal if it is a smart move. I will also lose ground as I am now 40 and will be paying a higher 'mortality rate' (using the wrong term but I hope you know what I mean). The man who recommends this move says Northwestern Mutual is such a superior company that the long-run benefit will overcome the short-term loss. What should I do? Thanks - Marti, Chicago, IL

Answer: For most of us, the main reason to own life insurance is to financially protect a loved one from our untimely death. That's usually a child, but it can be a parent or a partner. (Life insurance also plays a critical role in the estate planning of the wealthy.) Although you're accumulating savings, life insurance is not an especially efficient or cost effective retirement plan. It pales next to a 401(k), 403(b), IRA, Roth-IRA and other retirement savings plans--or just building up savings in taxable accounts, a home, and other alternatives. There's no rush, but I would go through your finances and see how life insurance fits into your overall plan, and decide whether it makes sense for you to keep a policy or not. It's dated, but I still find it a useful introduction to the topic is "Smarter Insurance Solutions" (Bloomberg Personal Library) by Janet Bamford.

That said, I'm concerned about this specific proposed shift. Your concerns and questions are legitimate. New England Life is a good, reputable company. It has a AA/stable rating from Standard & Poor's, the rating agency. Northwestern Mutual is an excellent company with an even stronger balance sheet at AAA/stable. Still, New England Life is no fly-by-night operation. It has a blue-chip balance sheet. (If it didn't my advice would be different.) You've owned the policy long enough that you're now really getting the benefits of the savings component. My fear is that this shift is not to your financial benefit but to improve the commission earnings of the "second opinion".

That's my worry. One quick, cheap way to check out whether this move makes financial sense for you is to contact the Consumer Federation of America. It offers a life insurance evaluation service. You can find the details at here. The service helps insurance consumers decide whether to buy a cash value policy or term insurance, decide among two or more cash value policies, and whether an existing cash value policy is worth keeping. The cost for the analysis is $70 for the first illustration.

Comments (1)

A Rollover IRA

Question: I was recently hired for a job in the public sector, working for the state of New York. My previous job was in the private sector. My 401(k) from my previous job is still being administered by my former employer, and it's now worth about $108,000.

The benefits administrator of my present employer has told me that I am not allowed to roll my 401(k) into any pension or savings plans that my employer offers. What are my options for doing something productive with my 401(k), instead of just letting it sit there? Tim, NY, NY

Answer: A rollover IRA (Individual retirement Account) is designed for circumstances just like yours. It's a routine transaction. First, figure out what financial institution offers the mutual fund options and services you'd like. They'll have the forms online for making a rollover IRA, but I always recommend calling the 1-800 number and ask for a human being to walk you through the process. The reason is that you want to make sure that your retirement savings are transferred institution to institution. In other words, you don't touch the money. It goes from your 401(k) to the financial institution you've picked for your IRA. This way you preserve the pension's tax shelter.

Comments (2)

Managing Money for 10 Years

Question: My husband, Gregg, runs a non-profit literary arts organization called the Citylit project (create link to www.citylitproject.org). He inherited a nice car from someone he published, Adele Holden, a poet/English teacher who grew up during the segregated 1930s on the Maryland's Eastern Shore, scene of Maryland's last lynchings. When her memoir book published, she bought a black Infiniti I-30 cash outright since, she explained, Gregg would be driving her all over the state to readings and events. He did, and when she passed away she left him the car. We plan to donate the proceeds from selling the car to CityLit Project and publish African-American poets, likely young emerging poets, given Adele's passion for teaching. So my question is, what's the best way to invest $10,000 for the most gains which also allows access to proceeds within the next 10 years? Thanks. Marik, Baltimore MD.

Answer: This is a wonderful story, and a terrific use of the money. Now, in terms of investing the $10,000, the key concept is the relationship between risk and return. It's an axiom of modern finance that the only way to create the opportunity to earn a higher return is to take greater risks--and vice versa. The trick will be to mix and match investments to create a portfolio that gives you the chance for a decent return for the amount of risk that makes sense to accomplish your goals. Another factor to consider is how much of this money will you draw on during the 10 year time horizon? The more you want to tap into it on a regular basis the more conservative the portfolio choices become.

One way to structure the portfolio is to build a layer investment cake. The foundation would be "cash", which is Wall Street jargon for short-term securities, such as a three month to 1 year certificate of deposit, Treasury bills, money market mutual funds, and the like. With these investments your principal is safe, you'll make some interest on it, and the money will be easily drawn on when you need it. You could boost the income you earn by then putting some money into longer term fixed income securities. Since you have a 10 year time horizon, I would consider a adding a final layer of stocks through an broad-based equity index fund such as the Standard & Poor's 500. That would be your riskiest investment, but it would also offer the best opportunity for growth. You can play around with the percentages (or skip the stocks altogether) depending on how much--or little--risk you're willing to take.

I'm curious if any readers have other suggestions about how they might manage the money. Please send them in the comments section.

Downsizing

Question: My wife and both turn 50 this year. Our son is graduating college and our daughter enters college this fall. We are downsizing into a smaller home, purchasing with cash. We'll then sell our current home. I've looked forward to being "mortgage-free" for some time, but several of our friends suggest losing the tax advantage is a bad financial move. Chris, what is your opinion? Tom, Charlotte, NC.

Answer: First of all, from a financial point of view it's really smart to make a downsizing move while you're still working. You'll save a lot of money--no mortgage, lower property taxes, cheaper utility bills, and so forth--and you can salt away at least some of that money for later on. In a sense, it's a smart savings strategy. Secondly, I don't think the mortgage deduction is all that important to your bottom line. Sure, it helps. But it's far better to enter your Golden Years owning a home without a mortgage. This way you have a solid equity foundation for your overall portfolio. Go for it

Comments (1)