Marketplace

Freelancers and unemployment insurance

Question: i am a self- employed artist. all of the news about record numbers of people collecting unemployment benefits has me wondering if these benefits are also available to self-employed people whose incomes dry up. i am currently managing to pay all of my bills and even save little bit of money but am concerned about what i will do in the future if i am unable to earn enough money/find a job. thanks, jenny, minneapolis, MN

Answer: One of the drawbacks of being self-employed is that you're usually ineligible for unemployment insurance once work dries up. The most common reason why artists operating as a freelance sole proprietor are excluded is that they file their income on a Schedule FC tax form. Yes, you get to take tax deductions as an operating business, but in most cases you can't claim unemployment insurance.

I want to emphasize the phrase, "in most cases." The rules surrounding unemployment insurance are complicated. So, if you ever do find yourself in need of filing, check with a professional. You can get good information at online resources geared toward artists in most major metropolitan areas.

02/02/09 by Chris Farrell

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A loan from family friend

Question: I'm turning 25 years old in a few months and am finally getting serious about eliminating my debt. I have a credit card with a $3,000 balance. It was at 24% APR until I called this summer and asked them nicely to lower it. It went down four points. Twenty percent is still too high. As our economy sours, my mom is preaching about this being a time for neighbor to help neighbor. During a conversation on the subject over the holidays, it came out that a family friend had a few thousand sitting in a savings account earning hardly any interest. She wasn't putting it in a CD because it wouldn't earn much more there. My mom pointed out that if Beth loaned me $3,000 to pay off my high interest credit card, Beth could earn more than one or two percent offered in a CD and I could get a lower interest rate on my debt. It's a win-win for all parties. Laura is ready to write the check and I'm ready to lower my interest payment. Do you have any advice as to how we structure the agreement? What's fair for all parties? Is there a precedent for this? Are there any online resources? I really enjoy your show. I learn new things ever week. Thanks for making us all better informed. Kindly, Virginia, Cincinnati, OH

Answer: Congratulations on getting rid of your debt. Now, what you're proposing isn't uncommon. There are a couple of important caveats. If I were writing to Beth, I would warn her to think seriously before mixing money and friendship. It's always risky proposition. Then, assuming she's still comfortable with it, just remember you are taking on an extra burden of making these payments no matter what. She's a family friend.

That said, it is a favorable deal to both parties, and it's done all the time. I strongly urge you to write-up a formal document laying out the interest rate, when the payments will be made, and when the loan will be paid off. This document will lay out her expectations and your obligation. A document like this for a small loan will also satisfy the Internal Revenue Service since she'll be receiving an interest income from the loan.

There are plenty of do-it-yourself documents on the web. For instance, Nolo.com, a legal self help company I admire a lot, has a standard form on its website here. You could also just do one on your own. However you do it, everyone signs it. Good luck.

02/03/09 by Chris Farrell

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Pay cut and may lose job

Question: A: I am currently employed (Not sure how long this will last?) just took a 30% pay cut and there is a good chance that I will either be laid off or the company will close it's doors within the next two months. I have a good amount of money in my 401K and a separate traditional IRA from a previous job.

My concerns are that I don't have an adequate emergency savings to draw from while I search for work and I will need to pay bills for quite some time as the current job market is awful...I may have to do some re-training/ie.. Find a new line of work.

As much as I hate the thought ...What are your recommendations in regard to an emergency draw of funds from either the 401k or the IRA to ensure my family does not find themselves out on the street? David, Livonia, MI

Answer: I'm sorry for your circumstances. That's tough and, sad to say, you have far too much company these days. The standard advice about not tapping into your retirement savings isn't so standard if you lose your job and your family comes close to finding "themselves on the street." Period.

You take care of your family first. That said, I'm hoping you are far from those dire circumstances. I would urge you to consider tapping retirement savings a last resort. It's the last financial defense in protecting your family.

I'm sure you're already doing all these things, but just in case, while you're still are earning a paycheck I'd cut back on spending, boost savings and plan ahead. This is the time to start going over your budget, and figure out where lie the savings. You also need to get a feel for income. Yes, you'll lose you job, but will there be severance? How much unemployment insurance will you get? Does you spouse work outside the home? What are the training opportunities open to you? Is there state, local or nonprofit money available to help foot the training bill or transition to a new career? I'd also talk to former colleagues, friends, tap deep into the network of people you've developed over the years. There are many steps to take preparing for the possibility of bad days ahead--and hopefully it won't come to pass.

One last thought: If after all this it turns out that you HAVE to touch retirement money, just draw what you need. That way you'll preserve as much of the retirement savings as possible while minimizing the impact of the 10% penalty and taxes on the withdrawal.

02/04/09 by Chris Farrell

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Convert to Roth

Question: Given the current Federal deficit, and the way the U.S. Government is currently burning through money, it seems like a sure bet that tax rates will have to eventually start going up in the future. Because of this I've been thinking of converting my current 403(b) into a Roth IRA. And given that value of my retirement account has gone down (like everybody else's) it seems like a good time to make the conversion. In my particular case, if I were to convert the entire amount, according to the calculators I've tried, I would still be able to pay the taxes and penalties for the conversion entirely from current savings. And again, given how little these savings are currently earning, it seems like good timing. What are your thoughts on doing such conversions? Bill, Durham, NH

Answer: Your basic insight is sound. A lot of people are rightly running their calculators to see if conversion into a Roth is a good financial move for just the reasons you mentioned. For many, the answer is coming out yes.

Problem is, you may not be eligilble. If this is an active 403(b) at work you can't convert it into a Roth. You can do it if you're no longer on the job but simply left the retirement plan alone with your former employer and the plan allows you to roll the money over into an IRA. (Before 2008 you had to roll a 401(k)-type plan into an IRA and then roll that over into a Roth. The law has been changed so that you can go straight to a Roth.) You're also eligible If you're over 59 1/2 and your company allows an in-service distribution.

Remember, before 2010 your adjusted gross income has to be below $100,000 to make a conversion. The same $100,000 limit applies to the overall income of couples filing jointly as singles. Those who are married but file separately can't convert at all. (I don't make these rules up; I'm just reporting on it).

I'm glad to see that you have other money to put toward the taxes owed on a conversion. That's an important test to pass to see whether conversion makes sense.

The IRA laws are not simple. You can see if you even qualify for conversion at the Fairmark website. The Roth information is here ( www.fairmark.com/rothira/index.htm.)

02/05/09 by Chris Farrell

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Starting out savings

Question: I am a 23 year old college student who is starting to discover the wonders of public radio and paying attention to the news on a daily basis. In the face of such a grim economic situation, I would like to prepare myself for the future to the best of my ability. Currently, I am able to save 25% of each paycheck and I keep that 25% saved in an online savings account which earns 2.2% APY. I do not have the capital required to make the minimum investment in items such as stocks and the like. I am also concerned that my 2.2% APY on my savings account is not enough to keep up with the rate of inflation. My goals are to save and possibly invest my money for 10+ years, but still have access to it in the case of an emergency. What should I do to help my money grow? For now, is keeping my money in a savings account my only option? Dennis, Cherry Hill, NJ

Answer: Welcome to the world of public radio! Yes, the economic news is grim, and likely to get worse in the coming months. Right now, I'm impressed with how much you're setting aside out of every paycheck. Frankly, I like what you're doing with the money at the moment. You are keeping up with the rate of inflation at the moment (at least as measured by the producer price index and the consumer price index). And if inflation does start to climb the shift will be reflected in higher interest rates on your savings in the online account.

It' isn't your only option, but the savings account is a good one. The reason I like what you're doing is that you'll have savings to tap when you graduate. That money will buy you flexibility and time when it comes to getting a job. You won't feel the pressure to use a credit card, either. When you do get that job, participate in the retirement savings plan and make an automatic withdrawal from your checking account into savings every month, say, $25, $50, $100. Personal finance is basically establishing good money habits, and you're well on your way.

Other thoughts on saving for Dennis?

02/06/09 by Chris Farrell

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Deduct 401(k) losses?

Question: Can I deduct the losses in my 401K on my tax return? I am 26 years old. Thanks, Leena, Dallas, TN

Answer: Most of us (almost all of us? Just about everyone?) have losses in their retirement savings plan at work. That's behind all the jokes about 201(k)s. No, you can't deduct those losses on your income taxes. It doesn't matter whether they are paper losses or realized losses. You're funding the 401(k) with pretax dollars and it's compounding (or losing) money sheltered from Uncle Sam. When you do withdraw the money some 40 years from now, you'll pay your federal income tax rate on it. Hopefully by then it will have grown a lot over the decades.

02/09/09 by Chris Farrell

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Stop making 401(k) contributions?

Question: Hi Chris - I'm 38 and there's a better than average chance that I won't make the next cut when my company has another layoff. I've always socked away 401k money since my 20's but think that now might be a good time to keep that money in cash to help provide even more cushion during a job search.

We currently have almost 3 months salary in the bank. My wife works part time and takes care of our 2 kids. Would it make sense for me to set aside the money that would normally go to the 401k, and then invest in a Roth IRA at the end of the year if I don't have to tap into it? We have no credit card debt - just a couple mortgages, a car loan and several monthly prescriptions. Thanks - Mike, Denver, CO

Answer: Your instincts are right. I would stop contributing to the 401(k) and stockpile more cash in an FDIC-insured account in anticipation of tough times. You don't want to take any risk with the savings for now. Another way to build up savings is to look at what debts can you eliminate. It reads as if you have a mortgage, second mortgage (either a home equity loan or line of credit) and a car loan. Can you get rid of the second mortgage? How about the car loan? Both?

The one caveat to this advice is if your company offers a match in the 401(k). Do you reduce your contributions to the match or just stop altogether? Normally, I would say cut to the match and that may still work for you. But if the odds are high that you'll be laid off soon I'd rather you focus on getting your household balance sheet in good shape to weather a job search. And, of course, it isn't an issue if the company doesn't match a portion of your retirement contributions..

Good luck.

02/10/09 by Chris Farrell

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Should we buy an apartment building

Question: My husband and I are ready to buy a home but given the uncertainty of these times and of even our seemingly secure jobs, we're thinking of buying a 2 or 3 family building, living in one of the units and using the rental income as a hedge against one of us losing our jobs one day. Or, if that doesn't happen, we would have the option of converting the building to a one-family home.

But my question is this--will banks take into account the value of the rental income when we are figuring out what we can afford and get a mortgage for? Is there any rule of thumb for that? Our income is about $250K and we would need to spend at least $1.1 million for a multi-family unit in our neighborhood in NYC. That's on the upper range of what most online calculators say we can afford, but with a rental income to help out, do you think we can do it? Any thoughts about whether this seems like a good idea? Erin, Brooklyn, NY

Answer: Buying an income producing property such as a duplex or fourplex is a classic way of lowering the cost of ownership. But the difference between being a homeowner and a landlord is comparable to the difference between driving a Volkswagen Beetle and a Mack Truck. Like a truck driver, when you're a landlord you're running a commercial business dependent on cash flow.

When we buy a home we hope to make money over time through forced savings (paying off the mortgage) and appreciation (a vague hope sometime in the future considering the state of housing). But a home is much more than an investment. It's a lifestyle, a neighborhood, a commute to work, school for the kids, and the like.

A rental property is a business. Like all small businesses, you'll get some tax advantages, such as depreciation (an offset to taxable income) and deductions tied to the repair and maintenance of the business. If the business does well and generates a good cash flow it will more than cover your mortgage and other expenses. It's a way to create wealth.

The size of the mortgage and the mortgage will be affected by a number of factors, such as the down payment, your income and debt ratio, and whether the apartments are empty or have tenants. The basic dynamic is the same as a home purchase: The larger the down payment the easier it is to get a loan and a decent rate. Mortgage loan limits are higher for a commercial mortgage, but so is the interest rate. The big issue for you--and the lender--is your ability to meet the monthly mortgage and other monthly financial payments even if rental units are empty. The banks will take the rental income into account, but at a discount because apartments can be empty.

In other words, like all small business there are genuine downside risks. For instance, you have to keep good books and your taxes will be more complicated. You'll need to work with a professional insurance agent to get the right kind of property and casualty coverage. Any landlord will tell you that the business is highly dependent on the quality of your tenants. It's a highly regulated business, especially in large metropolitan areas like Brooklyn or San Francisco, and landlords are sued more than any other group of business owners in the country. I would talk to landlords in your area about their experiences, go to some local landlord meetings, and tap into on the ground experience.

To be clear, owning rental property can be a great business. I just want to you to be sure this is the entrepreneurial venture for you.

02/11/09 by Chris Farrell

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Consolidate loans to mortgage

Question: Please help... Would it be a good or bad decision to put a non-consolidated Parent Plus Loan into a home refinance? The refinance rate is 4.5 and the student loan is 7.9 (!) I have two other consolidated loans at 3.25 and another at 5.875. I'm currently over the limit (2x) of interest I can deduct, so if included it, the interest it would be deductable, but does it make sense to increase my mortgage by so much (an additional 32K on a 156K mortgage? And I will have to pay an additional .25 point to do the cash out. Will the Plus Loan interest rate be reduced in July? Would it make sense to wait and consolidate? My refinance will settle before I know the next rate. Will the deductable student loan interest rate be raised? I have a line of credit rate currently at 2.5, but they will average 3 years interest to do a fixed loan, so that w on't help now. I would rather keep it separate, but am temped by the 4.5 rate. I want to make the best short and long term decision.... Thanks in advance for considering my question. Mary, Garrett Park, MD

Answer: I want to address the core of your question. I believe one reason why so many middle-income homeowners got into financial trouble in recent years is that they consolidated their debts into first and second mortgages. Yes, the interest payments are tax deductible. But I don't think the tax deduction is worth the extra risk.

For instance, it always upset me when financial advisors would recommend consolidating credit card debt into a mortgage. That's crazy. I feel the same way about student loans. There is financial flexibility with Parent Plus loans, such as a graduated payment plan, income sensitive payment plan, and an extended payment plan. (Of course, the price for taking advantage of these options is the overall cost of the loan goes up.) If you pay off the loan by rolling it into your mortgage you'll lose that flexibility, and increase the risk of losing your home if you have a job or income setback.

02/12/09 by Chris Farrell

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Keep funding 529 for daughters?

Question: Greetings Tess and Chris, I love the show. I'm a military officer, but since I graduated from a service academy, I was never eligible for education benefits through the old GI Bill. Apparently, with the new one, I now have benefits and can pass them to my wife or children. We have 2 girls, 6 and 4. We've completed a state sponsored pre-paid college program for the elder, and now we add $100/month to a 529 for her. We have $7500 in a 529 for the younger, and add $250/month to that account. So my question is: Do I now have overlapping benefits that I won't be able to use fully? If so, should I adjust our college savings rates to prevent having more money than we need allocated solely to higher education for our girls? As I tell my wife, if they go to a service academy, they won't need any of it! Micah, Kodiak, AK

Answer: Well, if they do go to a service academy maybe you and your wife can tap the 529 savings plan for your own education! It's great that you've saved for them. The bottom line is that your daughters will have a lot of choice when it comes to college. However, I would probably stop making contributions to the 529 plans for now. (I'd keep saving the money but in your name. It never hurts to add to savings.) The details and rules about transferring education benefits in the new G.I. Bill haven't been finalized. When they are, you'll be able to take a look at what you've saved, the value of the benefits from the military, and then make some adjustments to set it up so there will be few out-of-pocket costs when your daughters do go to college.

One reason why I don't think you've wasted any money is the cost of college. The most recent data has tuition and fees at an in-state public four-year college at $6,585. But the average cost including room and board is $14,333. And that's assuming they go to an in-state public university. The advantage of what you've done, coupled with the military education benefit, is that it will also bring the price of a private college within realistic reach if that's what they and you want a decade from now.

02/19/09 by Chris Farrell

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Tax-free alternative to 401(k)?

Question: Hi Chris, Really enjoy your show. I am a retired military living in Germany. I'm presently approaching 66 years old and am told I must cash in my 401K savings by age 70 1/2, which means they would then become part of my taxable income. Are there any programs out there which would allow me to move my pre-tax 401K savings to some other type of pre-tax savings program? Also, I heard a rumor that there is an initiative to extend the age limit past 70-1/2; have you heard anything to that effect? Leonard, Selzen DE

Answer: Thanks. When I was growing up we lived in Bremerhaven, Germany, for several years, and I went to the elementary school on the base. When I was a merchant seaman after graduating from college my first ship used to dock at Bremerhaven, and I got to revisit our old haunts. Anyway, you don't have to cash in all the savings in your 401(k). You just withdraw the amount you need and pay your ordinary federal income tax rate on the withdrawal. The remaining money continues to compound tax free. And, yes, at age 70-1/2 you are required to start taking your minimum required distribution.

The bottom line is that Uncle Sam is going to get paid. You could make a tax free transfer of the money from the 401(k) plan into a traditional IRA, but the same tax and required minimum distribution rules apply.

Now, there is no required minimum distribution with a Roth-IRA. You could convert the 401(k) into a Roth-IRA. The law has been changed so that you can roll a 401(k) straight into a Roth. But you'll pay taxes on the conversion. Remember, before 2010 you're adjusted gross income has to be below $100,000 to make a conversion. You also can't touch the money for 5 years. My guess is that the numbers won't push you toward the Roth option, though, but you could check it out.

One important thing to note: at the moment there is a one-year moratorium on required withdrawals from retirement savings plans for anyone 70-1/2 or older. It's only for 2009, and then the rule comes back in force in 2010. The idea is to buy some time for those retirees with battered portfolios. Although I think the whole retirement savings system will be looked at closely over the next several years, and that reforms will come, I'm skeptical that there will be any wholesale change in the distribution rules. The federal government will need the tax revenue in light of budget deficits as far as the eye can see.

by Chris Farrell

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Should I stick with mutual funds?

Question: In 2006 I decided that I would move my (significant) individual mutual fund holdings to a managed account with my investment firm (a major mutual fund company). I did this because I have been busy in the military and have not had time to manage my mutuals and keep track of recent goings on. I am young, so they determined I should take risk. I agreed. Now that whole amount is down 35% from when I put it in. I am 38 years old. What should I do? Chris, Ft. Worth (deployed to Baghdad), TX

Answer: It hurts when our savings decline by that much. You do have a lot of company, however. And your portfolio is probably reasonably well diversified with a tilt toward equities (because of your age). The reason I say that is you would be down a lot more without some bonds holding down your paper losses. (Conservative bond mutual funds with a big dose of government securities did well last year.)

Normally, I am a skeptic about managed funds, but in your case it was a smart move considering all the demands on your time in the military. I would ask myself the same question everyone should address during this market meltdown. Is my portfolio too risky for me? Here's a safe forecast: There will be other bear markets -- probably several -- during your lifetime. Are you okay with that? You're still very young, and you have a long time for the money to compound. That argues for leaving it alone. But if you don't like the losses, I would direct the managed account to create a more conservative portfolio over time. There's no rush, but you'll want to reduce your exposure to equities.

02/20/09 by Chris Farrell

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How to reduce student-loan payments?

Question: My husband has significant private student loans, about $100K, through Sallie Mae with above market interest rates. The current monthly charge is more than I can afford. What are my options to reduce the amount owed or the payment amount? I am on partial disability and my husband recently joined the military. Many thanks, Tanisha, Orlando, FL

Answer: The first thing I would do is to take advantage of the free legal assistance you can get at offices located on almost every military base, ship and installation. The military lawyers will have dealt with situations like yours many times over. According to www.military.com (a terrific resource on military benefits), military lawyers can do everything from negotiating with another party to drafting wills to personal finance advice. Unfortunately, there is less financial flexibility with private loans compared to federally-sponsored loans. Still, since your husband is on active duty he may qualify for a 36 month deferment from Sallie Mae. The Servicemembers Civil Relief Act offers active duty personnel debt protections, too. If his military service affects his ability to pay off debts such as credit cards, mortgage and some student loans the rate on the loan can be capped at 6%. The reduction is only for the time of active duty, but any interest above 6% is forgiven. This is for debt taken on before active duty. Again, the military lawyers will be able to walk you through the options available to you.

02/19/09 by Chris Farrell

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Successful strategy with IRA rollover

Question: I'm a Staff Sergeant in the US Army Reserves and spent most of 2008 in Iraq. One obscure maneuver I executed while there was to convert $26,000 from the Rollover IRA to my Roth IRA. Due to the Combat Zone Tax Exclusion (CZTE), my W-2 line 1 from the military will be less than $5000 because time spent in Kuwait, Iraq, etc. is excluded from federal and state taxes (at least, for CA; FICA is still taken out). This resulted in rolling over IRA funds at a lower tax rate than if I had done this during a normal year where my taxable income barely breaks into the six digits. One caveat: Of course, taxes still must be paid on the rollover, and so listeners should estimate what those are and save for that..... and, with the stock market tanking as much as it has, transferring a balance will not incur as much taxes because it's likely that a person's portfolio is much smaller than a year ago. All this compounds the advantages. I was even able to do this while on a base in Kuwait. My Rollover IRA (rolled over from my IBM 401k when I resigned) was with Schwab, which let me open a Roth IRA through the web, and then after a few emails, the transfer was executed. Cheers, Jimmy, San Francisco, CA

Answer: Thanks for sharing your strategy. For most savers, assuming they qualify, taking advantage of the bear market to transform their traditional IRA into a Roth is a savvy move.

by Chris Farrell

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Sell property to invest in stocks?

Question: We are both 44 years old. Single income, Clay is in the military, we will probably be living overseas for another 7 years (until 2016) before starting our next life. We've been thinking about selling properties to free up money to invest in the stock market now that it is low. We own a modest fixer upper in a great location (near Whitman College and downtown) in Walla Walla WA and a piece of land at the Oregon Coast. We have no kids and will continue to work after leaving the military until financially independent. We are not tied to living in Walla Walla, but bought the house with the idea of giving it a try when we return. We have no debts other than the one mortgage, and put 12% of base pay into TSP. If we return to Walla Walla in 6 years, we need a minimum of 50K to update the home. Here's how it breaks down: Walla Walla house: 190K remaining to pay, worth around 240K Mortgage is 30 yr. fixed at 6.5 with total monthly payment of around 1600 Rent income after management fee and costs around 800 per month 2 acres of land at the coast was purchase for 102K in 2006 (cash), it may be worth 150k today. Taxes are 1200/yr. Take home income today is about 50K (not counting housing allowance). Will retire at around 26 years of service. Sell and invest the cash in stocks, (willing to hold long term-15 years)? Or hold onto the house and land? Or some other combination? Clay and Lori, Beijing

Answer: You're in a good financial position. My main reaction is more along the lines of a question or series of questions. First, do you want to have so much of your wealth tied up in real estate far from where you live? What could go wrong, and what is your downside risk? Second, what kind of return do you think you can get from the land if you do hold on to it? The home in Walla Walla is an income producing rental property for now, and you're earning a decent cash flow from it. But the land is probably costing you money every year. That doesn't mean it isn't worth it, but what is a realistic expectation on a rate of return over time.

The reason I wonder about the land is that, like you, I'm intrigued by the stock market and whether it offers a better money making opportunity. These are unnerving times, with talk of a recession replaced by growing fears of a Depression. A first glance at market history during deeply unsettled times isn't pretty-you see numbers like the Dow's 89% plunge from its 1929 high to its 1932 low, followed by its partial recovery and subsequent 52% tumble from 1937 to 1942. But keep looking, though, and you can find lessons more valuable than the fact that the Dow's volatility is nothing new. There is a discernable rhythm over the long history of the markets, and it offers glimmers of hope to harried investors. Specifically, the despair and low prices that mark financial catastrophes set the stage for higher prices and loftier returns later on. "Markets tend to overshoot in both directions," the late financier Leon Levy wrote in his memoir, The Mind of Wall Street. "Just as we saw stock prices rise far above the value of the companies, we are likely to see the reverse. Stocks will then be undervalued, and there will be new opportunities for investors."

Here's the rub: The timing of the recovery is uncertain. Timing aside, stock market data support the notion that it's smart to own riskier assets after a long stretch of poor performance, and the S&P 500 has had an average annual return of 0.9% over the past decade.

So, my main recommendation is to think through the downside, and then take a close look at the land. But no matter what you two are in a good financial situation.

by Chris Farrell

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How to consider military retirement?

Question: I retired from the US Army in 2004 after twenty years of active service with approximately $36,000 per year retirement benefit. The military retirement is adjusted annually with COLA. I started normal and IRA mutual fund accounts in 1985 and continue to make contributions. I continue to work for the Government as an engineer. My question concerns asset allocation. Am I correct in considering my military retirement as an income-producing asset class (bond) and thereby allocating the remainder of my assets in mutual funds consisting of equities? If I divide the $36,000 by an estimated 5% return, that would result in a theoretical principle value of $720,000. After the recent 40% market fall, my portfolio does not approach this value. My current asset allocation is 84% domestic equities, 8% international equities, and 8% cash. Gregory, Pinehurst, NC

Answer: You're right to consider your military pension as the equivalent of a very safe asset, like a government-backed debt security. The same insight holds with your (future) Social Security payments. Theoretically, you can then take more risk with the rest of your portfolio in the hope of earning a higher return over time. But there's no guarantee you will earn that higher return. But that's in theory. You should adjust the risk in the portfolio to reflect your own desires.

by Chris Farrell

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Military benefits and Social Security?

Question: I will be receiving my Navy Reserve retirement pay when I turn age 60. I also paid into the Social Security system the entire time. Will I receive full Social Security benefits when I retire at age 65, or will that amount be reduced by the amount I am receiving from the military retirement? Bob, Lodi, CA

Answer: According to the Social Security Administration, there are 9.4 million military veterans receiving Social Security benefits. That means that almost one out of every four adult Social Security beneficiaries has served in the United States military. Veterans and their families make up almost 40% of the adult Social Security beneficiary population.

Your military pension should not reduce your Social Security payments. "You can get both Social Security benefits and military retirement," says Social Security on its website. "Generally, there is no reduction of Social Security benefits because of your military retirement benefits. You'll get your full Social Security benefit based on your earnings."

by Chris Farrell

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Refinance

Question: Today Friday the 13th, we signed refinancing papers for a 4.75% fixed 15-year mortgage. We had 6.0% 30-year fixed so this is a good deal for us. My first question. Will the "soon to be approved" stimulus packet have 4-4.5% refinancing available for those with good credit, as it was talked about last week? I have not heard anything this week about loan financing rates in the agreed upon plan.

If the lower refinancing rate will be available soon, it is worth it for us to decline the loan (within our 72 hours window) and take a chance on being able to get the lower rate loan in the near future. Or is the proverbial bird in the hand what we should hold on to at this point. Bryan, Ellicott City, MD

Answer: The fiscal stimulus package doesn't have anything to do with bringing down mortgage interest rates. The Treasury's proposed bank bail out plan does have the Federal Reserve buying securities in the market to bring down interest rates. (Don't worry; we're all confused about what is what these days)

No one really knows whether the Treasury and the Fed will succeed at lowering rates and, if so, by how much. So, the question is whether it's worth it to you to see if rates fall much farther and, if they don't, that it's a risk you're willing to take. My sense is that you got the mortgage and rate you want, and the cost/benefit trade-off for waiting isn't worth it.

02/13/09 by Chris Farrell

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Social Security and military retirement pay

Question: I will be receiving my Navy Reserve retirement pay when I turn age 60. I also paid into the Social Security system the entire time. Will I receive full Social Security benefits when I retire at age 65, or will that amount be reduced by the amount I am receiving from the military retirement? Bob, Lodi, CA

Answer: According to the Social Security Administration, there are 9.4 million military veterans receiving Social Security benefits. That means that almost one out of every four adult Social Security beneficiaries has served in the United States military. Veterans and their families make up almost 40% of the adult Social Security beneficiary population.

Your military pension should not reduce your Social Security payments. "You can get both Social Security benefits and military retirement," says Social Security on its website. "Generally, there is no reduction of Social Security benefits because of your military retirement benefits. You'll get your full Social Security benefit based on your earnings."

02/19/09 by Chris Farrell

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President's Day

Have a good President's Day.

Yesterday, at the newly reopened Smithsonian Museum of American History, I went to a small, special exhibit on Lincoln's Emancipation Proclamation. It had the document, as well as letters Lincoln wrote to various general's and other to explain his decision. It was moving.
The museum is terrific, and it wandering through it with my Mom and my sons for an afternoon was a good way to celebrate the holiday.

Back to posting on personal finance questions tomorrow.

02/16/09 by Chris Farrell

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Pay off credit card

Question: Out of the clear blue sky, I got a notice that my Capital One Platinum credit card rate is being raised from 4.99% to 13.99. I have a very high balance on this card (76% of available credit). I checked my own credit records (perfect, never late, all accounts up to date) and score (942) and figured they would want to negotiate with me, but no dice. The guy on the phone said they mailed out 8 million of these notices this week. My options are 1. Find a 0% introductory rate and transfer the balance (if I can even get one) or 2. Opt out of the change in the rate, close the account, and pay it off at 4.99%. Either way paying it all the way down will take me 12-18 months. What is the best alternative or is there another option that you would recommend? Katryn, Minneapolis, MN.

Answer: What the credit card companies are doing is legal. But it's wrong. That said, the best thing you could do is keep the 4.9% rate, close the account and payoff the debt. It's risky to carry a high balance in an economy sinking lower every day and it's prudent to eliminate credit card debt. So, unless there is some business reason why you need this particular piece of plastic, I'd get rid of it--and fast. Capital One loses a good customer, too. That's the power consumers have in our economy. I'm hoping after the shoddy way most credit card companies have treated their customers during the downturn everyone will refuse to carry a balance, slashing card company profits and practicing good personal finance habits.

02/17/09 by Chris Farrell

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Bankruptcy for fun?

Question: The economy is a hot topic around the water cooler these days, and I've been asking co-workers across my department about their financial strategies for the coming year. One co-worker said she was "advised" to "refinance her mortgage, buy two cars, then run her credit cards up to their limits and then declare bankruptcy". I was surprised at this financial self-destructive sounding plan - I asked 'what about your credit score, what do you plan to do when things turn around, you'll be in a credit pickle!!' and she shrugged her shoulders and said -- " so what, no one cares about credit any more and we're not going to get out of this. My children will never know prosperity in our country. I might as well get what I can get". This kind of thinking contributes to the downward spiral. I told her that I thought we would eventually pull out in a few years, and the responsible people (yep, the same ones that are getting the short end of the stick these days) will have the ability to recover faster with the economy. Everyone else who said 'who cares' and financially imploded will take years to repair the damage if they continue with reckless disregard for financial common sense. Whose outlook do you think is more likely? I want to be optimistic, continue to support my local businesses, and wait this thing out -- with my credit intact. I can't imagine planning to declare bankruptcy as a strategy. I see it as a last resort. Virginia, Raleigh, NC

Answer: To put it politely, your co-worker doesn't know what she's talking about. Her point of view is ignorant, irresponsible and, there is no other polite way to put it, financially stupid. Millions of people are being forced to declare bankruptcy after losing their jobs. They've lost their homes, spent hours dealing with creditors, lawyers and courts, and now they're trying to start all over again during a vicious economic downturn. Talk to them, and then say bankruptcy is an easy option. It isn't. Bankruptcy is a safety net.

Like the details or not, the Treasury and Federal Reserve, the Administration and Congress, are struggling to prevent the economy from sliding into depression and, at the same time, set the stage for the next upturn in the business cycle. I believe they are slowly succeeding, stumbling toward solutions as the depth of the problem become ever more apparent. But even if the economic troubles continue far longer than I imagine, even if we live a reprise of the 1930s, parents can do right by their children, educating them well, bringing them up a household where maybe there isn't much, but what you have is valued.

Last, you are absolutely right. Downturns eventually open up good opportunities for those with hefty savings and good credit. Yes Virginia, you're right on all counts.

02/18/09 by Chris Farrell

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How much in emergency savings?

Question: How many months of living expenses should I have in my emergency savings account, in our current economic situation? I have always heard "six months," but I suspect that applies to a "normal" economy, in which I could probably find a new job within six months. Thanks, Sheila, Belmont, CA

Answer: The size of the suggested emergency savings pot has evolved in recent years. For a long time, the rule of thumb was to set aside 3 to 6 months of easily accessible savings. That number now is 6 months to 1 year.

The reason for the increase is that the risk of a long spell of unemployment had gone up even before the recession and the odds had also gone up that the new job would pay less than the old one. Both of these risks are worse with a recession that shows no sign of ending anytime soon.

Of course, 6 months is a starting point. For many people, setting aside enough to cover living expenses from 3 months to 1 year is a goal, not a current reality. My attitude is that there's no real penalty for financial prudence. And, if it turns out that you end up saving more than is necessary, you can always re-label your "emergency fund" into your "opportunity fund." The lesson of past recessions--this one will be no different--is that anyone with savings will have ample opportunities to snap up bargains. Prudence pays off big in a downturn.

02/23/09 by Chris Farrell

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Student loans and fiscal stimulus

Question: Is there any chance of bailout money for student loan borrowers? I assume that if there is any bailout money aimed at student loans, it will be given to the lenders and not to the borrowers, but if individual homeowners are eligible for bailouts, why not individual students? A lot of students imprudently ran up too much debt, just like home buyers. : Eric, San Diego, CA

Answer: It's a good question, and we've gotten a number of similar queries from listeners and readers. The bottom line answer is that indebted graduates with a college sheepskin aren't getting help. The stimulus package does direct money toward making college more affordable, especially for students from lower income families. Higher education isn't going empty-handed, either, with money available for investments like university research and university infrastructure. But nothing was targeted at easing the student loan debt burden of college graduates. My guess is that policymakers--if they thought about it at all--decided the tax breaks will give graduates extra money this year and, if it makes sense, they can direct the money toward debt payments.

02/24/09 by Chris Farrell

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Mom and savings

Question: My 76 year old working mother has most of her retirement savings in the stock market so it is just going down. She has been putting her social security money in a GE Interest Plus account because it has a higher interest rate. She has over 300K in that account which is not FDIC insured.

Since the GE account is the only really available money she has, can you help me convince her that it is better to move it to two separate FDIC insured banks even if she gets a lower rate of return? Thanks, I am true believer in your show. Allison, Sheffield, MA.

Answer: I agree with what you're trying to do. To be clear, General Electric is a good company despite its recent earnings travails. For some people putting a slice of their savings in its short-term debt is a reasonable risk.

But, like you, I am concerned about your mother taking on that risk for a modest increase in interest income. It isn't a good trade-off. I assume you've talked over the risks with her, and she hasn't been convinced. Still, we live in a financial era where the unthinkable is thinkable, a world where the government nationalizes Fannie Mae and Freddie Mac, quasi-nationalizes AIG, the world's largest insurance company, takes big ownership stakes in the nation's largest banks and, most likely, will soon nationalize them (although it may use some other word than the dreaded term, nationalization).

The good news is that your mother is still working, making an income. She works for that money, and I imagine she doesn't want any of her savings to go poof, not at age 76. So, how about proposing a compromise? See if she'll agree to put some of the money--a third? half? two thirds?--into FDIC insured products. One thought is to invest the money in a ladder of certificates of deposit, from 3 months to 2 years. She can also get a pretty decent yield on FDIC savings accounts offered by online banks. This way she has the full faith and protection of the federal government behind a large chunk of her savings. But she gets to earn a higher interest rate on the remainder.

Let us know what happens.

02/25/09 by Chris Farrell

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Mortgage help?

Question: Hi Chris, I'm in more than a bit of a quandary...I purchased my home (townhouse) in 2005 and refinanced in 2006 (to get away from an frightful interest only mortgage to a traditional 30-yr fixed mortgage). While I live quite frugally, my mortgage is more than 60% of my income, and of course now my property value has tanked into what appears to be the abyss! I do also have a student loan that I'm paying off (great interest rate so I don't want to mess with that), so between all my mandatory payments, I feel I have absolutely no wiggle room at all, and do feel more than stressed. Will this new stimulus package be able to help someone like me, i.e., can I take advantage of this package to do some thing about my mortgage? Thanks so much. Mini, Herndon, VA.

Answer: I don't blame you for feeling stressed out. You're paying out way too much of your income for shelter. Let's hope the Administration's housing plan does buy you some relief. Now, it seems to me that the mortgage refinancing portion of the plan is designed for people like you. You're current on your payments. You have good credit, paying your bills on time. But you can't refinance into today's low rates because you don't have enough equity in your home after the steep decline in home prices. The new rules allow Fannie Mae and Freddie Mac to refinance mortgages where the value of it is between 80% and 105% of the value of the property. Many borrowers that are making their mortgage payments on time have seen their loan-to-value ratios climb into this range because of falling house prices. However, this program is for "conforming" mortgages, ones that fall within the $417,000 loan limit of Fannie Mae and Freddie Mac. (There are higher loan limits for 59 high-priced sections of the country.)

That's one avenue to pursue. There's another tactic to consider, or at least explore. The loan modification part of the package is aimed at borrowers in imminent risk of default. That's not you. But it has incentives for mortgage lenders and mortgage servicers to reduce monthly repayments to 31% of gross income--considerably less than you're paying right now. (And the new loan modification plan is supposed to stop the practice of lenders loading up mortgage modifications with fees, penalties and the like so that the new arrangement is actually more expensive than the previous one. How's that for disgusting?) I would at least try to see if you can get your loan modified. But if you do get an offer look carefully at the deal to make sure you come out ahead.

Hopefully, you will be able at least to refinance your mortgage at a lower rate.

02/26/09 by Chris Farrell

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Inheritance

Question: My boyfriend's father recently lost his 8-year battle with cancer. He received approximately $300k from his father's life insurance policy; a benefit that he feels was meant for him later in life, not at the age of 27. Though under unfortunate circumstances, the reality is that he now has this chunk of money.

What to do?

He has no intention to buy property at this time because, he just started going to school for paramedic firefighting and will not be looking for a job for two years (and may have to relocate for such job).

He is considering dividing the money in various investment/savings options, including CDs, a money market account, and a Roth IRA.

But, what about investing in stocks or mutual funds? Given the current state of financial affairs and his age, what advice could you give on investing a portion of his money now, for the long term? Rachel, Lauderdale-by-the-Sea, FL

Answer: I'm so sorry for your friend's loss. It's hard losing a parent. I have three main thoughts on what to do.

First, take the inheritance and put it into government backed products. He should preserve the value of the money while he figures out what to do with it. That means investing in FDIC-insured products such as certificates of deposit. Since the Federal Deposit Insurance Corporation backs up to $250,000 per account at a bank, I would divvy up money so that it's all insured. The FDIC's website at www.fdic.gov has a good pamphlet that clearly explains its coverage. (The same holds for federally insured credit unions.) He could also invest some or all of the money in U.S. Treasury bills. This way he won't lose any money to the vagaries of the bear market and recession that looks increasingly like a mini-depression.

Second, he should take his time deciding what to do with his inheritance. It might take a year or two or three to figure out the best course of action. That's fine. He should use the time to learn what investing and savings strategy will work for him over the long-haul, what risks is he is comfortable taking with the money, and what are his financial goals and ambitions. In addition, by taking his time he'll have launched his career as paramedic firefighter and have a better sense of his job and income prospects.

Third, he needs to trust himself and not the army of money advisors that will knock on his door. Sad to say, there are far too many smooth-talking sharks that prey on people with a financial windfall and not much knowledge of how to manage it. Of course, there terrific finance professionals, and an advantage of going slow and understanding his options is that he'll be better equipped to judge an honest financial planner versus a fee-hungry scalper.

02/27/09 by Chris Farrell

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