When the Road to Investing Gets Bumpy

Investing in the stock market is a lot like driving on a long road trip.  At some point, you’re going to run into pot holes and rough patches.  When that happens, you should definitely drive with more caution, but you have to keep on going if you want to reach your destination.

Similarly, if you’re investing for long-term goals such as retirement, you will encounter some market volatility, probably several times along your journey.  While you may be tempted to pull over and wait out the rough times, it will delay or may even prevent you from reaching your goals.

So what should you do when the road to investing gets bumpy?

Buy Low, Sell High:  The whole premise behind investing is to buy low and sell high.  You can’t do that if you pull out of the market or stop investing when the market goes down.  If you’re investing for the long-term, you should be glad when the market is down, because then stocks are “on sale” and you can pick up more shares at a lower price.  Who doesn’t love a good sale?

Diversify: One of the best ways to defend your portfolio against market losses is to have a portfolio that is properly diversified.  If you review the history of the stock market, you’ll see that the best performing assets vary from year to year and that it’s not easy to predict which asset class will perform well in any given year.  Therefore, by having a mix of asset classes, based on your risk tolerance, your goals and your timeframe, you are more likely to meet your goals.  In addition, having a mix of asset classes reduces your risk of loss, since you won’t have all of your eggs in one basket.

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Smart Money Moves to Make in Tough Times

The recent financial news - banks failing, the Treasury taking over Fannie Mae and Freddie Mac, the stock market dropping several hundred points in one day - may have you feeling a bit helpless when it comes to your finances.

While you may not be able to make the market go back up or keep banks from failing, there are steps you can take to make your finances as strong as possible in these tough times:

1.  Fund your emergency fund.  It’s more important than ever to have an emergency fund, in case you lose your job, have unexpected medical expenses, or have a major house repair, so that you don’t have to sell investments (while they’re down), or rack up credit card debt.  The general rule of thumb is to have three to six months of living expenses set aside for emergencies.

2.  Reduce debt.  If you have high interest credit card debt, the greatest return you can get right now is to pay off that debt.  Start by calling your credit card companies and asking for a lower interest rate (if you have a good credit score, you could get your rates down to 8-12%, which is much better than paying 20+ percent).  Then make the minimum payments on all of your credit cards except the highest interest rate card until paid off.

3.  Review your spending.  I’m always amazed at how many people have no idea where their money is going each month.  How can you reach your goals if you don’t know where your money is going?  If you aren’t already doing so, now is a great time to start tracking your spending using a software program (such as Quicken) or even spreadsheets that you create on your own.

4.  Increase your retirement contributions.  Many people panic and stop investing in their 401Ks or other retirement accounts when the market is down.  When the market is down is actually the best time to invest.  Remember “buy low, sell high”?  Well, the time to buy low is when the market is down!  Make sure that you are investing in a diversified portfolio that meets your risk tolerance, time frame and goals, and that you rebalance once a year.

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Keeping Your Money Safe

With everything going on in the financial world lately - the Treasury taking over Fannie Mae and Freddie Mac, the collapse of Lehman Brothers and IndyMac Bank, and the government bailout of AIG - it’s no surprise that investors are wondering if their money is safe.

Thankfully, there are safety measures in place for various types of accounts and investments.  Here is a rundown of the different safetynets in place for each type of account or investment you may have:

Banks:  Bank deposits are ensured by the Federal Deposit Insurance Corporation (FDIC).  Basically, the FDIC insures deposits up to $100,000 per owner, per bank.  If you have $100,000 or less in your name at any FDIC-insured bank or savings association, you have nothing to fear.   Since the limit is per owner, that means you could actually have more coverage than you think (for example, if you and your spouse have a joint account with $300,000 at one bank, $200,000 is insured - $100,000 for each “owner”).

In addition, if you have certain types of retirement accounts, such as an individual retirement account, you’re eligible for even more coverage - up to $250,000 per owner, per bank.  However, the FDIC does not insure money invested in stocks, bonds, mutual funds, life insurance policies, annuities and municipal securities, even if you bought those investments at an FDIC insured bank.

If you want to make sure that your deposits are below the FDIC limits, please visit EDIE The Estimator.   EDIE the Estimator can calculate your FDIC insurance coverage for each FDIC-insured bank where you have deposit accounts.

Credit unions have similar coverage through the National Credit Union Administration (NCUA).

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Debit Card Fraud More Damaging than Credit Card Fraud

While I was on vacation this week, some thief was busy emptying out my checking account.

I have always loved the convenience of debit cards, but this recent experience has me re-thinking the cost of that convenience.

First, your liability if you are a victim of debit card fraud is greater than if someone steals your credit card or uses your credit card to make unauthorized purchases.

With credit cards, your liability for unauthorized transactions is limited to $50. However, most major credit card issuers have a zero liability policy, so you typically aren’t liable for anything if you are a victim of credit card fraud.

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Money Makeover - Saving for college and retirement at the same time

I had the pleasure to work on a Money Makeover for the Kansas City Star recently. Here’s the article that appeared in the KC Star this morning…

Money Makeover: Couple frets over saving at the same time for their retirement, kids’ college expenses

by Gene Meyer
The Kansas City Star

Steven and Angie Cortez look into the future and see a financial dilemma they want to resolve now.

The couple, who both are educators and not yet 40, theoretically will be eligible to retire when Steven turns 53 and achieves the combination of age and years in service to qualify for Kansas Public Employees Retirement System teachers’ benefits.

That doesn’t seem realistic, the Olathe residents say, because their children, twins Kennedy and Carson, who turn 6 Monday, will still be in college when the milestone arrives.

They don’t mind postponing retirement for a few years. But they are concerned about how best to prepare now to hit two humungous savings targets — college and retirement — so potentially close together.

“We’ve been told that we should max out our Roth IRA savings before we contribute anything to college funds, but I’m not sure that’s the best way to go,” Steven Cortez said.

Neither target is an easy one.

Some rough, back-of-the-envelope calculations based on College Board projections show that the $50,000 it costs to send a student to a public college for four years now may more than double by the time Kennedy and Carson are freshmen. For a private school, the already higher costs will almost double too.

But a financial planner who analyzed the Cortezes’ situation more thoroughly calculates Steven and Angie also need to accumulate $1.97 million in the next two decades to supplement his KPERS and their other projected retirement benefits so he can retire at 60 and live as comfortably as they do now.

“Retirement savings should be your higher priority,” said Kristine McKinley, the certified financial planner from Lee’s Summit who examined the Cortez’s circumstances.

Saving for retirement often is more urgent than saving for college, McKinley said. First, as is the case with the Cortezes, retirement requires more money than college. Second, families have resources such as loans, grants or scholarships to turn to if savings come up short. Retirees have far fewer alternate choices.

But there’s good news too, McKinley told the couple.

Saving more aggressively and more efficiently now for retirement should also provide a potential cushion to help with the college funding if that’s needed.

The keys are Roth IRAs that the Cortezes opened to provide tax-free income when they retire. In a jam, Roth savers also can withdraw money they’ve contributed — but not the investment profits earned — before retirement without incurring penalties, she said. Pulling money out also will trim the account’s potential growth, however, so it shouldn’t be done lightly.

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Family Records Organizer CD

If you’re like most people, you probably have dozens of financial accounts and records to keep track of, such as retirement accounts, bank accounts, credit cards, investments, debts, loans, and mortgages, as well as trusts, wills and medical information.

T. Rowe Price offers a complimentary Family Records Organizer CD to help you with these organizational challenges. This CD provides you with an easy way to gather in one safe place all your family’s records, including primary contacts. It can also help your loved ones know where to find this information in case of emergency.

You can order your complimentary Family Records Organizer CD at www.troweprice.com/getorganized

Health Insurance for Early Retirees

by Kimberly Lankford of Kiplinger.com

Despite a limited income, I’ve invested wisely in my IRA over the years and could retire next year at age 62. However, I don’t know if I will be able to get medical insurance or how much it will cost after the COBRA provisions expire in 18 months. Given that I take medication for depression, it is likely that any future coverage would have major restrictions — that is, if I were able to get coverage at all. Are there any alternatives for health insurance for people like me?

You ask such a great question. So many of our readers have saved carefully through the years and could retire early, except for one unknown: How much they’ll have to pay for health insurance until they’re eligible for Medicare at age 65. You’re very wise to start thinking about that now and get an idea of how much those extra costs will be.

The good news is that several consumer-protection laws can help you qualify for health insurance on your own, even if you have medical conditions.

Your first step should be to continue coverage through your employer’s plan through COBRA, a federal law that requires employers with 20 or more employees to let them keep their coverage for up to 18 months after they leave their jobs. Your premiums will be a lot higher than they had been as an employee — after you leave the job you have to pay both the employer’s and employee’s share of the cost, and most employers subsidize about 75% of the premiums for employees. But at least you can’t be rejected or charged a higher rate because of your health.

If you’re healthy or have moderate medical conditions, check out your other options right away because you may find a better deal on your own. The prices and rules about covering medical conditions can vary enormously from insurer to insurer, so it’s a good idea to contact an insurance broker who knows which insurers in the area are likely to offer the best deal for someone with your condition (you can find a health insurance broker in your area through the National Association of Health Underwriters). You can also visit eHealthInsurance.com to get price quotes for several companies’ policies (or call 800-977-8860 if you have medical conditions to explain them up front).

If you have a medical condition, some insurers may reject you while others may offer you a decent rate. Or some may offer you a policy but exclude the condition, while others could boost your premiums by 25% to 150%. It’s generally better to pay extra than to accept an exclusion for a potentially expensive condition.

And if insurers do reject you, you generally have other options. Thirty-three states have high-risk pools, which must accept people with medical conditions who have been rejected elsewhere (for more information, go to the National Association of State Comprehensive Health Insurance Plans Web site. And a few states, such as New York, New Jersey and Massachusetts, must cover everyone regardless of their medical condition — this is called “guaranteed issue.” This leads to very expensive insurance for younger, healthier people, but does provide an option for people who have health problems.

A few states don’t offer high-risk pools or guaranteed issue policies, but you should still have some options if you’re coming off an eligible group policy. The Health Insurance Portability and Accountability Act of 1996 (HIPAA) requires that states provide some kind of coverage after you exhaust COBRA as long as you haven’t been without coverage for more than 63 days in the preceding 18 months. For more information, see Health Coverage for All.

The rules and strategies vary a lot from state to state, but you should be able to get a lot of information at your state insurance department Web site (go to our insurance page for links). The Georgetown University Health Policy Institute also publishes excellent consumer guides for getting and keeping coverage in each state.

Tags: health insurance, insurance for early retirees

New financial aid tool helps families determine whether they will qualify for federal financial aid

Last month, the federal government launched a new online tool to help families predict whether they’ll qualify for federal financial aid. Called the FAFSA4caster, it’s modeled on the government’s official aid application, the FAFSA (which stands for Free Application for Federal Student Aid).

The FAFSA4caster estimates a family’s expected family contribution to college costs and notes whether a family will qualify for the federal Pell grant program, allowing families to plan ahead for the cost of college. To use the tool, parents will need to enter their child’s Social Security number, as well as their own tax and financial information.

When you’re ready to apply for aid, you can easily transition from FAFSA4caster to FAFSA on the Web. Much of the information that you enter in the FAFSA4caster will populate your FAFSA on the Web application, making the experience of applying for federal student aid a lot easier.

To see the tool, visit the Department of Education’s website at www.fafsa4caster.ed.gov.

Tags: financial aid, federal financial aid, pell grant, fafsa

10+ Ways to Save on Fuel

by Jenny McKinney and Patrick McKinney, Retirement Planning Guides at About.com

Vanguard changes their fee schedule

Vanguard has eliminated several account related fees and replaced them with a single account service fee, effective April 26, 2007.

Here’s a summary of the changes:

The following annual $10 account-related fees have been eliminated:

• The custodial fee on traditional IRAs, Roth IRAs, and SEP–IRAs with a balance of less than $5,000.
• The maintenance fee on index fund accounts with a balance of less than $10,000.
• The custodial fee on education savings accounts (ESAs) with a balance of less than $5,000.
• The low-balance fee on all nonretirement accounts with a balance of less than $2,500.

These fees have been replaced with a single account service fee. This $20 fee will be charged annually for each Vanguard® fund in which you have a balance under $10,000 in an account.

The annual account service fee can be avoided by:

1. Signing up for account access on Vanguard.com® and choosing electronic delivery of shareholder materials, including statements, confirmations, fund reports, and prospectuses.
2. Consolidating your accounts or investing additional assets to bring all account balances in all funds to $10,000 or more.
3. Maintaining total Vanguard mutual fund assets of $100,000 or more.

To learn more about Vanguard’s new fee policy, please click here.

Tags: investment fees

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