May 2010


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My Financial News Digest

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May 2010

  1. 1. CARY ROWELL'S A C O M P I L AT I O N O F I N F O R M AT I O N A N D I D E A S F O R E F F E C T I V E M O N E Y M A N A G E M E N T Financial Front Money line NEWS BRIEFS AND HIGHLIGHTS FROM THE FINANCIAL WORLD Do You Lump-sum pension payouts may Don’t remodel to increase a Have Enough? not be available to all holders of defined-benefit plans. A new law home’s value if you plan to move soon. You would be lucky to recover requires employers to tell their work- even a portion of your investment if ers if a defined-benefit plan is fully you sell before the depressed housing funded—that is, if it has all the money market recovers, and that may take By W. Cary Rowell needed to pay all its obligations. Fully another two years. Also, affordability is LUTCF, MBA funded plans may offer retirees either moving up in importance to home buy- a series of payments or a lump-sum ers, given tight economic conditions. I hope you find you have enough when you con- payout, but plans that do not have “Sprucing up” your home still is worth- sider what’s really important in your life. enough money to pay in full at least while, however. Examples: Painting I recently read a letter to a financial columnist 80% of employees are allowed to pay walls, trimming bushes and straighten- that read, “Many of my 50-something friends are only 50% of a retiree’s pension in a ing up your garage. wasting some invaluable time that they’ve been lump sum. And plans that do not have given on Earth. They are caught up in an ‘earning enough money to pay at least 60% of If your mortgage lender fails, keep and spending cycle’ (must keep working hard so employees do not have to make any sending your monthly payments to the they can keep buying things they don’t really lump-sum payments at all. Ask your same address until you are told to do need) while worrying they’ll need to save a lot of defined-benefit plan’s manager for otherwise. If your lender transfers money to retire. details on the financial health of your your mortgage to another servicer, you “I can’t believe the number of smart, talented company’s plan. will be notified within 15 days and the friends I have who are not particularly happy new servicer must contact you within doing what they are doing,” the reader said. But Looking for a lost savings bond? 15 days after the transfer. The Real Go to and down- Estate Settlement Procedures Act they believe “they must continue so they can stop load Form 1048, Claim for Lost, Stolen (RESPA) sets rules for mortgage trans- working at (fill-in-the-blank age) to play golf or sit or Destroyed US Savings Bonds. Fill in fers. For more information, visit by the pool.” the following information: the bond, and search for “RESPA.” I must agree. What a waste, doing something owner’s name, address and Social Your mortgage terms will not you don’t like so eventually you can stop and Security number; approximate issue change—the contract is legally binding do...nothing? even if transferred to another party. date; and serial number if available. Why not pursue your passions even if the pay is Once the form is certified at a bank, less? (That reader did, returning to school for a mail to the Department of Treasury degree in a different field.) If you love what you (the address can be found on the do, you may never feel the need to totally retire, or at least won’t mind working a few more years. form). With the serial number, the Wit & Wisdom process will take three to four weeks; Retirement, as this reader said, would be a time without it, you may be waiting months to work for joy and learn new things. to get a duplicate bond. “A bone to the dog is not charity. If you take photos of your home W. Cary Rowell LUTCF, MBA for posting on-line, be sure the pic- Charity is the bone Financial Services Professional 628 Chestnut Centre tures do not show off valuables. Also: shared with the dog, Before holding an open house, lock up Myrtle Beach, SC 29572 valuables or store them off the premis- when you are just as (843) 449-7805 es. There have been recent reports of hungry as the dog.” well-dressed thieves coming to open — Jack London houses and stealing jewelry, handbags, clothing, even champagne. Volume 22, Number 3
  2. 2. Investment Strategies ASSET ALLOCATION: Think Goals, Risk Tolerance, Timeline By Humberto Cruz Q: I thought you were an invest- ment guru. Instead, you apparently park a lot of money in the dozen times over the years and taken his advice to heart, drawing the dis- tinction among the ability, willingness willingness to take risk have decreased. Thirty years ago, while building up my career (and portfolio), bank. Do you recommend safety first and need to take risks. I had 80 percent in stocks. and don’t get involved in stocks and What’s the most appropriate asset bonds? “Never take more risk allocation for you? That’s a personal than you have the decision for you to make, perhaps A: Glad you asked, because a discussion about investment risk is needed these days. ability, willingness or need to take.” with professional help. Good advice would have kept a 70-year-old I met recently from having most of his First, I am no investment “guru.” retirement money in the single — and My success has come by keeping For example, you may be able to take sinking — stock of his former employ- things simple and following basic a fair amount of investment risk if you er, Wachovia bank. rules. won’t need the money for a long time While that’s an extreme case, I have diversified broadly and have and also have a steady, good-paying research by the Employee Benefit kept my asset allocation (broadly job. Research Institute (EBRI) and speaking, the mix between stocks and But you may still not feel comfortable Investment Company Institute shows bonds in my portfolio) in line with my with too much risk, preferring to give many older Americans are heavily risk tolerance. up potential gains to sleep better at exposed to the stock market. “Never take more risk than you night. Based on the most recent figures, have the ability, willingness or need On the other hand, you may need to almost a third of 401(k) plan partici- to take,” said Larry Swedroe, an take at least some risk to generate the pants in their 60s had 80 percent or investment adviser in Clayton, MO returns to meet your goals. An all-cash more of their 401(k) money in stocks, and author or co-author of seven portfolio may feel “safe” but likely is including company stock and mutual common-sense investment books. inadequate for long-term needs. funds. “We live in a world of uncertainty,” Swedroe’s advice is to consider all In the 56-65 age group, 27 percent Swedroe said. “Stocks are high-risk three factors separately (ability, will- had more than 90 percent in stocks. investments, no matter how long the ingness and need to take risk) and Another 15 percent had between 80 investment horizon.” Never treat the choose the least overall amount of risk and 90 percent, and 11 percent had unlikely (such as a major, prolonged consistent with them. between 70 and 80 percent. bear market) as impossible, or the Since retiring from full-time work in While such high allocations to stocks likely (stocks eventually always go up) 2000, I’ve kept no more than 30 per- can be OK for younger workers, “it is as certain, he cautions. cent of my portfolio in stocks — just 20 less certain that those approaching I’ve interviewed Swedroe half a percent since 2008 — as my need and retirement would receive similar rec- ommendations,” Jack VanDerhei, EBRI research director, told the House Education and Labor committee recently. Unpublished research by EBRI found the average allocation to stocks in so-called “target-date” mutu- al funds specifically designed for investors in the 56-65 age group was a more moderate 51 percent. $ FND Reprinted with permission. © Copyright Tribune Media Services. All Rights Reserved.
  3. 3. Debt Management Paying Off Your Mortgage Can Boost Cash Flow In Retirement By Mark Miller Should you carry a mortgage into Mortgage interest tax break: Many retirement? homeowners like the idea of keeping a Before the economic crash last year, mortgage for the tax deduction on inter- financial planners advised many pre- est costs. But that benefit applies to tax- retirement and retired investors to invest any free cash in stocks, rather Many planners now than pay down a mortgage. But the new economy has ushered in much advise clients to focus Funding a pay-down: If you have more conservative attitudes about on debt reduction as one sufficient savings to pay off your mort- retirement planning — especially of the best retirement gage without raiding emergency savings indebtedness. Many planners now advise clients to security “investments” funds, use lower-return taxable savings before tapping tax-advantaged IRA or focus on debt reduction as one of the you can make. 401(k) accounts. best retirement security “investments” If you don’t have adequate cash to jet- you can make. In retirement, you’ll payers who itemize beyond the standard tison the mortgage, refinancing to a likely be on a fixed income and face deduction. And the greatest interest lower rate may help you accelerate pay- pressure to keep pace with rising costs, expense comes in the earlier years of a ments. Or, consider getting a part-time and debt-related interest expense just mortgage; with an older mortgage, the job and devoting your earnings entirely adds to the challenge. payment is mainly principal, reducing to accelerated mortgage payments. The no-brainers to focus on include the value of any tax deduction. credit card debt and auto loans. But if Another option to consider: Sell you’re a homeowner, a mortgage likely The underwater dilemma: Many your current home and move to an area is your most significant monthly debt- pre-retirement baby boomers took on — or home —with a lower cost of living related expense. Let’s look at the issues higher mortgage debt in the years run- that can be financed mortgage-free. to consider in deciding whether a ning up to the real estate crash; a study “That can be one of the best ways to mortgage pay off is right for you near this year by the Center for Economic extricate yourself from mortgage debt,” — or in — retirement: and Policy Research found that 30 per- says Christine Fahlund, a senior finan- cent of Americans age 45 to 54 are cial planner at T. Rowe Price. Where’s the best return? If you “underwater” on their mortgages — that $ FND have a dollar to invest, consider is, their debt is higher than their homes’ Reprinted with permission. © Copyright Tribune Media whether your best return will come current value, and they would need to bring Services. All Rights Reserved. from investing it, or reducing the bal- cash to a closing in the case of a sale. ance on an interest-bearing mortgage. For some, that raises a question about If your mortgage rate’s after-tax rate is paying off mortgage debt that won’t pro- On The Money five percent, you’d need to do better vide a return when the property ulti- than that in the stock market to be in mately is sold. Indeed, University of positive territory. Historically, stocks Arizona law professor Brent T. White have returned eight to 10 percent a even suggested in a recent research year over 30-year periods — but it’s paper that the rational economic move returned about zero over the past 10 for some underwater homeowners years, and the market’s short-term would be to default on their loans and direction is anyone’s guess. give their homes back to the bank. Most importantly, stocks shouldn’t be Since that raises more moral and legal a big part of a retirement portfolio, so issues than most people can stomach, the appropriate comparison is a more the best advice is to simply look at your conservative fixed-income investment, home as housing, not an investment. such as certificates of deposit, Treasury In that context, owning your property “I finally put something aside for my retirement. Bills or Treasury bonds. debt free is more efficient than carrying I put aside my plans to retire!” a loan.
  4. 4. CARY ROWELL'S 628 Chestnut Centre Myrtle Beach, SC 29572 W. Cary Rowell is a Registered Representative offering securities through NYLIFE Securities, LLC., Member FINRA/SIPC (843) 720-1900 - 200 Meeting Street, Suite 202; Charleston, SC 29401 This publication is provided to our readers as an informational source only. The ideas, opinions and concepts expressed here should not be construed as specific tax, legal, financial and/or investment advice. You should consult with your professional advisors regarding your particular situation. Retirement Planning Seniors Can Boost Their Social Security Benefits By ‘Re-retiring’ By Kathy Kristof Retirees may be able to take advantage in a lump sum plus some money left Kathleen Wiegand, a Social Security of a loophole in the Social Security law over, you shouldn’t do it, Horowitz said. spokeswoman in San Francisco. which allows you to “restart” your That said, the typical retiree’s biggest The agency would then respond with retirement benefits years after you’ve risk is outliving their savings. “The a letter saying how much they’d have retired. If you’re healthy, have some biggest risk old people have is living to to repay. Once they repaid those bene- savings, and are under age 70, it may 100,” said Kotlikoff. “You can’t count on fits, they could “re-retire” and start get- pay off. dying on time.” ting payments at the higher rate. Someone who originally retired at age Let’s take a look at Peter and Kate, a Kotlikoff estimates that his hypotheti- 62 and “re-retires” at 70, for example, hypothetical 70-year-old retired couple cal couple would each need to write the could boost monthly benefit payments by who originally started taking Social government a check for $94,556. 76 percent, said Brett Horowitz, a certi- Security benefits at age 62. Kotlikoff esti- That payment gets them an extra fied financial planner with Evensky & mates that each spouse would be receiv- $620 per month, or about $7,440 per Katz in Coral Gables, Fla. ing $13,250 per year or some $1,104 per year. If they live at least another 13 The catch? You have to repay what month today. years, until they’re 83, they’re ahead of Social Security has given you so far. However, if they had retired at age 70, the game. That would pay back their Sound crazy? It would be if you’re in they each would be receiving $1,724 per $94,556 outlay and then some. poor health, said Larry Kotlikoff, an eco- month, or $20,692 annually. $ FND nomics professor at Boston University. To restart their retirement, they would Moreover, if you don’t have more than have to fill out form 521, a “request for Reprinted with permission. © Copyright Tribune Media Services. All Rights Reserved. enough in savings to repay the benefits withdrawal” of retirement benefits, said