InsidePersonalFinance                 RicEdelman.com 888-PLAN-RIC MARCH 2009

Another Crisis in the Making?       ...continued from page 1

Wilshire 5000                               +215%                                      Nicholas with
Top 10 Scams of 2008
Some Lists Never Go out of Style

Y                                                     3
Despite Fraud, Markets Grow
You need another excuse to avoid investing

8                               Lessons Learned
                                      in 2008
Bad Impersonation Reveals
$113 Million Fraud
A prominent New York at-          to convince purchasers that
Your Personal
                                                                            Finance Rescue
   on It                  by Al Burgos, Sr. Financial Planner

Is the Stork Headed Your Way?

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Social Security Myths
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Is the Stork Headed Your Way?   ...continued from page 9

Flexible Spending Account                                  secu...
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funds sold them in the market                  can ignore all this, sit tight and be con-         currently sharp enou...
Q      About 80% of my retirement
       right now is in the company
stock that I got pre-tax, and I am
the very lowest rate; they will only sell   transfer the money to them in the                  I’m concerned, though, ...
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Inside Personal Finance


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Inside Personal Finance

  1. 1. RIC EDELMAN’S InsidePersonalFinance RicEdelman.com 888-PLAN-RIC MARCH 2009 Notice something Another Crisis in the Making? That flight to safety is about to crash into a mountain different? there is no debate, because the Federal Re- We have a new look! serve has set its interest-rate target at zero. Let me know what Rates cannot go into negative territory, you think! Email me at so they only have one direction to go: up. comments@ricedelman.com. It may take months or even years for that to happen, but eventually rates will rise. When that happens, bond values will drop. Featured in This Issue Why? You can thank the simple law of I t’s a sad fact that some consumers do supply and demand. Say the government Volume 15, No. 3 stupid things when they are scared. issues a 1% bond and you buy it. Later, say They sell low and buy high. They aban- that the government raises rates to 2% and don the stock market altogether and park you decide to sell your bond. Would an 3 The Best & all their cash in savings accounts. Or they investor rather buy your 1% bond or a Worst of load up on bonds. new one that pays 2%? Times A lot of people think bonds are a safe, Clearly, the 2% bond is the better choice. quiet place to ride out investment turmoil. In order to find a buyer for your bond, then, 4 Top 10 Scams of 2008 But if in the so-called flight to safety you’ve loaded up your portfolio with a bunch of bonds (regardless of whether they are government, municipal or corporate), I’m you’ll have to offer a higher interest rate. Oops — you can’t do that! What you can do, though, is lower your price. By selling the bond for less than its face value, the worried for you. buyer is compensated for your bond’s 9 Is the Stork lower interest rate. Headed Your Bonds are subject to two prominent risks Way? that can expose investors to substantial How much lower? Let’s look at the math. losses. If you own bonds or are thinking Say you buy a $10,000 10-year AAA-rated about buying them, be aware of these risks. bond paying 3.9%. If rates rise 1% and you 10 Social try to sell your bond, you’d lose 7% — $700 Security The first is interest-rate risk. Interest rates — of your money. If interest rates go up Myths and bond prices have an inverse relation- 2%, you lose 14%, or $1,400. ship: When one rises, the other falls. This is not conjecture; it’s mathematical fact. And interest-rate risk isn’t the only risk. 12 There’s another, called credit risk. In normal times, investors debate whether Q&A continued on page 2 interest rates will rise or fall. But these days Ric EdElman’s inside Personal Finance maRcH 2009 RicEdElman.com 1
  2. 2. Another Crisis in the Making? ...continued from page 1 As companies experience financial difficul- credit rating. Ideally, this means buying ties, their bond ratings get downgraded. bonds issued by and fully backed by the If an AAA bond falls to AA, the bond’s U.S. government. Municipal bonds and value drops 8%. corporate bonds can be downgraded and are therefore riskier. (Interestingly, some And watch out if interest rates rise and will argue that the safest bonds are those bond ratings decline at the same time. that have already been downgraded: Junk If your AAA bond falls to AA at the same bonds are worth buying, this argument time that interest rates rise 1%, you’d lose goes, because their ratings have nowhere 15% of your money. If interest rates rise to go but up.) to 3% and the bond falls to DDD, you lose 44% of your money. And in a truly terrible Third, and more importantly, don’t over- My goal is to teach you the but possible scenario, if interest rates rise weight your portfolio with bonds. Main- fundamental principles of to 3% while a bond falls to junk value (BB), tain a meaningful allocation to stocks, real personal finance — everything you would face a whopping 83% loss. estate, natural resources, precious metals, from getting out of debt and oil and gas — assets that are not (or to managing substantial Fortunately, there are several ways you not directly) affected by interest rates and estates. I am convinced that can reduce these risks. First, pay attention you can achieve financial credit ratings. Diversification helps when to a bond’s duration. That term refers to facing the challenges of a financial mar- success through education, the life of the bond. (It’s not the same as ketplace in turmoil. self-initiative and self-reliance maturity, which is the date the issuer is — not by speculation or by to return your principal; duration refers to Imagine the poor soul who invested his blindly following someone’s self-proclaimed “hot tips.” the average life of a bond, which is usually money in stocks in 2008 — and watched That’s what makes Ric shorter than its maturity. Ginnie Maes, for the S&P 500 fall 38%. Determined not to Edelman’s Inside Personal example, have a 30-year maturity date but let that happen again, and desperate to Finance® so different from all typically have a duration of only seven or avoid further losses in the stock market, he the others — and why this so years because people refinance, default moves his money to bonds — and unwit- newsletter will not tout stories or sell their homes — thus paying off their tingly sets himself up to lose another 40% offering “great stock tips” or get- mortgages — long before the loan is due when interest rates rise. rich-quick schemes. Instead, it to mature.) is filled with practical, realistic Don’t let that be you. If the stock market’s and truly helpful information, Long-term bonds are more sensitive to recent performance has tempted you to enabling you to discover the interest rates than short-term bonds. sell stocks low, you might buy bonds high tools and strategies you need Therefore, you can cut your interest-rate without knowing it — and it’s always what to achieve financial success risk by limiting your bonds to those that you don’t know that hurts you. for yourself and your family. have durations of seven years or less — and the shorter the duration, the less risk. That’s why you should let your portfolio be managed by investment professionals Second, limit your bonds to those that who know what they’re doing. IPF TELL ME WHAT YOU THINK are unlikely to experience cuts in their comments@ricedelman.com SUBSCRIPTIONS P.O. Box 3000, Denville, NJ 07834 or call toll-free (888) 987-7526 SPEAKING ENGAGEMENTS Contact Maribeth Bluyus at (703) 818-0800 EDITORIAL 4000 Legato Road, 9th Floor, Fairfax, VA 22033-4055 or call (888) 752-6742 fax (703) 818-1910 toll-free fax (866) 742-7222 EMAIL comments@ricedelman.com PUBLISHER AND EDITOR-IN-CHIEF Ric Edelman MANAGING EDITOR Kelly Pike LAYOUT & DESIGN Christine Janaske Ric Edelman’s Inside Personal Finance® is published monthly by Edelman Financial, 4000 Legato Road, 9th Floor, Fairfax, VA 22033-4055, (888) 752-6742. ISSN 1098-402X. Subscription rates are $69.95 per year. For foreign postage, add $18 per year for Mexico or Canada and $40 per year for airmail overseas. © 2009 Edelman Financial. This material may be reproduced only with our express written permission, which we’re likely to give. Periodicals postage paid at Fairfax, Va., and at additional mailing offices. POSTMASTER: Send address changes to Ric Edelman’s Inside Personal Finance, 4000 Legato Road, 9th Floor, Fairfax, VA 22033-4055. Material discussed is meant for general illustration and/or informational purposes only, and it is not to be construed as tax or legal advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary. Therefore, the information should be relied upon when coordinated with individual professional advice. Investors should be aware that there are risks inherent in all investments, such as fluctuations in investment principal. This is particularly true for mutual funds. Edelman Financial is a marketing name for two affiliated registered investment advisors. Edelman Financial Services LLC primarily serves the Washington, D.C., area; Edelman Financial Advisors LLC serves clients nationwide via its own advisors and unaffiliated registered investment advisors. Ric is a registered representative of and offers securities products and services through SMH Capital Inc., an independent broker/dealer, member FINRA/SIPC. He is separately registered as an investment advisor representative and offers Investment Advisory services through Edelman Financial Services LLC, a registered advisory firm. The information and opinions expressed are Ric’s own and not those of SMH Capital Inc. 2 Ric EdElman’s inside Personal Finance maRcH 2009 RicEdElman.com
  3. 3. Wilshire 5000 +215% Nicholas with Annual Returns new best Oct. 1998 - Oct. 2008 friend, Hamilton +13% +18% Invested the Missed 20 entire time worst days Missed both Missed 20 The Best best days & Worst Why Being Invested ALL THE TIME Is So Important of Times -57% Staff Stories Don’t let fear of bad days keep you away from the good Director, Financial Planning Diane Jensen I n a perfect world, we’d buy on the day when the market was the went to Antarctica on her sabbatical in De- lowest and sell on the day it was the highest. The market would cember. (Don’t worry, it was summer there. be down when we were young and saving for retirement and Pictured below.) Client Services Associate skyrocket while we lived off our investment income after we left the Rachelle Pollard’s 6-year-old daughter world of employment. Ananda sang a solo in her school’s winter musical. Izzy, son of Document Processing I don’t have to tell you that we don’t live in a perfect world — not even Coordinator Ran Yeatts and wife Amie, close. But I thought it would be interesting to see what kind of returns celebrated his first birthday in September we might achieve if we did so. — a major milestone for a boy born four months early and who spent his first eight The chart above shows an analysis of the Dow Jones/Wilshire months in a hospital. Meetings and Event 5000 Composite Index* for the 10-year period of October 1998 to Planner Maribeth Bluyus and Graphic October 2008. Designer Christine Janaske coordinated It’s hard to imagine that the profit for an entire decade occurred in just a 35-pound candy donation to a local food a handful of trading sessions, but the chart above shows that’s clearly bank. Network Engineer Mike Pike ad- the case. opted a beagle-mix puppy named Hamilton. (Pictured above with son Nicholas.) Director, If you didn’t bother to predict which days are the ones that matter Project Management Mike Attiliis is proud and instead remained invested the entire time, you could have earned of son Brandon, 14, whose team won the a 13% return. Prince William Jubilee ice hockey tourna- ment in his age bracket. IPF But if you tried to capture that 215% return, you would have had to have been incredibly lucky! But if you were both lucky and unlucky Diane Jensen — meaning you missed the best days (unlucky) but also missed the worst days (lucky), your return would have been 18% — and you would have had to have made 40 decisions about when to be in or out of the market. By contrast, being in the entire time required only one decision, and you still would have earned a double-digit return. So, avoid the temptation of guessing when the market will rebound. Missing even a single day of the recovery could have a huge negative impact on your portfolio. IPF *An index is a portfolio of specific securities (common examples are the S&P, DJIA, NASDAQ), the performance of which is often used as a benchmark in judging the relative performance of certain asset classes. Indexes are unmanaged portfolios, and investors cannot invest directly in an index. Past performance does not guarantee future results. Ric EdElman’s inside Personal Finance maRcH 2009 RicEdElman.com 3
  4. 4. Top 10 Scams of 2008 Some Lists Never Go out of Style Y 3 ou don’t have to lose $50 bil- Work-at-home scams. lion in a Ponzi scheme to get These scams came in at #2 scammed. ConsumerAffairs.com last year, and they remain common. has announced the top scams of 2008. This year “secret shopping” is the most New ones have joined the classics, but prevalent scam, promising income and if you’re not careful, they all lead to the free merchandise but resulting in small sonal information about you that they same place — a lighter wallet. losses when upfront fees are paid or sell to other crooks, or they promise big damages when victims wire large 1 Foreclosure rescue scam. to provide you with quicker access to sums of money to “test” money-wiring Record numbers of distressed economic stimulus checks. services. homeowners paved the way to the #1 spot for this particular scam, a retread of 2007’s #6 scam, “We’ll Buy Your 4 Phony “government official” scam. Fraudsters masquerading as 6 Campaign 2008 scams. Last year’s election generated a lot of excitement — which scammers Home.” In this new version, home- government officials captured the #7 were quick to exploit. Spammers owners make payments to a “rescuer” spot last year, with IRS scams the most sent emails with links to President and sign over the deed to the house. common. Now the Food and Drug Barack Obama’s acceptance speech. This is supposed to stop foreclosure, Administration says consumers have To watch, consumers had to download but instead it aggravates the problem been offered discounted prescription a program. But instead of playing the — the homeowner has signed over drugs from scammers pretending video, the “keylogger” recorded user his home to the scammer, losing all to be with the agency. Victims are IDs and passwords. Other fraudsters equity, yet still owes the full mortgage asked to wire funds to the Dominican claiming to be from the voter regis- balance to the lender. Republic, but after sending the money, tration board called people advising the fake FDA warns the consumer that 2 Unauthorized charges. them of a “problem” with their registra- they’ve violated the law and must wire Ever sign up for a “free trial”? Often tion and tried to collect their Social money to pay the fine or face legal free trial offers are extended after Security numbers. action. Other common frauds imper- making a credit card transaction with 7 sonate the Federal Trade Commission Fake lottery scam. another merchant. If you don’t cancel and tell consumers they’ve won a lot- Deposed King Abdul Abacha the trial, you’ll be charged monthly tery or sweepstakes. (and his urgent request to help transfer for the product or service. In more funds out of Nigeria) is said to be devious cases, scammers place a small charge on your credit card or phone bill and hope it goes unnoticed. A 5 Financial meltdown scams. The financial crisis has led to an increase in credit counseling scams, the ruler of email scams. But when it comes to snail mail, nothing beats fake lotteries. How it works: Victims receive nickel can add up to big profits for the payday loans, phony job offers and a letter and a check saying they won perpetrators, and that’s why this fraud investment scams. Phishers have also the lottery. They are told to cash the is up from the #8 spot last year. milked the crisis by promising to offer check and send part of it back to cover advice but instead merely collect per- taxes and fees. Naturally, the check is continued on page 11 4 Ric EdElman’s inside Personal Finance maRcH 2009 RicEdElman.com
  5. 5. Despite Fraud, Markets Grow You need another excuse to avoid investing enabling speculators to buy the bonds Congress reacted by passing security from farmers and veterans for pennies reform legislation in 1933 and 1934. on the dollar. Like Bernie Madoff, Richard Whitney As a result, the country’s first public in- used his clout as former president of vestment enriched speculators instead the New York Stock Exchange to cover of those who financed the revolution. misdeeds in the 1930s. He was busted Still, rather than destroy the country, for embezzling from charities, the Hamilton’s plan established the U.S. yacht club where he was treasurer government’s credit. and his father-in-law’s estate and I served three years in prison. t’s not every day that somebody The Ponzi scheme Madoff pulled defrauds investors of $50 billion in off got its name from Charles Ponzi Meanwhile, Oscar Hartzell convinced the fashion of Bernie Madoff. (although he was certainly not the first investors in Iowa with the last name to try this type of scam — it was once Drake (and eventually others) that they But he’s not the only person to rip- known as “Robbing Peter to pay Paul”). were entitled to a portion of Sir Francis off investors. From small-scale con In 1919 and 1920 Ponzi promised Drake’s fortune, which supposedly had artists to billionaire scoundrels, history investors a 100% profit in just 90 days been collecting interest for 300 years is replete with hucksters. Alchemists by buying postal coupons in foreign and was worth billions. The catch: tried to turn metal into gold; “ship scut- countries and selling them in the U.S. The investors needed to give Hartzell tlers” deliberately sank ships in for a profit. Ponzi collected about $8 cash to sue the British government ancient Greece for the insurance million (nearly $100 million today) and to release the fortune. Hartzell raised money; some have tried to sell instead repaid old investors with new millions, and donations continued to famous landmarks and even land investors’ money. The scheme unrav- come in even after he went to prison in a country that did not exist. eled when a journalist discovered for the fraud in 1933. Stories of fraud are in turn scandalous there weren’t enough postal coupons in existence to justify the volume of In the 1960s and 1970s, Equity Fund- and heartbreaking. But the truth is investments. ing Corporation made a name for itself that despite reports of these scams, marketing packages of mutual funds the world goes on. Investors keep “Match King” Ivar Kreugar controlled and life insurance, which were sold to investing. Businesses keep growing. nearly 75% of the world’s match reinsurers for cash. The problem: The The U.S. economy continues to expand. production in the 1920s and used insurance policies were fake. Hundreds Don’t believe me? Consider that one his empire to buy other international of employees knew about the fraud of the earliest examples of investment companies, including banks, and lend and helped it along by creating fake fraud in the U.S. occurred in 1792 and large amounts of cash to foreign coun- computer printouts and other docu- involved a founding father. To finance tries. With nearly 200 companies under mentation. As with Madoff, several the Revolutionary War, states sold his control, Kreugar cooked the books people reported suspicions to the war bonds to citizens. Afterward, the to report profits that didn’t exist, pay Securities and Exchange Commis- first U.S. Treasury Secretary, Alexander increasing dividends and loot sion, but the story was written off as Hamilton, crafted a plan to have the acquired companies. The deception preposterous. When a whistleblower federal government take over the was revealed when Kreugar died in finally convinced the SEC in 1973 states’ debts and repay bondholders. 1932, creating a “Kreugar Crash” that that the fraud was real, the firm’s But before the plan became common caused many investors to go broke. stock was wiped out, costing investors knowledge, word spread to New York, $300 million. continued on page 10 Ric EdElman’s inside Personal Finance maRcH 2009 RicEdElman.com 5
  6. 6. 8 Lessons Learned in 2008 A lot of mistakes were made in 2008. But mistakes can be valuable — if we learn from them. With that in mind, here are eight lessons offered by the financial markets of 2008. 1 When investing, assume the worst. Too often, people engage in wishful thinking, not financial planning. They buy a house they can’t afford and hope its value will rise, or they invest could run the risk of breaking the buck like the Reserve Fund did last year, leaving investors with 97 cents per $1 invested. 4 Be realistic. The economy and stock market will take time to recover. Just because 2008 is over doesn’t mean the problems with our nation’s economy are. Patience is necessary. in a product they don’t understand and get swindled à la Bernie Madoff. Some people buy 5 It’s okay to be scared. It’s natural to feel unsettled in times of economic doubt. The key is to prevent fear from only their company’s stock or accept shares as compensation instead of cash, losing both their causing you to do the wrong thing at the wrong savings and their jobs when the company tanks time for the wrong reasons. Investment behavior (think Enron, Fannie Mae, Lehman Brothers, etc.). is dominated by fear and greed; when the econo- These problems can be avoided by investing as my is strong, we get excited by profits, and greed though things won’t go well: Simply consider the makes us want to buy. Falling prices fill us with worst-case scenario (the house’s value drops or fear and encourage us to sell. Instead, we need the company goes bankrupt) and invest only if to focus on the long term and know that wealth you can stomach it. is created in periods of uncertainty. 2 Maintain diversification. Don’t make big bets. That means you 6 Be skeptical about what you read, see and hear. Pundits love to scare you because that’s what sells shouldn’t buy individual securities, put your entire life savings in a bank account or tie up all newspapers and grabs radio and television audi- your money in the equity of a paid-off house. ences. If you see a headline stating “Why Home Rather, build a diversified portfolio based on your Values May Take Decades to Recover,” don’t accept situation and reassess what you’re doing from it at face value — evaluate the claim and decide time to time to make sure it’s still appropriate for yourself. Remember that the media are not for your situation. smarter than you. 3 Build ample cash reserves. In an ideal world, you need 12 months’ 7 If you’re properly diversified with an investment horizon of at least three years, buy more. worth of spending in a safe place — either U.S. Treasuries or FDIC-insured bank accounts. The key to building wealth is to sell high and buy Never chase yield by buying investments that offer low. With today’s low prices, the current market is unusually high dividends or interest rates. Higher offering the investment opportunity of a lifetime. 8 rates always mean higher risks. Money market If you’re glued to the news, go watch accounts may be extremely popular, but if you use basketball. IPF one that isn’t invested solely in U.S. Treasuries, you 6 Ric EdElman’s inside Personal Finance maRcH 2009 RicEdElman.com
  7. 7. CAVEAT EMPTOR Bad Impersonation Reveals $113 Million Fraud A prominent New York at- to convince purchasers that torney has been charged by the notes were genuine. He the Securities and Exchange Commission with conduct- allegedly distributed phony financial statements and Edelman Financial ing an elaborate $113 million scheme involving the sale audit opinion letters from a reputable accounting firm Boosts Client of bogus promissory notes. Marc S. Dreier, the founder and recruited others to play the parts of representatives of Privacy and managing partner of a legitimate companies involved Why does privacy protection have 250-attorney firm, used phony in transactions, even creating to be inconvenient? documents and impersonated dummy email addresses and C other people to market fake telephone numbers. ontinuing our tradition of utmost client promissory notes to hedge He got caught when repre- care, Edelman Financial has introduced ad- funds and other private invest- sentatives from a firm he was ditional steps to increase client privacy and ment funds, the SEC alleges. trying to con didn’t believe his the security of information clients entrust to us. The SEC says Dreier created an impersonation of a Canadian Now, client paperwork will reveal only the last elaborate charade designed firm’s executive. IPF four digits of your Social Security number, and the first two digits of your account number will $50 Million Lost in Ponzi Scheme be redacted. As many as 80 investors lost securities futures contracts, Also, when you call the office and speak with a staff $50 million in a Ponzi scheme but traded very little of it. member who doesn’t know you, we’ll authenticate run by Joseph S. Forte of Instead, he withdrew millions your identity by asking questions about you and Broomall, Pa., the Securities in so-called fees for his per- your account. and Exchange Commission sonal use and lied to investors alleges. According to the SEC, about the fund’s performance. Finally, we won’t always complete paperwork Forte told investors that he Forte was never registered for you like we’ve done in the past. When we would invest their money in with the SEC. IPF send forms for you to sign, there’s a concern that someone other than you might open or intercept the mail. Therefore, we’ll avoid pre-populating the 100% Return in 90 Days Proves paperwork with private information. Either you’ll complete the forms, or we will do so for you after Too Good to Be True you sign and return the documents to us. Although An alleged investment of- through a network of purport- this may be a little inconvenient, it’s worthwhile to fering a 100% return in 90 ed investment clubs, the SEC improve privacy protection. days turned out to be a Ponzi reports. George L. Theodule, These steps — along with our ability to send scheme and affinity fraud through his company Creative sensitive data to you via DataMotion’s secure email that collected more than $23 Capital Consortium LLC, lost at protocol — will help us continue to protect your million from thousands of least $18 million trading stocks information from those who steal mail or try to investors in the Haitian-Amer- and misappropriated at least ican community nationwide $3.8 million for himself. IPF impersonate you. If you have any questions, call us anytime. IPF Ric EdElman’s inside Personal Finance maRcH 2009 RicEdElman.com 7
  8. 8. Your Personal Finance Rescue Ric’s new book offers an antidote to bad investing B attered banks and ailing automakers are enjoying gov- ernment bailouts, and you can’t help but wonder: Who IRA Withdrawals Not is going to step in to save your own financial security? The answer is you, and I’ll show you how with my new book, Required This Year Rescue Your Money from bad investments as well as big losses, excessive fees, high taxes, and avoidable risks, caused by painful Another reason that converting mistakes, major missteps, immense blunders, giant slip-ups, large to a Roth is a dumb idea gaffes, enormous oversights, whopping errors, second thoughts, C cumbersome rationalizations, ongress has granted some tax relief for and wild guesses, all because retirees: No IRA withdrawals are required you got bad advice, poor for 2009. counsel, silly suggestions, Ordinarily, people age 70½ or older must make a man- errant recommendations, datory withdrawal from IRAs and retirement accounts; idiotic opinions, incorrect the amount is based on your age and the previous instructions, and useless year’s ending value. information from know- nothing pundits, arrogant Withdrawals for 2008 were especially painful for journalists, self-proclaimed retirees because account values had declined experts, idea-of-the day dramatically — yet withdrawal amounts were based columnists, commission- on December 31, 2007, when account values were seeking brokers, and inexpe- much higher. This forced many retirees to sell invest- rienced advisors, all of whom ments that had fallen in value. you thought were smart but who you now realize To help, Congress has waived the withdrawal require- are actually ill-informed, uneducated, inexperienced, unskillful, ment for 2009. (However, some retirees will still have untrained, flat-out wrong, or just plain stupid. to make a withdrawal: If you turned 70½ in 2008 and didn’t make your 2008 withdrawal by December 31, Yup, the title says it all. 2008, you must do so by April 1, 2009.) The Panic of 2008 has caused consumers across the country If you don’t need the money, don’t take a distribution to impulsively make bad investment decisions that are only in 2009. If you receive monthly checks from your ac- worsening their predicament. Rescue Your Money reveals the count, call your advisor to stop those distributions. myths, mistakes and major obstacles that are preventing people from achieving financial security and offers solid, Congress’s action demonstrates yet again the superi- effective advice in a practical how-to guide that you can read ority of Deductible IRAs over Roth IRAs. Roth propo- in a single sitting. There’s even a special section for people nents have argued that Roths are superior because who are already retired. they aren’t subject to mandatory withdrawals. But now, for 2009 at least, neither is the Deductible IRA! So if you know someone whose finances need rescuing, be sure to tell them about Rescue Your Money, available in book- Imagine the hapless investor who converted his IRA stores this month. IPF to the Roth in order to avoid mandatory withdrawals. He could have avoided those withdrawals anyway! IPF 8 Ric EdElman’s inside Personal Finance maRcH 2009 RicEdElman.com
  9. 9. PLAN on It by Al Burgos, Sr. Financial Planner Is the Stork Headed Your Way? T he birth of a child is one of the new habit. Check with your HR department greatest joys a family can experi- or call your insurer to get details about ence. It also changes everything — costs and coverage for your new bundle(s) including a family’s finances. of joy. Find out which hospital delivery expenses you’ll be responsible for. I can now speak from personal experience. My wife Alicia and I welcomed twins last Disability insurance. You need to maintain spring! Sasha and Mason are the light of your income even if you’re not healthy our lives. We would do anything for them. enough to earn it, and that’s why this form And one of the best things we’ve done of insurance is crucial. Remember that for them so far is to ensure our family’s pregnancy is considered a disability, so financial security and prosperity by taking moms-to-be need to obtain this coverage to heart the advice I give my own clients. before becoming pregnant. Learn about Here are some items (and lessons I’ve coverage provided to you at work, and learned along the way) to keep in mind consider getting a supplemental policy if you or a loved one is expecting: that can provide additional coverage. Cash Reserves Life insurance. Both parents need life The first order of business is to start saving insurance, whether or not both earn a “If you want even before the baby arrives. It sounds paycheck, so the survivor has funds for trite, but babies are expensive (the De- child care and other costs (as well as your children college savings) should the other die be- partment of Agriculture says the average family spends $20,200 in the baby’s first fore the kids are supporting themselves. to turn out year) and you will spend your cash reserves For most young parents, 20- or 30-year well, spend more quickly than you think, especially if term policies are sufficient. Don’t buy either parent (or both) takes an extended policies for the babies; instead, add an twice as much absence from work. So before the child is inexpensive rider to your policy to cover time with born, build your cash reserves to 6 to 12 the cost of a (God forbid) funeral. months’ worth of current expenses and them, and Property and casualty insurance. Make cut (better yet, eliminate) your credit sure you have at least as much in liability half as much card balances. coverage as you do in assets. Ask your money.” Insurance homeowner’s agent about an umbrella Like many parents-to-be, I was worried liability policy. It’s cheap and beneficial. – Abigail Van Buren about navigating the maze of insurance. Here are the policies you’ll need to deal Check your policies and their deductibles. with as you await your new arrival(s): A benefit of having plenty of cash in reserve is that you can raise your deduct- Health insurance. Most adults of child- ibles, which lowers the cost of your insur- bearing age are not used to visiting the ance polices. continued on page 11 doctor’s office regularly, so get ready for a Ric EdElman’s inside Personal Finance maRcH 2009 RicEdElman.com 9
  10. 10. Social Security Myths M illions of Americans are or will be relying on Social Security benefits during retirement. But a recent survey of 61-year-olds by Fidelity Investments shows that most know little about how Social Security works: 56% don’t know when they will be eligible for full Social Security benefits (age 66 for those born 1943-54). 54% are unaware that they need to apply for benefits three months before they wish to 12% are not aware that working in retirement could affect their benefits, including the tax liability of that income. start receiving payments. Many incorrectly believe that the Social Security Administration will contact them when it is time to receive benefits. 72% don’t know that a nonworking or lesser- earning spouse could be eligible for Social Security based on a higher-earning spouse’s work 51% are not aware that when a spouse passes away, the surviving spouse may be eligible to receive the larger of their two Social Security payments. history alone. If you or your parents are nearing retirement, take the time to understand Social Security. If you have questions, 31% believe that Social Security payments are not taxable. contact the Social Security Administration at www.ssa.gov or (800) 772-1213 or ask your financial planner. IPF Despite Fraud, Markets Grow ...continued from page 5 The 1980s brought about the movie More recently, the implosion of Around the same time, a 20-year, Wall Street, which told America that energy firm Enron sent shockwaves $311 million Ponzi scheme operated “greed is good.” Based on the stories through Wall Street. At the time, En- by James Paul Lewis Jr. of Lake Forest, of junk bond king Michael Milken and ron was one of the country’s leading Calif., unraveled. Preying on elderly infamous insider trader Ivan Boesky, and most innovative firms. The firm church members, he stopped paying it depicted the excesses and hostile collapsed when massive accounting investors dividends in 2003, claiming takeovers of the 1980s. The movie irregularities were revealed, caus- the Department of Homeland Secu- made millions and so did Milken and ing thousands of Enron employees rity had frozen the fund. In reality, he Boesky — until they went to jail. and investors to lose their entire life spent most of the money on himself savings. It was a tragic loss for those and was sentenced to 30 years in Barry Minkow also took greed to individuals, and the country was prison for his long-running scheme. unprecedented levels. In 1986, at the outraged — especially as word spread remarkable age of 21, he raised $100 that those responsible for cooking the These are just a handful of examples. million from some of the biggest books, including CEO Jeffrey Skilling, Thousands of others exist. But the firms on Wall Street when he took sold their shares ahead of time. lesson is that despite the action of his carpet-cleaning company, ZZZZ ne’er-do-wells and other unsavory Best, public. But his company dealt The demise of Enron kicked off a people, investing is still the best way with more than dirty rugs. Tricking series of other accounting scandals to build wealth and increase your dozens of lawyers, accountants and that included telecommunications financial security. bankers, Minkow used forgery, credit firm WorldCom, cable company card fraud, check kiting and mobster Adelphia and manufacturer Tyco Frauds will be revealed from time to loans to maintain his phony business International. Investors lost billions time, but the market will still grow. and hide money laundering activities. of dollars, people went to prison The important thing is to ensure that Minkow went to prison for more and Congress passed the Sarbanes- you are making smart investments than seven years; his investors lost Oxley Act of 2002 to reform public with people you trust. IPF $50 million. companies. 10 Ric EdElman’s inside Personal Finance maRcH 2009 RicEdElman.com
  11. 11. Is the Stork Headed Your Way? ...continued from page 9 Flexible Spending Account secure retirement by establishing a Top 10 Scams of 2008 ...continued from page 4 Take advantage of your employer’s RIC-E Trust®. Invented by Ric more flexible spending account (also known than 10 years ago and awarded two bad, and the victim is out the cash as a cafeteria plan). This allows you U.S. patents, the Retirement Income sent to the scammers. to avoid income taxes on money you for Everyone Trust lets you (or any spend for items not covered by insur- ance, including deductibles, co-pays adult) contribute $5,000 or more to an account that will grow uninterrupted 8 Charity telemarketing scam. Telephone fraud has been around nearly as long as the tele- and, in some cases, child-care expens- until the child reaches retirement age. phone, and you’d think that the Do es. Remember that you must spend all At 8% a year, such an account for Not Call List would help to prevent the money you place into the plan by newborns like ours would grow fraud. But charities are exempt from the end of each year. to $750,000 by the time they reach the list, clearing the way for fake cha- age 65. That’s why Alicia and I are in Tax Deductions rities to continue calling you. They the process of opening a RIC-E Trust® It’s important to talk to a tax advisor. collect money, but little, if any, goes account for each of the twins. New parents are typically eligible for to support those they purport to help. new deductions and credits, most of Estate Planning which are available whether you item- ize or take the standard deduction. This is the part no one likes to discuss. Alicia and I had a will, but we knew we 9 EPPICard scam. As many states have moved to debit-like EPPICards to administer Make sure you review your tax with- needed to review it. With kids on the payments and benefits, a new scam holding, and if one parent stays home, way, we needed to choose guardians has made the list. To take advantage verify that you can deduct money (and secure their cooperation). And of the people using them, scammers placed into his or her IRA. working with our attorney, we needed have been sending fraudulent text, to create instructions for handling our College Savings vs. Retirement voice and email messages warning of assets should something happen to While college planning is near and a problem with the victim’s EPPICard us. Like all Americans, we also need dear to my heart, nearer still is retire- and threatening to close the account. a durable power of attorney and a ment. As Ric likes to say, you can take When the victims contact the fraud- healthcare power of attorney so we out loans to pay for college, but you sters, their personal information is can make decisions for each other in must pre-fund retirement. Staying on stolen and their account is drained. case one of us becomes incapacitated. track with your retirement goals is key. 10 Estate planning is a sober (but not Kevin Trudeau’s “Weight- New parents need to contribute the somber) activity, and completing the Loss Cures ‘They’ Don’t Want maximum to their retirement plans at process gave us comfort in knowing You To Know About.” work, as well as to IRAs. Spouses who that our kids will be well cared for This book promises an “easy” recipe for don’t earn an income must still and raised by someone slimming down, but when consum- save for retirement too. who wasn’t selected ers purchase the book, the FTC has If you are fully by a judge. charged, they find that it describes a funding retire- complex, grueling plan that requires Indeed, the list of ment, you’re severe dieting, daily injections of financial planning ready to open a prescription drugs that consumers for babies is exten- 529 college sav- cannot easily obtain and lifelong sive. I’m confident ings plan. With dietary restrictions. Trudeau was Alicia and I are do- the help of your Mason and Sasha Burgos ordered to pay back more than ing right by the twins. financial advisor, you $5 million in profits and he is And I’m certain you want can create the right asset banned from promoting the book to provide your family with allocation for the child. And if you in infomercials. Other too-good-to- the same peace of mind. So if you’re contribute to a plan offered by your be-true weight loss scams abound. an expecting parent, best wishes to home state, you may be eligible for a Trudeau’s latest book and infomercial you. Call your financial planner to reduction in state income taxes. purportedly reveals how to get rid share the good news and start plan- of debt/credit problems. IPF Even better, you can actually start ning now for that bright future. IPF now to help your child enjoy a more Ric EdElman’s inside Personal Finance maRcH 2009 RicEdElman.com 11
  12. 12. Q&A These are Ric’s answers to questions sent to him by readers and questions from callers to his popular radio show. Call 888-PLAN RIC or email comments@ricedelman.com with your questions! Q I’ve lost $800,000 of my formerly $2.6 million port- folio, and it’s killing me. I’m really That would be a positive step because it enables you to sell assets that are relatively high in value (selling high Q I have a question on an exchange-traded fund. I’m basically a buy and hold investor uncomfortable having my money, is always good) and buy assets that in retail mutual funds. But as you everything I have ever earned, in are lower in value (and buying low is know, panicky selling hurts exist- a place where I really don’t know always good). If your financial planner ing shareholders. Are ETFs less what is happening or why it’s hap- hasn’t been doing that for you, you likely to see portfolio disruption by pening. My husband and I want need to ask why. shareholder redemption and why? Q to retire in about 10 years and we I have a 30-year fixed mort- Yes, they are less likely to suffer, for recently bought some new prop- gage at an interest rate of three reasons. One, they tend not to erty and it all feels like it’s slipping 5.75% and I was wondering when attract market timers to the same away. How do I stay the course? would it make sense for me to extent that retail mutual funds do, First, let’s turn those dollars into per- refinance. How low would interest so there is less likelihood of trad- centages. As a percentage, you’ve lost rates have to go? ing in that regard. Second, they 30%, and while that feels frightening to have very low turnover themselves, Twenty years ago, I would have told you, losing 30% in 2008 suggests that which means they are not as likely you that interest rates had to drop 2% your portfolio could be well diversified. to be subject to style drift or bracket in order for refinancing to make sense. If so, you probably don’t have as much creep because some fund manager That rule is no longer true, because the to worry about as you fear. is trading heavily. Finally, due to cost of refinancing is much lower these the way many ETFs handle their tax Without knowing where your money days, as are interest rates. reporting, they are able to offset one is invested and relying solely on the I suggest you call your mortgage com- investor’s selling with another’s buy- 2008 performance you’ve described, pany and ask, “If I were to refinance, ing — enabling the fund to avoid you should consider staying the course. what would be the new interest rate reporting the transactions as capital But let me elaborate on what that re- and what would be my new monthly gains or losses. ally means. People sometimes accuse payment?” Then ask how much it will me of being someone who argues for This explains why the typical cost to get that new loan. the “buy and hold” approach, and that exchange-traded fund often issues is not what I’m saying. My argument is If it costs $1,000 to refinance and doing capital gains distributions that are that you should “buy and rebalance.” so saves you $50/month, it will take dramatically lower than those of- you 20 months to break even. If you’re fered by typical retail mutual funds. In other words, if you have a properly Q going to move during or soon after diversified portfolio, the key now is that time, it’s not worth it. But if you I have only Maryland AAA or not to simply hold on to it, but to plan to stay in the house 10 years, it’s AA bonds, and whether they rebalance it. Compare your portfolio’s a good deal. are transportation bonds or other allocation of one year ago to your bonds, there has been a substan- portfolio today — and rebalance it By learning the costs and savings of re- tial paper loss in both. Someone so that today’s portfolio looks like last financing, you can decide if it’s worth it. told me it’s because the hedge year’s portfolio. 12 Ric EdElman’s inside Personal Finance maRcH 2009 RicEdElman.com
  13. 13. Q&A funds sold them in the market can ignore all this, sit tight and be con- currently sharp enough) to keep very rapidly to raise cash. I’m curi- fident that the state of Maryland will records as to what portion of each ous as to what your opinion is. return all your money upon maturity. distribution should be tax free. Of course, the latter could force you to Hedge funds have had a minor impact wait decades, and you might not want 1. Okay on bonds. There are other reasons for to wait. Also, the reduced returns you 2. Okay their decline in value. might earn between now and then 3. Okay could prove more expensive than sell- 4. Not Okay One big factor is that muni bonds suf- ing and investing elsewhere. To figure 5. Not Okay fer from credit risk. Most muni bonds are insured, and the companies that insure them (MBIA, Ambac, Fitch, etc.) out which course of action is best, talk with a financial planner. Q Do you think the federal government will keep FDIC Q have been experiencing their own fi- These five events relate to insurance at the new max of nancial problems. So if the bond’s value my family. I’ve chosen to in- $250,000 or go back to $100,000? is based on the insurance that supports vest in a Roth IRA in each instance I have CDs and do not know if I it and the insurance is in question, the instead of a Deductible IRA. What should keep the money there. bond’s safety is in question. are your thoughts on this? Second, Maryland is one of a very small number of states that are AAA-rated. In the current credit crunch, there are “People sometimes accuse me of being worries (I’m not suggesting that the someone who argues for the ‘buy and hold’ worries are real) that Maryland might approach, and that is not what I’m saying.” lose its AAA rating. If it falls to AA or A, the bonds will decline in value. Thus, you are in a position where 1) When grandparents/parents No one knows, but I’d bet they will things can’t get any better: Your bonds fund an IRA for a low-income leave the limits in place. If they don’t, are already AAA (the highest rating), so student. there will be plenty of notice and if things change, they can only change probably grandfathering to protect 2) For a low-income young adult. for the worse. those who already invested based on In other words, there is a difference 3) For those not eligible to con- current rules. between reality and perception of real- tribute to a deductible IRA. But if you’re really worried, then spread ity. Maryland’s bonds might be in great 4) For those who prefer not to the money among several banks, financial shape, but if the marketplace begin distributions at 70½. placing less than $100,000 with each. fears change, perception will alter the This way, you don’t have to worry bonds’ values. 5) For those who were organized about it. Instead, you can worry about enough to invest in an IRA even why you have so much money in low- So, you have a choice: You can sell the though it was not tax deductible, return accounts in the first place. bonds and avoid further losses, or you but are not organized enough (or Ric EdElman’s inside Personal Finance maRcH 2009 RicEdElman.com 13
  14. 14. Q&A Q About 80% of my retirement right now is in the company stock that I got pre-tax, and I am advisor, because you need to examine the implication of this on your overall tax return. It’s reasonable to assume that the S&P makeup will change along with the market values of these firms. Q Q no longer with the company. My Over years of listening to you My wife and I last month cost basis is $8.60 a share, and the I have carefully reviewed the signed a contract on a value right now is $28 a share. A individual holdings of my mutual house that is being built and is broker suggested that I do a net funds to ensure I really was diversi- scheduled to be completed in unrealized appreciation (NUA) to fied. I continue to do so and I no- May. Right now, our interest rate lift the money out of my retire- tice that the funds, including ETFs, is floating. We have the option ment account so that I can diversi- are investing heavily into financial to lock in the interest rate by pay- fy it at an after-tax format and take services. I am a bit alarmed and ing 1.25 points and paying a half- all the benefits of the NUA. What confused by this trend. Does it point-higher interest rate. Should do you think? mean the government has thrown we go ahead and lock or should I’m scared to death that 80% of your a lot of money at these industries we wait and see what happens? retirement is in a single stock. Action and their health is not as bad as I’d prefer it a little lower, but I’d needs to be taken: You need to sell we have been led to believe? be happy with the current rate. that stock and diversify your portfolio. You’re putting together two pieces of If you’re happy with the current rate, As you know, when you pull that mon- information that are unrelated. then lock it in. ey out, you’re going to incur taxes on the profit, and it’s going to be treated The S&P 500 Stock Index ranks stocks People who are about to borrow as ordinary income. based on their market value. Many money always say they want the best funds invest likewise. Over the past rate. It’s the same kind of game people NUA lets the appreciation be taxed as 20 years, stocks in the financial sector play in the stock market: They want to a long-term capital gain, as opposed to have grown faster than other sectors buy at the very lowest point, and they ordinary income. We’re not a big fan of (and lately are falling faster, but never want to sell at the very highest point. NUA, in most cases, because it doesn’t mind) and as a result represent a larger Anytime that happens, it’s sheer luck. provide future tax deferral for you. portion of the S&P than in prior years What we would prefer you do is take So, ask yourself a different question: (and hence comprise a larger portion the money and liquidate the security, Am I happy with terms that are avail- of many mutual funds). diversify the asset, keep it tax deferred able? If the answer is yes, take them. if you don’t need the money and move The government rescue plans are unre- You can always refinance again later if on from there. lated (or at least not directly related) to the rates get even better. Meanwhile, this phenomenon. if the rates get worse, you’ll be glad I would recommend you get a second you locked in. So you win both ways. opinion from another financial advisor So, in short, yes, many of the firms (you kind of did that by asking me, but in this industry are in as bad shape Too often, people try to make this stuff you need a more detailed analysis than as you’ve heard. Thus, government a lot more complicated than it really is. I can do for you here), as well as a tax intervention is appropriate, though They set goals that are impossible to advisor. Don’t rely solely on a financial distasteful and hopefully temporary. reach. They will only take a rate that is 14 Ric EdElman’s inside Personal Finance maRcH 2009 RicEdElman.com
  15. 15. Q&A the very lowest rate; they will only sell transfer the money to them in the I’m concerned, though, about your their house for the very highest price; future, and in the meantime, having wife’s behavior and your mutual lack they will only sell a security that has them help you make investment deci- of communication (how long has this made a profit. Achieving those goals sions will impact the future value of the been going on, and how did you only requires dumb luck — and that’s money that they are going to receive. now discover it?). not something I’d want to stake my Now let’s talk about the 4-year-old. Counseling is in order — marital for future on. I am a firm believer that you should you both and psychological for her. Q I have five grandkids be- tween the ages of 4 and 9. To teach them to invest, I’m look- begin discussing money with children as young as age 3. For example, as he learns to count, let him count coins There are issues here that must be ad- dressed, or that debt will continue to grow and the marriage will continue to ing for a place where I can open instead of marbles. For more ideas on weaken. Q an account for each of them for, how to teach your grandchildren, visit Is it just as safe and secure say, $100; add $10 a month; and www.jumpstartcoalition.org. to open a CD with an online put maybe 80% of it in a stock If you do all of the above, you’ll be doing bank as compared to a brick-and- mutual fund, 10% into a bond a wonderful thing for your grandkids. mortar bank? The yield is higher. and 10% in money market funds. Then they can see how each of those grows over time. Do you know of such a place? Q I recently learned that my wife has racked up $30,000 in credit card debt. Lucky for her Sure, as long as it’s FDIC-insured. Deal- ing with an Internet bank is the same as with any other. The reason the yield the ground is too frozen to dig a is higher is simply technology: When Yours is a noble idea, and I applaud you shallow grave, so I have to figure you go to your local bank, there are for it. However, I know of no mutual other ways to dig out. Card issuers bricks and mortar, with tellers stand- fund that will enable you to open an have agreed to lower the interest ing behind bulletproof windows. account with only $100 or add only rates. Any way to use my 401(k) Those expenses affect the rates the $10 a month. Let’s talk about the 9-year-old first. Instead of investing real money, make “I’m scared that 80% of your retirement is in a single stock.” it hypothetical. You can track the funds as though you really own them using the newspaper, a Web site or an Excel spreadsheet. It gives the same message you are trying to teach. (about $150k) to pay this off with- bank can offer. Since Internet banks out penalty? I’m not planning to don’t have those expenses, their Second, if you do want to make it real, retire for another 13 years. costs are lower, enabling them to set up the portfolio you had in mind pass the savings to you in the form using your own money and share the Nope. of higher yields. results with the kids: Let them see your Which is good, because you should statements and watch the prices of never use retirement assets to pay the securities you buy. You can always credit card debt. Ric EdElman’s inside Personal Finance maRcH 2009 RicEdElman.com 15
  16. 16. Based on our client survey responses, we’ve redesigned Inside Personal Finance to make it easier and more enjoyable to read. It still contains all the personal finance news and informa- tion you rely on, just in a nicer package. And we’ve Download the latest podcasts and reduced waste by eliminat- get a full listing of cities where the ing envelopes and using recycled paper. show airs at RicEdelman.com. RIC EDELMAN’S InsidePersonalFinance RicEdelman.com 888-PLAN-RIC Periodicals Postage P.O. Box 3000 Denville, NJ 07834 Ric’s Newest Book Is Here! Available In Bookstores Everywhere This Month If you’re scared or confused about how to handle your investments and fed up with “advice” from brokers, advisors and media darlings that has cost you huge sums and placed your financial security at risk, the solution is right here. ENJOY THE NEW IPF? PASS IT ALONG SO YOUR FRIENDS CAN LEARN AND ENJOY! See Ric on Washington, D.C.’s WETA Television in March and Learn How to “Rescue Your Retirement.” Check your local listings.