Common Mistakes with Retirement Planning

The biggest mistake in retirement planning is not planning at all. I know many families who cannot afford to retire because they failed to save money when younger.

So let's assume you are planning and are saving. Moneyland at Time.com has identified The 7 Biggest Retirement Planning Mistakes

1. Assuming you can work until age X
   Two in five retire before they had planned to due to illness or job loss. So start early!
2. Ignoring Taxes
   Take advantage of IRA's and 401(k) reduce the taxes you'll spend for access to your money
3. Not saving enough for Medical
   The average couple who retires at age 65 will spend $285,000 in health-care costs!!!
4. Failing to Establish a Lifetime Income
   Few now-a-days (other than union or government workers) will have a pension for life. The article suggests an "immediate fixed annuity" to supply cash flow.
5. Retiring too soon
   You get less from Social Security if you draw from it the first year you are eligible.
6. Underestimating how long you'll live
   Many will live to 95 or 100 and outlive the money they saved
7. Spending your retirement too quickly
   Spend no more than 4% of retirement savings each year.

$500 in the bank

MSN Money has a great article titled, Why you need $500 in the bank, which is cited in another story worth reading, 3 money tips for every income.

In the money tip for households earning less than $20,000 (below the poverty line of $22,000 for a family of four), Liz Weston says, "Forget, for now, all the advice about saving three to six months' worth of expenses." Yes, that is a worthy goal, but out of reach for a family below poverty. But this does NOT mean a family in poverty is off the hook from saving anything. Liz sets a target of $500 in the bank for emergencies.

Begin with $100 left in the checking account - always. This cushion will help protect against the costly mistake of bouncing a check. One tip is writing a $100 check to yourself, then don't cash it. Record it in the checkbook but then rip up the check. [Personally this would drive me batty since I balance the checkbook every month to the penny, but it works to "trick" some people into not spending that last $100]

Next: month by month put away a little money, say $20 per month, more if you can, into a savings account to reach $400. This will cover many common emergencies like a car repair bill, doctor bill, and replacing a broken refrigerator.

Lastly don't touch this savings unless there is a real emergency. If you do spend it, you must restore it ASAP.

Bottom Line

What happens if you don't have $500 in the bank? You may be forced to use a credit card and pay high interest rates for an emergency bill over months or years. Or use a payday money lender who will charge an outrageous fee. Or fail to pay your rent and risk eviction. Etc.

Everyone, should have at least $500 set aside for emergencies.

End of Year Money Checklist

"Money often costs too much."
-Ralph Waldo Emerson

The year is almost over and year-end is a great time to give yourself a financial checkup. The website TheDigeratiLife recommends 16 Money Moves For Your Year End Financial Checklist.

1. Check your Credit Report - you can request a FREE report once a year from Equifax, Experian, and TransUnion. The website http://www.annualcreditreport.com/ makes this easy to do. Watch out for sites that claim to offer a free credit check but also sign you up for a fee-based service.

2. Review your expenses for the year - are you over budget? Do you have a budget? Do you know how much you spent?

3. Evaluate your financial plan - do you have a plan for paying off the mortgage and other debts, for building up an emergency savings account? Did you meet the goals of your plan?

4. Get all medical/dental check-ups done before year-end. With most insurance plans, the insurance deductibles reset at the start of the new year, so you'll pay in full for any doctors visits in 2012 until you reach the deductible again.

5. Spend your FSA - if you have a Flexible Spending Plan for medical expenses then you must spend it or lose it. Some plans have a grace period of up to 2 1/2 months. Know your FSA deadline for spending.

6. Review your insurance claims for the year - is everything OK?

7. Add something to an IRA

8. Contribute to 529 plan for your kid's college

9. Give money to your kids - some gifts to kids can be tax deductible up to federal limits. Check out the rules for this.

10. Prepay tax deductible expenses - I'm not a fan of this one. By paying early you're taking from next year's deduction to help this year.

11. Review your investments like stocks, bonds and mutual funds

12. Sell investments for tax purposes. If you sell a losing investment in this tax-year it can help offset the taxes for investments that made money. Think carefully about this. Unless the investment is junk that you want to get rid off, personally I'd hold on to it and hope that it recovers instead of locking in the loss. Or hold on to it and sell in a tax year where I have huge gains elsewhere.

13. Defer buying mutual funds till next year. Mutual fund companies are required by law to pass on any fund capital gains to their investors. If you buy in December you'll get a tax bill for the gains made in 2011 that you missed out on by buying late in the year.

14. Make your annual charitable donations

15. If your 70 1/2 or older be sure to take money out of our IRA to meet minimum distribution requirements

16. Prepare for a year-end bonus. If you're lucky to get a bonus, how will you spend it wisely?

Bottom Line

Read the Digerati article in full because some of the suggestions above are very tricky and can backfire if done wrong or without the help of a financial planner.
http://www.thedigeratilife.com/blog/year-end-financial-moves-money-reminders-annual-checklist/

One thing I would do differently is check my credit history at three different times of the year from Equifax, Experian, and TransUnion. Why get three reports at the same time when you could get one report in Jan, one in May and one in September instead?

Death and Taxes

"In this world nothing can be said to be certain, except death and taxes"
-Ben Franklin

Today I'll discuss that very sad time when a family must deal with death AND taxes.

When a spouse dies it can take time and effort to transfer legal authority over family accounts to the surviving spouse or other heirs. To avoid cutting off all family access to funds during the transition, consider registering some (or all) accounts with both spouses jointly. Brokerage accounts call this JTWROS, Joint Tenants with Right of Survivorship. This can also apply to credit cards and utilities which may refuse to cooperate with a spouse unless authorized in advance.

If you die without a valid will an "Intestate" Administrator may be appointed by a judge to act as Executor to divide up your assets according to the distribution laws of your state. Some "heirs" might not be recognized, such as step-children that you never legally adopted. If you die without heirs, the state will keep your money and property.

In many families one parent is the treasurer who pays the bills and manages accounts. But if that person dies, will the surviving spouse or heirs know what to pay and where the money is? Be sure both spouses can locate the following: previous year’s Tax Returns (in case audited), Bank/Credit Union statements, Credit/Debit Card statements, Retirement Accounts, Brokerage Accounts, Mortgage or Lease Statement, Utility Bills, Car Payments, and Insurance payments.

 

Give the gift of peace of mind to your family by making copies of legal documents and storing them in a safe place outside the home (in case of fire). Birth Certificates/Adoption papers, Marriage/Divorce papers, Insurance coverage, Social Security cards, Passport/Green Card, Naturalization documents, Will, Power of Attorney, Mortgage or Real Estate Deeds of Trust, Car Registration/Ownership Papers, Military ID or Military Discharge papers.

 

Bottom Line

 

The death of a loved one is trying enough but is often made more stressful from lack of planning. A Will is very important and can help prevent heirs from fighting over and even suing over the family property. My Grandmother preassigned most of her belongings to her two children and six grandchildren so everyone knew who got what. She did not have a rich estate but she did have a LOT of stuff collected over 90 years on an Idaho farm. My portion was a salt & pepper shaker collection which is proudly on display in our home.

 

It can take time to "probate" a will and transfer ownership of bank accounts, etc. During this period a family could be blocked from accessing funds needed to pay bills. Hence the importance of sharing Joint Ownership with Right of Suvivorship with a spouse or trustworthy heir.

 

Here is what Wikipedia says about Probate:

 

"Probate is a process by which a will of a deceased person is proved to be valid, such that their property can in due course be retitled or transferred to beneficiaries of the will.

• Creditors need to be notified and legal notices published.
• Executors of the Will need to be guided in how and when to distribute assets and how to take creditors' rights into account.
• A Petition to appoint a personal representative may need to be filed and Letters of Administration obtained.
• Homestead property, which follows its own set of unique rules in states like Florida, must be dealt with separately from other assets. In common law jurisdictions jointly owned property will pass automatically to the surviving joint owner separately from any will, unless the equitable title is held as tenants in common.
• There are time factors involved in filing and objecting to claims against the estate.
• There may be a lawsuit pending over the decedent's death or there may have been pending suits that are now continuing. There may be separate procedures required in contentious probate cases.
• Real estate or other property may need to be sold to effect correct distribution of assets pursuant to the will or merely to pay debts.
• Estate taxes, gift taxes or inheritance taxes must be considered if the estate exceeds certain thresholds.
• Costs of the administration including ordinary taxation such as income tax on interest and property taxation will be deducted from assets in the estate before distribution by the executors of the will.
• Other assets may simply need to be transferred from the deceased to his or her beneficiaries."

This is a sad and painful topic but needs to be bravely faced for the sake of surviving heirs.

401(k) Withdrawal Mistakes

“Retirement at sixty-five is ridiculous. When I was sixty-five I still had pimples.”
-George F. Burns (who lived to 100)

If you are contributing money to a 401(k), congratulations! This is a great way to save money for retirement and reduce the taxes paid. But putting the money into a 401(k) is just half the battle. You must be extra careful when taking money out of the 401(k) to avoid tax penalties.

Check out the U.S. News article on 401(k) Withdrawal Mistakes to Avoid.

1. Leaving before you are vested.
My company supports profit sharing but I don't get to keep my full share until employed for five years. Your company may have similar restrictions on matching contributions to your 401(k).

2. Not doing a direct rollover.
When I joined my current company, the new investment advisor was eager to manage the rollover of my 401(k) from my prior employer. This is not something you should try to do on your own. If you close out your old account you have 60 to deposit then money in a new IRA or 401(k). Otherwise the government considers it an early withdrawal and hits you with heavy penalties of 20-30% or more.

"As a general rule of thumb, don't ever have the check made payable to yourself."

3. Rolling over into higher-cost investments.
You are not required to rollover your 401(k) when you change jobs. It's definitely a good idea if you fear your old company might go out of business or default on pensions. Otherwise compare the management fees on the old plan and the new and go with the lower fees.
In my case the mutual funds were quite different in old and new 401(k). I liked the old funds and decided not to rollover my 401(k).

4. Two required minimum distributions in the same year.
Very tricky. You must take out money EVERY year after age 70½. You can delay your first withdrawal to April 1 of the year after you reach age 70½ but only counts for the prior year and you'll still need to make a second withdrawal for the current year. This double withdrawal could push you into a higher tax bracket.

5. Withdrawals before retirement.
401(k) withdrawals before age 55 will usually require you to pay income tax and a 10 percent early withdrawal penalty. Don't do it! Consider this alternative instead,

"If you roll the money over to an IRA, there are several government-approved ways to spend your nest egg that don't incur the early withdrawal penalty, including unreimbursed medical expenses that exceed 7.5 percent of your income, health insurance after a job loss, college costs, and a first home purchase up to $10,000."

Bottom Line

Be careful with your retirement nest egg. Know the rules about the right ways to take money out of it.

Seven Reasons to Change Your Will

"Lawyers Are": A learned gentleman who rescues your estate from your enemies and keeps it himself.
- Henry Brougham

As a follow-up to yesterday's important documents, here are 7 Reasons to Review or Revise Your Will from Investopedia.com.

1. You have a new child, make a new friend, or find a long-lost relative
2. You Move - different states have different inheritance laws
3. You win the Lottery - if you come into a large sum of money you might want to establish a Trust to manage the cash.
4. You get divorced
5. Your spouse, child, parent or other passes away
6. You change your mind about who gets what. "I swear, after what cousin Joe did, that he won't get a penny!"
7. You want to support a new/different charity

Bottom Line

Wills are living documents that must be maintained with changes in your life.

25 Documents You Need Before You Die

"Some people are so afraid to die that they never begin to live."
Henry Van Dyke

According to the Wall Street Journal, there are 25 Documents You Need Before You Die.

• An original Will (be sure it is legal and notarized) stored with your attorney or in a courthouse.
• (optional) A revocable living trust can be changed anytime during your lifetime. You can transfer ownership of various assets to the trust and serve as the trustee on behalf of beneficiaries you designate.
• A "letter of instruction" is a supplement to a will that lists the names and contact information of your attorneys, accountants and financial advisers as well as "instructions" to follow upon your death. The letter of instruction is NOT a legal document and is not binding upon your heirs. It expresses your preferences and should be readily accessible, especially if it contains instructions on funeral arrangements.
• A durable financial power-of-attorney form. Without it, no one can make financial decisions on your behalf in the event that you are incapacitated.
• List all safe-deposit boxes owned. Have one or more family members registered so they can open the box without a court order. When my sister and I were registered recently BOTH my parents had to approve the change since both were registered with the bank for the box.
• Include a copy of your marriage license and divorce decrees. Include the distribution sheet listing bank-account numbers that accompanied the divorce settlement to avoid disputes about ownership or payments due. Also include a copy of the most recent child-support payment order. In the majority of states, the obligation to pay child support still exists after death.

Proof of Ownership Documents

• Provide documents for all home and land owned, cemetery plots, cars, boats, stock certificates, savings bonds, brokerage accounts and escrow mortgage accounts. If you fail to tell heirs
  what you own (with proof) the assets could be lost forever.
• List all banking accounts and CDs. Include the online log-in information so family can notify the bank of your death. Abandoned accounts become the property of the state.
• Loans you made to others are assets which should be listed along with a copy of the loan agreement.
• List all debts you own and include the contract. This may include mortgages, car payments, bank loans, stocks on margin, etc.

Health-Care Privacy

• Provide a durable health-care power-of-attorney form so your designee can make health-care decisions on your behalf if you are incapacitated.  Otherwise federal health-information privacy laws will prevent doctors, hospitals and insurance companies from speaking with your designee. You may also need to fill out an Authorization to Release Protected Healthcare Information form.
• Write a living will detailing your medical wishes. Do you wish to be revived if your heart stops?
• Terminally ill patients may wish to have their doctors sign a do-not-resuscitate order.

Life Insurance

• Include a copy of all life-insurance policies. Family members need to know the name of the carrier, the policy number and the agent associated with the policy. Don't forget to include corporate life insurance you earned with retirement.

Bottom Line

These documents are useless if your heirs don't know about them. Or if they are locked inside a safe deposit box that they don't have the key to. Make sure your heirs know these documents exist and where to find them. Store copies outside the home in case you and your documents are lost in a fire, tornado, etc.

7 Money Moves to Make Now

"The art is not in making money, but in keeping it”
-Proverb

My wife sent me a link from Ladies' Home Journal about Financial Spring Cleaning: 7 Money Moves to Make Now.

1. Review your Insurance

"We bundle our policies with one provider for a lower overall cost; we keep deductibles high to keep premiums low; and we take advantage of discounts." 

Are you over insured? If your car is old, drop everything but liability (subject to state laws). Collision and Comprehensive won't pay much to repair a clunker.

Is the value of your house over appraised? For $7.95, accucoverage.com assesses your home's value using the same data insurers use.

2. Pay Off Credit Cards ASAP
If you have a lot of credit card debt consider this, "Take out a three-year personal loan from a credit union. You lock in the rate, which can be about the same as a transfer fee, and it's better for your credit score."

Bonus Resources: Creditcardguide.com has info on credit offers and deciphering fine print. Credit.com gives you a "soft" estimate of your credit rating without the request registering with credit agencies.

3. Roll Over an Old 401(k)
If you change companies consider rolling an old 401(k) into a new one. This can protect you from your old company going out of business. "You can also roll it into an IRA, which may give you more investment options. (Look for a low-cost provider like Vanguard, T. Rowe Price, or USAA.)"

In my case I left my 401(k) with my prior company. It's stable (150+ yrs old) and offers a different mix of mutual funds than my new 401(k).

4. Get a Home Energy Audit
Look for free or low cost Energy Audits on how to save money heating your house. Some states and energy companies will cover the costs.
Bonus resources: The Department of Energy website (energysavers.gov) offers a DIY guide to energy audits and a list of upgrades that qualify for federal rebates. The Database of State Incentives for Renewables & Efficiency (dsireusa.org) has a state-by-state guide to rebate programs.

5. Open a Higher-Yield Checking Account
Look online for banks that will offer you a better deal on checking. But watch out for the rules and penalties. Also beware - last decade Iceland was famous for its high rates until the country's banking industry collapsed.
Struggling banks sometimes offer high interest rates as a way to try to boost their funds, so be sure to type the bank's name into Bankrate.com's "Safe & Sound" engine. Look for a rating of at least three stars.

6. Look for Cheaper Cable and Internet.

7. Consolidate Vital Records

"Dealing with all this money stuff showed me how balkanized our finances are: I take care of some things, Rob takes care of others. If something happened to either of us, the other could not necessarily jump right in. We needed an overall map, a worst-case-scenario guide, to our financial affairs."

Google "Merrill Lynch" and "Organizing your financial life. Critical information at your fingertips" for a useful form and checklist to get you started. The form documents all accounts and recommends you locate and properly store important records such as property deeds and passports.

Bonus resource: The legal website LawEasy.com gives free access to all sorts of legal templates, including a "child emergency health form" that would be useful for babysitters or daycare facilities to have.

Bottom Line

One easy way to save money is not to spend it in the first place. The ideas above will help you cut cost and expenses.

Confusing Credit Terminology

The creditor hath a better memory than the debtor.
James Howell

John Ulzheimer, President of Consumer Education at SmartCredit.com, explains seven pairs of confusing credit terms at http://www.mint.com/blog/how-to/confusing-credit-terms-02212011/

I'll paraphrase and elaborate and try not to make any mistakes.

Credit Report vs Credit Score

A credit score is a financial "grade" based upon an interpretation of your current credit report by a credit agency. (See FICO score below)

Credit Report vs Credit File

A credit file is all the information about you that is floating around a credit bureau’s database waiting to be compiled into an official credit report. No one outside a credit bureau should see your credit file while your credit report can be purchased by banks, auto dealers, etc.

Credit Reporting Agency vs Consumer Reporting Agency
“Consumer reporting agency” is a legal term describing any organization that regularly compiles information about consumers for the purposes of selling it to a 3rd party. 

A credit reporting agency is just one example of a consumer reporting agency. A non-credit example is LexisNexis; they collect personal data and create consumer reports for employment screening, resident screening, insurance underwriting, and volunteer background checks.

Credit Score vs FICO Score

FICO is an acronym for the Fair Isaac Corporation, the creators of the very popular FICO credit score. There are other credit scores like NextGen and VantageScore but hardly anyone uses them. It is important to know which type of score you have because the ranges are different: A FICO score is between 300 and 850. A VantageScore score ranges from 501-990.

Home Equity Loan vs Home Equity Line

A home equity loan is a loan with a fixed payment for a fixed number of months. (Ignoring for simplicity variable rate loans.)

A home equity line is a revolving line of credit, just like a credit card. You can borrow against it, pay it back, and borrow again.

In both cases the loan/line is secured by your home, which means if you default on your payments you could lose your house.

Credit Card vs Charge Card

A credit card is a revolving account, which means you have a variable payment depending on your outstanding balance for the month. 

A charge card (like American Express) requires payment in full each and every month. There is no minimum payment and no rolling the rest over with interest to be paid in the future.

Chapter 7 vs Chapter 13

Both are types of consumer bankruptcies.  Under Chapter 7, “liquidation”, any "statutorily dischargeable debt" is eliminated. 

Under Chapter 13 the debt is "adjusted." The consumer pays to a trustee who then distributes the money to the consumer’s creditors.

Bottom Line

When my wife got a home mortgage she had a great lawyer. He made her read the entire contract with the bank. She said, but that's your job.

He replied, no. It's your money and your home. You must understand what you are signing. His job was to make sure the contract was fair and to help her to understand the language of the contract she would have to live with for the next 20 or 30 years.

Always read and understand any financial document you sign.

Biggest Ripoffs

"Money is like a sixth sense - and you can't make use of the other five without it"- William Somerset Maugham (British author)

Is money tight and you're trying to stretch every buck? Then stay far away from the the 12 biggest ripoffs in America:

1. Movie Popcorn (as my wife puts it, the actual cost of the container is more then the popcorn. By weight movie popcorn is more expensive than fillet Mignon.

2. Text Messaging - there is a 6,500% markup of cost vs price.

3. College Textbook (way over priced and getting worse at double the rate of inflation)

4. Branded Painkillers (like Advil. Buy generic)

5. "Free" Credit Reports (you'll get trapped into a monthly service that is hard to escape)

6. Wine at Restaurants ($$$ - all alcohol and sodas at bars and restaurants have huge markups)

7. Hotel Mini-Bars (don't even open the little fridge -ever)

8. All you Can Eat Buffets (this one is odd. You think -wow I'll eat a lot and save money. But most buffets are not cheap, say $10 to $15 or more per person. That same money could buy a filling meal of better quality elsewhere.)

9. Premium Gasoline

10. Actively Managed Investments (in tests monkeys are just as likely to predict successful stocks as professional analysts.)

11. Hotel In-Room Movies ($$$ - watch a DVD on your laptop instead)

12. Health Club Memberships (most have no-cancellation clauses. Once you join, you must pay - no matter what, unless you die.)

13. Printer Ink (Billshrink.com readers added this to the list. It is now possible for an ink cartridge to cost more than the printer)

Bottom Line

Most of the fees above are gouging you for "convenience". You can make cheap popcorn at home, or exercise at home, or watch movies on DVD. It's your money, don't waste it on overpriced convenience.

Money & Marriage

"Money is not the most important thing in the world. Love is. Fortunately, I love money."-anon

The Wall Street Journal has an excellent article entitled, Questions to Ask After 'I Will' but Before 'I Do'.

“Couples don't fight over love. They fight over money. They fight because one person didn't balance the checkbook or made a bone-headed investment without consulting the other.” - WSJ

Here are topics to discuss with your fiancee before you marry:

1. What are your Assets and Liabilities?
Don’t wait until after the wedding to discover your partner has a huge school loan. Or skimp on the wedding and then discover she/he is independently wealthy but also cheap. Or has a huge portfolio of stocks but refuses to sell them for any reason.

2. What are your long-term monetary goals?
Is there a debt you want to pay off ASAP? A car or big vacation you want to save for? Make sure your spouse is in agreement.

3. What are your money habits?
Do you max our your credit card and then make the minimum payment while your partner to be abhors debt and pays for everything in cash upfront? If your spending habits clash, expect some heated fights ahead.

4. How will you divide financial duties?
Who will balance the checkbook, pay the bills, decide on which bank, CDs and other investments? Who will deal with insurance companies and medical bills? How will you decide on large costs like home remodeling, a new car, new suits, etc.

5. How will you divide the money?
If you both work will you keep separate accounts or pool the money together? If you share, will there be limits on individual spending? Imagine a spouse who enjoys a $50 lunch each day at work or with friends. Or has an expensive hobby that drains the account dry.

Bottom Line

From WSJ - “What couples don't always grasp is that money is rarely the real culprit. It's the lack of communication, often stemming from a lack of knowledge about each other's personal financial quirks and beliefs.”

Disability Insurance

"Insurance: An ingenious modern game of chance in which the player is permitted to enjoy the comfortable conviction that he is beating the man who keeps the table."- Ambrose Bierce

Shortly after I got married, my new wife and I attended a free financial planning seminar. We were by far the youngest persons in the room (I was in my late 20's at the time.) Everyone else was near retirement by which point it's a bit late to begin "planning." As a follow-up to the seminar we were offered a free review of our assets with a Financial Planner. We listened carefully to the advice offered and followed all of it EXCEPT for one item: buying Disability Insurance.

The purpose of disability insurance is to compensate for lost wages if you are unable to work due to injury or medical reasons. (AFLAC says the duck.) We decided against buying disability insurance because of the high cost - much more than our car or home insurance.

A reason for the high cost might be the high odds of collecting on the insurance. The book “How To Insure Your Income” claims everyone has an 80% chance of being disabled for 90 days before age 65. Others set the odds much lower at 30% for blue collar jobs and 10% for white collar jobs. In my case I've been "disabled" twice for back surgery, each requiring a six week recovery. In both instances I took a brief sick leave and was allowed to work from home with a laptop computer. I was fortunate.

Alternatives to disability insurance include:

-Social Security. It may take more than a year for your claim to be processed and longer if you appeal a rejection. It pays at best a few thousand dollars a month.
- Worker’s compensation. Covers you only if you were hurt on the job.

Bottom Line

If you're interested in Disability Insurance, check out Questions to Ask Before Buying Disability Insurance. Questions include:

• What percentage of my income will you replace if I become disabled?


• Is there a maximum payout that you’ll make (in dollars) per year, no matter what I earn?


• If I can’t return to the job I had before, can I continue to draw payments forever? Until I’m 65? Or some shorter period of time?


• Will you guarantee that I can renew the policy each year, at the same price? What about at a higher price?


• If I’m paying the premium on time, are there any circumstances under which you can cancel my policy?


• What if I’m unemployed and can’t pay the premium for a short period of time?


• Is there a waiting period after you become disabled before you can start collecting on a claim?


• What injuries or illnesses does my policy exclude? If I’ve already been treated for depression or back pain or cancer will you not cover those maladies at all in the future?

Get the answers in writing!

FEMA Tip of the Week

"Over half a billion dollars a day is being spent by FEMA" - Thad Cochran

Recently I discovered that FEMA offers a Tip of Week site. I've been on a FEMA email list for ages and somehow managed to miss this fact. Check out: http://www.fema.gov/privatesector/tips.shtm

Recents Tips include:

• Develop and practice for emergencies at work with employees by reviewing your office emergency plan. www.ready.gov/business/plan/emerplanning.html.


• Create an emergency plan for your organization’s financial and critical records. Click here to develop an emergency financial aid kit: www.operationhope.org/smdev/lf1.php?id=187


• Prepare your employees before, during and after an earthquake with FEMA Earthquake tips. www.fema.gov/hazard/earthquake/index.shtm


• Participate in Community Emergency Response Team (CERT) training to support community preparedness efforts. https://www.citizencorps.gov/cert/


• Place a weather radio or television in an accessible place to readily monitor severe weather conditions. View active weather alerts at http://www.noaa.gov/

Bottom Line

Check out the tips. You'll be glad you did.

What are your neighbors buying?

"Some couples go over their budgets very carefully every month; others just go over them."-Sally Poplin

If you have a family budget (and you really, really should have a family budget), then you’ll appreciate a new web site that allows you to see what your “neighbors” are spending (in aggregate). The site is at http://www.bundle.com/ and is called EverybodysMoney. The photo at right is a screen shot of the site looking at spending for Stamford, CT, where I work. The values show monthly spending for the “average” neighbor.

$1,668 Family & Health (Pets, Insurance, Healthcare, School, Charity)
$1,139 Shopping (General, Hobbies, Office Supplies, Clothing, Electronics)
$1,022 Food & Drink (Dining out, Groceries)
$ 892 House & Home (Utilities, Phone, Home Improvement, Home Maintenance)
$ 659 Getting Around (Gas, Auto expenses)
$ 455 Travel & Leisure (Commuting trains, air fare, hotels, entertainment & cable TV)

Curiously Rent/Mortgage is not included anywhere.

In each bubble you can hover the mouse and click “Go deep” to get subcategories. Hover over the subcats and you can “See Stats” for greater detail. For example the top Merchant under Dining Out in Stamford is Starbucks! You also have the option of changing the location, looking only at homes with X kids, or only at homes in a particular income bracket.

This site is marked Beta and the data set is skimpy in places. I tried to look at Ossining, NY and could only get results for all of Westchester county.

Bottom Line

A tool like this can help you to discover that your spending is higher than average for your region. If yes, you may want to cut back. But don’t get too smug if all your expenses are “average”. I added $1000 per month to the Stamford numbers above for rent and got $6,835 spent per month. Multiply by 12 and this means $82,000 per year in EXPENSES. Assume 30% for taxes and you have to earn $120,000 per year to be “average” in Stamford.

Financial Advice for Baby Boomers

“The trouble with retirement is that you never get a day off.”-Abe Lemons

The financial advice you should follow changes as you age. When you're young and single you can afford to take risks. When you're married with children you want you be more conservative with the family savings. When you reach 50 it's time to be ultra safe so you don't destroy the nest egg that has to last you another 40 years.
MSN.com smartSpending has these tips for Baby Boomers over the age of 50.

1. Get out of debt.
   Good advice at any age but you really, really want to be debt free by the time you retire. What option will you have if you lose your house because you can not pay the mortgage at age 60? Good luck finding a new job.


2. Maximize retirement savings
   At age 50 you're in the final inning for building up your retirement.


3. Beware of big expenses that might drain your savings
   Do you still have kids in college or a child not yet married?


4. Seek career freedom
   Look for a job you'll be happy to work part time, on your terms, as an alternative to retiring. Most of the tour guides my wife works with are post-retirement and do the job for fun and spare cash.


5. Think about where you will retire
   Pick a state and look at the tax impact. For example, Florida is popular because there is no state income tax.

Bottom Line

Don't wait until the last minute to plan your retirement. Begin early.

FDIC

"Bank failures are caused by depositors who don't deposit enough money to cover losses due to mismanagement"- VP Dan Quayle

How secure is your bank? So far in 2009 the FDIC has rescued 188 failed banks such as Bank of Honolulu, First Bank of Idaho, and California National Bank. If your bank fails, what happens to you?

If your bank is NOT insured by the Federal Deposit Insurance Corporation (FDIC) then you are out of luck. You will most likely lose all money and get nothing.

What is the FDIC?

TheSimpleDollar.com has the answer. The FDIC is an organization run by the government of the United States to sell insurance policies to banks. Most banks in the US buy the insurance and pay a fee to the FDIC for coverage. FDIC insurance covers checking accounts, savings accounts, certificates of deposit, most money market accounts, and cashier’s checks. It does not cover stocks, bonds, mutual funds, US treasuries, or safe deposit box contents.

Under current law FDIC insures investors up to $250,000 per depositor per account type. I always thought the limit was per bank but a report by the Congressional Budge Office (CBO) says that separate coverage applies to an individual account, a joint account and an IRA account at the same bank.

What Happens When an FDIC Insured Bank Fails?

The FDIC takes over that bank and all of the accounts held there. Under the “purchase and assumption” method, the FDIC sells the failed bank to another bank who takes over the accounts and some (or all) of the loans. This is often done over a weekend. You'll wake up Monday morning and discover your money is with a new bank. This happened when Wachovia failed and was taken over by Wells Fargo.

When there is no buyer, the FDIC liquidates everything in the bank and then issues payouts for depositors up to the $250,000 limit. The process is straightforward, usually involving minimal hassle from the customer, and frequently paid within a week.

Bottom Line

Before 2008 the FDIC limit was $100,000 per depositor. Congress raised this to $250,000 as a temporary measure during the banking and Wall Street crisis. It will return to $100,000 on Jan. 1, 2014 unless Congress extends the law.

When the FDIC was created in response to the Great Depression, The Banking Act of 1933 set the recovery cap at $2500 (about $40K today if adjusted for inflation). The limit was quickly rasied to $5000 in 1934 (=$80K today) and to $10,000 in 1950 (=$85K today). In 1966 the FDIC limit became $15,000 (=$95K today), and rose again three years later to $20,000 (=$112K today). It became $40,000 in 1974 (=$166K today) and $100,000 in 1980 (=$250K today).

I find it interesting that each time the limit is adjusted "for inflation" the amount of coverage (in today's dollars) keeps going up. From $40K equivalent in 1933 to $250K today. If you think about, who is the government protecting here - the average citizen or wealthy backers? How many Americans have more than $40K saved in a bank? According to a study by the Congression Budget Office (CBO), only 1 percent of all accounts exceed $100K. Even families at the highest income level in 1998 had an average checking account balance of only $19,000. I love this quote from the CBO report, "The one certain result of raising deposit insurance coverage is increasing the costs of insurance [for banks and the government]."

References

The CBO study on FDIC limit and inflation, http://www.cbo.gov/doc.cfm?index=3474&type=0
More facts on the FDIC at http://www.enotes.com/everyday-law-encyclopedia/fdic
Inflation Calculator http://www.westegg.com/inflation/infl.cgi

HyperInflation

“The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists.” - Ernest Hemingway

We live in brave, new, perilous times for the US economy. Historically the US dollar has been the most trusted currency in the world. But that could change given the unprecedented level of debt that the current administration is creating. Here are some recent headlines:

• Profligate borrowing and spending puts America’s AAA credit rating at risk


• Fed cannot account for $9 trillion


• Nothing Suggests We're Anywhere Near the Bottom of this recession


• April Foreclosures Rise 32%


• Social security to run out of money...


• Medicare already in the red

And yet things could become even worse. Typically when governments print new money to cover overspending and debt, the result is inflation. Huge debt and a loss of faith in a nation’s ability to pay can lead to hyperinflation where rates of currency devaluation can exceed 50% a MONTH. Few people comprehend what a high compounding interest rate can do. At 50% monthly inflation, a loaf of bread that costs $1 in January will be $1.50 in Feb, $2.25 in March, $3.38 in April, $5.06 in May, and $86.50 by December. After two years the $1 loaf would sell for $11,223.

When hyperinflation occurs, normal cash is insufficient; who carries $11,000 in their wallet? The government starts printing larger denomination bills in response. Instead of $10, we start carrying $100 bills, then $1000, then $10,000 bills, etc. You may be thinking, where would I get $10,000? If you’re lucky your salary will be adjusted for inflation and your pay will skyrocket; though probably not as fast as prices are skyrocketing.

Some real world examples of Hyperinflation include:

• The 1923 Weimar Republic of Germany issued two-TRILLION Mark banknotes and a postage stamp worth 50 Billon Mark. Banknotes lost value so quickly that some were used as wallpaper.


• In 1946 the Hungarian National Back issued a banknote for 100 quintillion pengo (100,000,000,000,000,000,000). Hyperinflation in 1946 Hungary peaked with prices doubling every 13.5 hours. This record held until 2008…


• In July of 2008 in Zimbabwe, an egg cost ZW$50 billion yet ATM withdrawals were limited to ZW$100 billion to keep the machine computers from crashing due to numerical overflow. One British pound was worth ZW$1.2 trillion. With an estimated annual inflation rate of 90,000,000,000,000,000,000,000% many shops would only cash checks if the customer wrote double the amount, because the cost would go up by the time the check had cleared.

Bottom Line

Will the US experience extreme levels of inflation? No one knows. Normally a recession is an antidote to inflation since record levels of unemployed people have little money to spend and this drags prices downwards. The official US inflation rate for March 2009 was negative, a state of deflation. (US Prices Fall Most Since 1955) But despite economic theory – sometimes you get the worst of both – inflation and unemployment. This is called Stagflation and occurred in the US under President Carter in the 1970s.

How can you prepare for inflation and what can you do about it? SurvivalBlog.com has some answers:

1. Time Eats Money. Know the rate of inflation vs. your rate of return on investments. If inflation were 5% annual and your savings accounts pays 1% then you are losing 4% of you money every year. Look at your stocks and bonds also. What are they paying out vs. inflation? You may need to find an account that pays better or…


2. Convert your money to tradable goods, like silver and gold, that hold their value. Personally, I’m not a big fan of this. Who can I trust to buy my gold back? In college I sold an engagement diamond ring back to a jeweler and got just 1/10th of its value. And are you savvy enough to avoid being defrauded with diluted or false silver/gold?
   
3. Stockpile useful goods that you will use or can barter. The “sin” goods of alcohol and tobacco will always be wanted and often become “currency” in regions where money is lacking. Or you can keep your hands clean and store more honest goods like aspirin and other medicines, canned foods, soda drinks, grain, etc. Don’t stockpile anything that will spoil. And don’t boast about your stockpile least you become the target of thieves.


4. You might also convert your dollars to the currency of other nations that are not in a crisis. However with this global recession, who isn’t in trouble? And beware! Those offering the best rates on CDs are often the most desperate and on the verge of collapse. Iceland was the darling of Europe with amazing currency and bank rates until the bubble burst and the nation essentially went bankrupt overnight.


5. Think replacement cost. With hyperinflation you must always know the current and near-future value of goods. Yesterday’s prices or what you spent before is meaningless. Recall the stores in Zimbabwe asking for double the cost value in checks because of time it takes for checks to clear. Home insurance for the purchase price of your home is useless. You need to be insured for the replacement cost to rebuild in the future. Likewise you might buy something at $10 and sell for $15 and feel quite proud. But while you held the item its value increased 100% so you really sold $20 at a loss.

How to Budget

“It's time we reduced the federal budget and left the family budget alone.” - Ronald Reagan

If you’re not a federal government and able to print your money then you must learn to spend less than you make. This is called budgeting. It’s important for every day life so you know your daily spending limits. It’s also vital for special events like how much can we afford on a vacation, new car, or new house? The current so-called mortgage crisis was partly caused by people buying more house than they could afford. Other mortgage disasters resulted from people who spent more than they earned by using the home equity of their house as an open loan that never came due while prices climbed upwards. (For a well-written story of a NYT economic reporter with mortgage problems, see www.nytimes.com/2009/05/17/magazine/17foreclosure-t.html?pagewanted=1&_r=2)

It is easy to spend: Starbucks coffee, cell phones, cable TV package, bar drinks, cigarettes, meals eaten out. These things add up quickly. My wife had to point out to me how much money I was spending on breakfast and lunch in NYC every workday. It was never a lot at one time but it added up to a lot in total. Last weekend we visited some craft fairs and farm markets and afterwards were amazed how quickly we had spent the cash taken from an ATM at the start of our travels.

A documented budget and spending plan can also help with lifestyle changes. When my wife wanted to quit her job, we looked at our spending habits and found ways to cut back so we could live on just my income. Years later when I was laid off, we added up our fixed expenses plus some modest discretionary spending to determine the minimum salary I could earn to support our lifestyle. When calculating earnings don’t forget to include taxes and other items that reduce income. There is a huge difference between salary and your take home pay. Suppose for example that state plus federal taxes are 30% of your income, you give 10% to your church and you give 10% to a 401K or other retirement savings. Then there is a 50% reduction in your net earnings and in order to live on $40,000 per year you would have to earn $80,000.

You also have to be realistic when estimating earnings. Don’t spend assuming this year will have a huge bonus equal to last year. Don’t spend assuming you have a high-salary job that will always be there. Don’t spend assuming you can work lots of overtime to make up the difference. Don't spend assuming you can pay it back "someday" with a lottery winning, inheritance, or other windfall event.

Bottom Line
If you’ve never done a budget before, check out the Consumerist's 9-Step Beginner's Budget plan. It provides a getting started spreadsheet and instructions on how to use it.

www.ncnblog.com/2009/05/11/10-things-to-do-before-creating-your-next-budget/ has some advice on starting a budget.

Here’s an online site for creating a budget which claims it “is private and accessible only to you”, www.tomorrowsmoney.org/section.cfm/387/429/877/881

Kiplinger offers the following as traditional spending levels. Actual results may vary but if they differ by a lot then ask yourself why you’re a high spender in some category:

• 30% Housing
• 10% Utilities and other housing expenditures (including renters insurance)
• 15% Food (at-home and away)
• 10% Transportation (including car loan)
• 10% Debt repayment (student loans and credit cards)
• 10% Saving
• 5% Clothing
• 5% Entertainment
• 5% Car insurance and miscellaneous personal expenses

For a detailed history of one hundred years of government programs to encourage "everyone" to own a home (with disastrous results every time) see Obsessive Housing Disorder.

Cedit Card Chargebacks

"Money isn't everything - there's credit cards, money orders, and travelers' checks" - anon
One advantage of using credit cards for purchases is the option of a Chargeback. When you feel that you have been defrauded by a vendor and the vendor is unwilling to refund your money or replace damaged goods, then you can ask your credit card to cancel the charge off your card.

However a chargeback is not a sure thing. Check out the Consumerist article, Top 10 Reasons Your Chargeback Will Be Denied.

1. You are lying. The vendor will present their evidence.
2. You waited too long. Most cards have a 60 day limit on chargebacks.
3. Not getting independent proof of damage/fraud for chargebacks over $100
4. You bought it overseas. (Chargebacks are only valid on US goods.)
5. You stayed in the hotel room. (No chargeback for a room, no matter how bad, if you spent the night there.)
6. No proof that you mailed back the goods. (Use registered mail.)
7. You don't remember the date or details. (Be as specific as possible. At the first hint of trouble, write down all details do you don't forget)
8. You did not allow the vendor a chance to fix the problem
9. You are disputing the wrong things (Don't try to use legal language you might get wrong)
10. You used Mastercard. With Mastercard (MC) the burden of proof lies on you.

Bottom Line

For more details, check out http://en.wikipedia.org/wiki/Chargeback. This site lists four general code categories for chargebacks:

Technical - Expired authorization, non-sufficient funds, or bank processing error.
Clerical - Duplicate billing, incorrect amount billed, or refund never issued.
Quality - Consumer claims to have never received the goods as promised at the time of purchase.
Fraud - Consumer claims they did not authorize the purchase, or identity theft.

Student Loans

“It's easy to get a loan unless you need it.” - Norman R. Augustine

On Instapundit.com I learned some things about student loans that I did not know.

“They’re the worst debt you can get — huge, at unattractive interest rates, and non-bankruptable.” – Instapundit.com

The New York Times reports

“Thousands of recent graduates have been unable to find jobs or are earning too little to cover the payments for loans that are sometimes as high as $50,000 … as many borrowers have learned, student loans are among the most ironclad debts, on par with child support, alimony and overdue taxes. They stick with you no matter what … Even death isn’t a good enough excuse for discharging some private loan debts. And the government can wield a heavy hand to collect what it is due: If you fail to repay your federal loans, it can garnish up to 15 percent of your wages or take your tax refund or part of your Social Security benefits.”

About two-thirds of graduating students will have a loan to pay off (typical size is $22,500 but the NYT describes one student who managed to get $150,000 into debt.). Sadly, loans are unavoidable for most students due to outrageous fees. When I was in college tuition rates rose much faster than the rate of inflation and my school still had record enrollment and overcrowded dorm rooms. Families were willing to pay any price for college degrees.

Here are some options to reduce the debt:

• Invest early in a 529 Investment plan – it’s like a 401K for college. With favorable tax incentives, you put away money when your child is young and can only spend it when they reach college age. When college investment plans were first advertised I recall that you were locked into a single college (i.e send money to MIT when your child is born.) But SavingForCollege.com claims that with a 529 plan, “you can be a CA resident, invest in a VT plan and send your student to college in NC.”
  
• Earn a National Merit Scholarship via the PSAT test. Of the 1.5 million entrants, some 50,000 with the highest PSAT/NMSQT® Selection Index scores qualify for recognition in the National Merit Scholarship Program. Whether you get any money is up to the colleges you apply to and their standards. I was offered a 4-year Merit Scholarship from Michigan State University that covered most tuition costs but no merit scholarship for Cornell University. When Cornell called me to ask why I had rejected their acceptance, the answer was simple - I couldn’t afford them.
  
• Apply for the “needs” based Federal Pell Grant. If you can prove to the government that you are poor enough, you might get a Pell Grant.
  
• Check with the Financial Aid department of the colleges you apply to for any unusual funds that you’re eligible for. Alumni may leave scholarship money for American Indian applicants, children of Rotary members, etc. Check also with local organizations and local companies, like Lions Club, for scholarships.
  
• Students should get a summer job. When I graduated, Harris Corporation offered “scholarship” internships to top students from local high schools. I ended up working for Harris for five summers. To maximize the paycheck I worked 2nd and 3rd shifts for the extra pay differential.
  
• Students can work at college. I worked in the dorm cafeteria my freshman year. The following year I returned to campus too late and all cafeteria positions were already assigned. I walked directly to the office of the head of my department (mathematics) and asked for a job. He said yes and that began nearly 10 years of teaching starting as assistant and leading to class instructor and course coordinator. A dorm friend of mine, an engineering student, got a job at college soldering electronics and said the hands on experience was great.
  
• Live cheap - buy used books and avoid spending money on frills. Cheap can also mean choosing a state school were you live to get a lower resident rate, living with your parents, and or going to a community college for your first two years. Yes there are some snobbish jobs that prefer Ivy League graduates but in the long run the name of the school won’t matter so long as the education was good. I’ve looked at resumes of job applicants from Russia, India, Canada, etc. I know nothing about the reputation of the schools they attended so instead I look at past job history and their ability to answer questions during the interview.

Bottom Line

If you have a Student Loan and are unable to make payments, read the complete NYT story, Student Loans. There is detailed advice on steps you can take with different lenders to get a deferment and forbearance.

For more information on 529 plans check out morningstar.com
http://news.morningstar.com/articlenet/article.aspx?id=287783

Avoiding a loan is NOT easy. I managed to cover expenses without one but only by working summers at Harris Corp, working the rest of the year at college, living very cheap and having a Merit Scholarship. I was very lucky.