As the economic situation continues to worsen Americans are looking more and more for answers to protect themselves and their finances.
This is third installment of Web Exclusive: Economic Crisis.
Local financial planner Thom Hall sat down to answer 17 questions submitted to KSL.com.
- **I am currently maxing out my Roth 401(k) and my Roth IRA. I have an eight-month emergency fund. I have no debt except my mortgage and the mortgage is at $230,000. After all the monthly bills, 401 (k) and IRA contributions I have about $500 extra month. Should I pay down my mortgage at an accelerated pace or invest the money. I have no issues with having a mortgage. I also have no fear in investing in the markets at this time. -Wayne, Salt Lake City**Thom Hall: Wayne, I congratulate you on your foresight to make maximum use of your tax free investment options. The answer will lie in your expectations for the future. If you feel you will be able to get a higher return on your investments than the interest rate you are paying on your mortgage, it may be a better option for you to invest more rather than accelerate your mortgage payoff. You need to take into account potential increases in taxes in future years and the tax treatment of your investment account (that is, will it grow taxable, tax deferred or tax free). You also need to take into account that you will likely reduce the tax deduction on your home if you were to accelerate your mortgage. In your case, you may be better off investing the proceeds, but I would caution you on being too aggressive with the outlook on our economy in the next couple of years.
- **We are raising our grandson who is slow with other problems and we wonder if we should do a reverse mortgage. And if so, is it safe with all that is going on? Our income is social security with no pension and my wife has no medical insurance and I have the VA but with a large co-pay. Or should we try to hang on to leave something to our grandson and his mom? We have checked into a reverse mortgage and find no two alike. -Jack, Salt Lake City**Hall: Jack, reverse mortgages are a little complex, but can be a great fit under the right circumstances. A reverse mortgage is when the mortgage company pays YOU every month on a paid off or nearly paid off home. The loan does not have to be paid off until after you die so long as you follow the guidelines, and the interest rate that accrues is generally lower than traditional financing. The amount of money available is determined by your age (you must be at least age 62 to do a reverse mortgage), and the value of your home which is now subject to a limit set each year by HUD. I recommend you look for one that is a "HECM" under FHA and HUD as you will find uniform standards that are established and guaranteed by the government. The biggest downside of a reverse mortgage is the fees that are assessed up-front when the account is established. This is not paid out of pocket, but will be included when the loan is ultimately paid off. I suggest finding a mortgage professional that specializes in reverse mortgages to be fully informed of your decision. FHA requires all seniors to attend a counseling session before completing a reverse mortgage to help them be clear on how the program works, and determine if it is in their best interest.
- **In your opinion, what is a reasonable amount of debt to have from student loans with respect to projected first year earnings after graduation? -Brandon, Provo**Hall: Brandon, I don't know if there is a number I would consider reasonable - I encourage you to keep student loans to an absolute minimum, and accelerate their payoff as soon as you are able. I think many students take on more student loan debt than necessary, and then find it a very long difficult process to get those loans paid down. Having a high level of student debt can also cause problems when you are trying to qualify for a home down the road.
- **My daughter is 13. I have a 529 for her but fear that the economy will not recover in 5 years (when she will start college). Should I put the money for her college into bonds or continue with stocks (and hope that things have recovered in five years) -Steven, Salt Lake City**Hall: Steven, being within five years of needing those funds, I would encourage you to really look on the more cautious side than to hope for a recovery. If the market were to have a substantial drop from here, there may not be time for that to come back before the funds were needed. You may even want to look for fixed investments rather than bonds at this point. Interest rates are low now relative to inflation. If interest rates climb in the next few years, it could cause losses in some kinds of bonds.
- **I was recently laid off from my job of 13 years and the company is going out of business. I have a sizable 401k that is administered by a separate party. How do I get this money and what are my options with it? My new employer does have a 401k plan, but I am not sure I want to move my money into it just yet. Can I set up my own retirement plan? -Ron, Farmington**Hall: Ron, you can either leave your 401(k) where it is, roll it over to an IRA, or to your new employers plan - you won't pay any taxes if you roll it over. If you are under 59½ years old, you will pay both income taxes and likely a 10% penalty if you withdraw those funds. You should probably look at an IRA instead of your new company 401(k) as you will have much greater flexibility in investment choices in an IRA. There are many investment strategies available in IRA's that you cannot access in a 401(k). If you roll it over to your new employer's 401(k), you would not be allowed to move it to any investment other than the ones offered by that plan while you still work there.
- **I have a 401K plan with a former employer (the balance is high enough that I don't have to pay a low balance fee). Should I still consider rolling that into my current employer's 401K plan, an IRA or some other option, or should I leave my money with my former employer's plan until the market starts to turn around? I'm not going to be able to contribute anything since I'm currently contributing to my employer's 401K (I'm only 25% vested at the moment) and I don't have enough to contribute to another retirement fund as well. -Clifton, Provo**Hall: Clifton, please refer to the answer above - the same principle applies.
- **I just cashed in my 401K, I lost $12,000, I didn't know what to do so I asked my Financial Co. to sell my stock and send me a check. What shall I do now? I am 64 years old and need to have some money for retirement. What I have left it $24,000 and short of time. Please help. -Daisy, West Valley City**Hall: Daisy, by ‘cashing in' your 401(k), you have subjected yourself to ordinary income tax on the entire balance. Fortunately, you are over 59 ½, so you will not be subject to a 10% penalty. If you are still working, I would encourage you to invest $6000 into a Roth IRA for this year, and you could do the same thing in January with another $6,000. That would almost immediately put half of that money in a tax free ‘bucket' for retirement. Remember, you will have to wait for at least 5 years after opening a Roth IRA before you can access your gains. As far as the balance of the funds, it will depend on when you retire and plan to need the money. I would recommend not investing in individual stocks, but instead look at conservative, income-oriented investment options.
- **My husband and I have good stable jobs. We set a goal (a certain amount of money to set a side) to have enough down payment towards a house. We currently rent and spend about $1200 a month everything included but it seems like we are not reaching our goal anytime soon. I guess the question is what is a realistic goal to set? And how much can one really save in a month? We have $0 debt apart from a car loan. -June, Salt Lake City**Hall: June, I think your goal of a down payment for home ownership is a great goal to work towards. I find many couples have ‘leaks' in their budget - little things that money is spent on that aren't necessary. I encourage you both to sit down, review you budget, and agree on your goal and spending limits. Set a goal for what you think you can save each month and pay yourself first. Don't wait until the end of the month to see what's left. Read "The Richest man in Babylon." There are also some great online tools to help you automatically set up a budget and track it. I like www.mint.com and www.mvelopes.com.
- **At what point, in the midst of all the news about banks closing, would you suggest to pull all your money out of your accounts, in order to keep your money safe? -Kyle, Bountiful**Hall: Kyle, accounts at a bank or credit union are guaranteed by the U.S. government up to $250,000. In spite of the media focus on financial problems, I really don't think this is the area to be concerned about right now.
- **Are Indexed Annuities a good Safe Investment? -HJ, Bountiful**Hall: H.J., indexed annuities can be an appropriate solution under the right circumstances. The problem is determining if yours are the right circumstances. The safety of the annuity will be directly tied to the safety of the insurance company you are dealing with. They are making the promises, and will be the ones that have to make good if problems emerge. Indexed annuities can be very complex - if you don't understand it, or something doesn't make sense - don't buy it. They are not a replacement for the stock market due to the limits that are in place on ALL indexed annuities. Make sure the person you are speaking with is both insurance and securities licensed, and can offer you other options besides just fixed or equity indexed annuities.
- **After my husband was laid off last year we went into some major debt to make sure and pay for all of our bills. I am wondering if I should sell my stock now to pay off my debt or wait until the markets come back a little bit and then sell it or not sell it at all. The stocks could wipe out all of our credit card debt, but I know I will be taxed for it. -Sarah, North Salt Lake**Hall: Sarah, depending on what you paid for your stocks, you may pay little or no tax after this recent downturn. Also, if the account is a Traditional IRA or 401(k), all withdrawals will be taxed at ordinary income tax rates. Contact your investment company and determine what your cost basis is. If it's not in an IRA or 401(k), and the cost basis is higher than the current value, you may even be eligible for a tax write off. As far as whether that is a good idea or not, I would need to know more about your current circumstances. If your husband is currently employed, and you have additional cash flow to begin paying down those debts, you could keep your investments growing and put a plan together to pay the debt down over time. If you do not have the ability to pay the debts down, then I would suggest you consider stopping the bleeding and pay off the debts. An analysis of your full financial circumstances should be done before making a decision.
- **I have $20,000 in credit card debt. I called my credit card company and asked them if there was anyway I could stop my finance charges or lower them on my card? The agent said there was no way until I defaulted on my payments and since my account was in great standing there was nothing she could do. Is there another way around this besides transferring to a lower interest credit card company? -Claudia, Heber City**Hall: Claudia, your best option is to ask them to lower the interest rate, and let them know about other offers you have. If they refuse - move it to a better card. You run the risk of ruining your credit if you stop making payments in order to force their hand to reduce your interest changes.
- **I have an Uncle who passed away and left myself as payable on death and left me a sizable sum of money (although under $250,000 for inheritance purposes). Will I be taxed on the money or is there a way that I can put it into an IRA or other financial vehicle so I lessen the tax liability? It is in a money market account now. -Brad, Bountiful**Hall: Brad, it depends on how the money was invested. First of all, the money market account will keep the money secure until you decide what to do with it. If it was a taxable account (as opposed to an IRA), you may have received a ‘step-up in basis' at your uncle's death, and may therefore have little or no income tax due. On the other hand, if it was in a traditional IRA or 401(k), the funds will be taxed, and you need to be very careful or you could inadvertently subject yourself to unnecessary penalties or taxes. I recommend finding a Certified Financial Planner that can help walk you through what you have, and what your options are.
- **How come financial planners seem to have a "wait it out" attitude or a "minimize losses" attitude rather than an aggressive, make money in this market strategy? It seems there are plenty of opportunities outside of the stock market or low yield investments (CD's, T-bills, bonds, etc.). There seems to be great opportunity in the real estate market such as private mortgages or acquiring rentals that would pay higher yields. -Michael, Herriman**Hall: Michael, all financial planners are different and have their own unique approach to dealing with the economy, investments and financial planning. I suggest you keep looking until you find an advisor whose philosophy is compatible with yours.
- **What is the best way to pay off several high interest credit cards that are maxed out? Is it better to hit the one with highest interest with all extra cash or to pay off the smaller ones first? -Anonymous**Hall: From a raw numbers standpoint, you are generally better to begin with the highest interest debt, and work your way down to lower interest debts. An exception might be a mortgage where you are able to deduct the interest from your taxes. Some recommend paying off the smallest debt first, which has a positive psychological benefit, but will take a little longer to pay off.
- **My husband will be going to law school soon and we will have to take out loans to pay for it. I won't have a job because I will be taking care of our kids. How do we survive when neither of us is working?? -Emily, Provo**Hall: Emily, get absolutely serious about establishing a mutually agreed upon budget, and stick to it. Keep that student loan debt to a minimum.
- **Putting money into my 401k after watching it lose value by 40% seems like putting good money after bad. I have a very diversified mix of stocks, bonds, etc. Should I put new contributions into a new mix for a while or just ride it out. I plan to retire in about 7 years at age 70 and know it is time to reallocate (past time actually after seeing the results of the last 6 months but I always seem to buy high and sell low). I am not stressing...just trying to figure out what next. -Carolyn, Uintah**Hall: Carolyn, you should spend some time determining what your ‘risk tolerance' is - I would suspect that this close to retirement, it's a lot lower than it might have been in previous years. You need to determine what rate of return is required to meet your income needs, and have a plan of how to invest if the market continues up or down. This is probably a time to look for strategies that will help you protect your retirement income. Look for steady singles in your portfolio, don't go for home runs.
Thom Hall is a registered representative offering securities through Securities America, Inc., member FINRA/SIPC. Thom is also a financial planner offering advisory services through Securities America Advisors, Inc. Financial Strategies Institute and Securities America are not affiliated.
The information provided is general in nature and should not be considered a recommendation to buy or sell any security, or of a specific investment strategy. Please consult a financial advisor regarding your specific situation prior to implementing an investment plan. Past performance does not guarantee future results.