Oct. 1, 2008— -- As the Senate prepares to vote on the massive Wall Street rescue or bailout plan, depending on your perspective, we decided to ask some experts how you can best navigate this skittish economy.
Simply put: Americans are facing plenty of uncertainty about their own finances.
ABCNews.com -- with the help of the Garrett Planning Network, the Financial Planning Association and several financial planning and advice companies -- reached out to experts across the country to get answers to some of the most pressing personal finance questions posed and inspired by our readers. Below, a sampling of the experts' responses.
Q: I am in my 50s, and I'm seeing huge losses in my 401(k) and other retirement plans. I'm worried it might all disappear and I'll have nothing to live on once I retire. What should I do?
Deborah Winterhalter, president, the Grace Financial Planning Company, Warrenville, Ill.: "If you are more than five years from retirement, keep contributing to your employer's retirement plan. Maximize your contribution if you are able or contribute at least enough to get any employer matching contribution. You are buying today's shares 'on sale.' This might be a good time to look at what percentage of your 401(k) plan is invested in stocks and what percentage is in bonds to see if an adjustment should be made. The percentage you are investing in stocks may be higher than what you are comfortable with."
Susie Johnston, certified financial planner, Cherry Hills Investment Advisors, LLC, Greenwood Hills, Colo.: "My recommendation is to review your investments within your 401(k) to make sure they are diversified. You should have investments in all areas of the market, including international mutual funds. You should probably have 60 percent to 70 percent in stocks and 30 percent to 40 percent in bonds and cash positions. Continue periodic investing (dollar-cost averaging) into your 401(k) as this market corrects and remember that this will end -- it might not be soon, but it will."
Jay Hutchins, president, Comprehensive Planning Associates Inc., Lebanon, N.H.: "You are experiencing a normal emotion under today's market conditions: fear. Just as it is imprudent to shift all your money into stocks when they are going up (that is the greed emotion), it is equally imprudent to shift all of your money out of investments when they are going down."
Q: I have some time until my retirement, and I'm sick about worrying about the stock market. Can I just put my money in savings accounts and CDs for now and then just jump back into the market when stocks start recovering?
Jake Engle, certified financial planner, Wealth Planning & Management LLC, Seattle: "Who anointed you as smarter than Warren Buffet? If Warren doesn't get out of the market and market time ('wait to jump back in'), neither can you. Every unbiased academic study has shown that you can't market time. Don't try. Keep buying stock mutual funds in your 401(k) and with all your savings. Stocks are 'on sale' right now. Treat it as a blessing, and grab some."
Winterhalter: "Trying to move in and out of the stock market (market timing) is generally not wise. It is very difficult to know the best time to sell stocks, and once you've done that it is difficult to know when to buy stocks again. Many people end up doing nothing, because they are paralyzed by indecision. It is better to have a plan and stick with it. Keep enough emergency cash available to meet at least three to six months worth of your living expenses in an account that is easy to get at (such as a savings or money market account). Next, come up with an investment plan that you feel you can stick with in both up and down markets."
Hutchins: "Following crises-induced panic selling, stock markets tend to rebound in an explosive manner. This makes it unlikely that you will be able to re-enter the market quickly enough to participate in much of the recovery. You will likely have converted temporary paper losses to permanent real losses. You may find your easier sleep today coming at the expense of sleepless nights during retirement."
Q: Are annuities a good investment choice right now? Does the government bailout of AIG affect my AIG annuity?
Hutchins: "Annuities are contracts in which you turn your money over to an insurance company, and the insurance company promises to return it plus some predetermined rate of return, which may be based upon interest rates, market indices or some combination of the two. Your money, therefore, becomes the insurance company's money. If they go belly up, so can some, much, or all of your annuity. That is one risk, [but it is] alleviated if the government comes to your insurance company's rescue. ... The primary benefit annuities offer is tax deferral, and the ability to convert your savings into a guaranteed (assuming the insurance company remains solvent) stream of lifetime income. The higher your tax rate, the more beneficial is an annuity from a tax perspective; and the higher interest rates, the larger the lifetime income you can lock in, [but] historically speaking, both income tax rates and interest rates are low so annuities may not be a particularly attractive investment option at this time."
Brendan McNamar, founder, WiseWealth Inc., Mesa, Ariz.: "Your AIG annuities are safe. AIG bought high-quality bonds to match the obligation to you when you bought the contract. These are separate from the parent company's financial problems. Annuities are not attractive during times of low interest rates. You have to pay a lot for a little income. They are more attractive, for part of your portfolio, when interest rates are higher and are expected to move lower. They should always be bought directly from a company like Vanguard or Berkshire Hathaway, with no sales person."
Q: What do the bank mergers -- JPMorgan Chase and Washington Mutual, Bank of America and Merrill Lynch, Citigroup and Wachovia -- mean for average bank customers like me?
Winterhalter: "For the time being, things should continue just as they always have. You will be able to make deposits and withdrawals normally. In time, the bank name may change on your account, but you can continue with your regular banking. Now is a good time to make sure your bank or savings and loan institution is FDIC insured. Go to www.fdic.gov/deposit/ and look for "Find Bank." FDIC Insurance covers up to $100,000 per depositor per bank. Certain bank retirement accounts are insured up to $250,000/owner. This insurance covers all types of deposits at an insured bank, including checking, savings, money markets and certificates of deposit. The insurance limit can only be increased if the accounts are held in different categories of ownership."
Paul Palazzo, Managing Director of Financial Planning, L.J. Altfest & Co. Inc, New York: "If you had money in two banks that have now merged, be careful that your total does not exceed insured limits. If your bank is insured by the FDIC, the money you hold in checking, savings and NOW (negotiated orders of withdrawal) accounts, as well as CDs and bank money markets, is protected up to certain limits -- $100,000 per person per bank, and another $100,000 per person for accounts held jointly. If you're wondering if your bank is covered, check at www.fdic.gov or call 877-ASK-FDIC."
Hutchins: "As a borrower, the underlying cause of the mergers signals tighter credit and you may find it more difficult to borrow. Your cost of borrowing is also likely to rise."
Q: I keep my money in money market funds because I thought they were safer than the stock market. But now I'm hearing that money market funds are in trouble too. Should I take my money out?
Connie Stone, certified financial planner, Chagrin Falls, Ohio: "The amount you had in money market accounts as of Sept. 19, 2008, is insured. Some financial institutions (i.e. Vanguard) are considering adding another layer of insurance (Treasury guarantees) for their money market accounts. Yields on money markets are low compared with CDs. You might want to put some of your cash in 6-, 12- and 18-month CDs to increase the yield if you do not intend to use the money during those timeframes. Otherwise, your money should be safe in money market funds. Check with your financial institution to see if they're adding Treasury guarantees on money market accounts."
Engle: "No. There is a new government effort to backstop money market funds. You should consider this question: 'To whom does my money market make 30 day loans?' Municipal money market funds make short-term loans to state and local governments. These governments get revenue from taxation, and can raise taxes if they have a shortfall. Muni funds are the second safest form of money market, after U.S. Treasury money market funds."
Winterhalter: "Most institutions try very hard to make sure money market account values do not go below $1 per share. It is suggested that you check with your financial institution to see what safeguards they have in place. Being knowledgeable about your finances will help you to make reasonable and educated financial decisions. Brokerage accounts carry SIPC (Securities Investors Protection Corporation) insurance, which covers you should your brokerage fail. It covers cash assets up to $100,000. Some companies purchase insurance above these limits to provide customers additional protection above the SIPC limits. Be sure to keep current copies of your statements."
Q: I keep hearing about credit unions. Is it safer to keep my money in a credit union instead of a commercial bank?
Winterhalter: "Both commercial banks and credit unions are insured financial institutions. Credit unions are insured by the National Credit Union Association. This independent federal agency is backed by the full faith and credit of the U.S. government. The NCUA operates the National credit Union Share Insurance Fund , which insures consumer deposits up to $100,000/depositor just like FDIC does. The NCUA Web site (www.ncua.gov) provides additional information and a great online calculator. "
Engle: "Both are equally safe. It's a matter of convenience for you. If the credit union offers higher interest rates, or is closer to your home or work, then by all means choose it. In any choice, consider the locations of the ATM machines and other convenience products, such as online banking, etc. Credit unions are sometimes nonprofit or affiliated with employers or groups you might support. That's another reason to consider a credit union."
Palazzo: "Credit unions provide a nonprofit alternative, but like all financial institutions they are subject to risks. Eleven credit unions and 13 banks have failed this year."
Adam Levin, chairman of Credit.com: "The answer depends on the particular institution that you are considering. Credit unions, for the most part, have shied away from the subprime market. Many local banks also have avoided the rush to capitalize on the subprime lending frenzy. Smaller institutions tend not to be saddled with crippling volumes of nonperforming loans."
Q: I'm a homeowner. I need money, and I want to take out a home equity loan. Is that even possible today? How hard is it to get any kind of loan?
Levin: "Borrowing against your home equity requires three things: a good credit score, sufficient demonstrable income to support the new loan and all your other credit obligations and, most importantly, meaningful equity in your home. Lenders still are writing home equity loans and lines of credit but the least costly loans will require no less than 30 percent equity in your home after the new loan. Your best bet will be a local credit union or bank that is familiar with property values in your area."
Engle: "It is possible, but maybe not advisable at this moment. Ask yourself, 'Do I need money, or do I want money?' It looks like the Fed is about to lower interest rates again. If you can wait a few months, you should have no trouble getting a loan if you have good credit, and a valid use for the money."
Hutchins: "It is harder to get a loan today than it was yesterday; and absent effective action on the part of Congress and the administration, it will be even more difficult tomorrow. Whether you have good or bad credit, and lots of or little equity in your home, there is simply little money out there available to be borrowed. Most banks act primarily as brokers for loans: They make the loan, then immediately sell it to bigger banks, insurance companies and other institutional investors (you know, those firms that you have been reading about going bankrupt, being bailed out by the government or being absorbed at fire sale prices by other teetering financial institutions). All of this is changing day to day, so go to your local community bank and apply. You might have even better luck at a credit union if you belong to one. The acuteness of the problem is likely to subside, but the availability of credit is unlikely to return to levels anywhere near what it was prior to the current crisis."
Johnston: "I recently contacted a credit union and they tell me their standards for approving loans have not changed at all. They are still doing home equity loans. In my opinion, a home equity loan is a great vehicle to have as an emergency asset. However, I strongly recommend not using it unless you absolutely have to."