The Financial Crisis and You

By Nancy Trejos
Washington Post Staff Writer
Sunday, September 28, 2008

It has been a whirlwind year for the financial world, with some of the nation's most iconic institutions falling from distinction to extinction. What started as a mortgage crisis affecting some people has turned into a global crisis affecting all people, and average Americans are trying to make sense of it all. Many readers submitted questions to The Washington Post seeking guidance during this rough period. Many came from people here in the D.C. area. But they also came from up north, farther south, the Midwest and the West Coast. They came from people just starting their careers, from those ending their careers and from those well into retirement. We decided to call some of them to hear the stories behind their questions. We then asked several financial advisers for answers. Please continue to send your questions to The Post's Web site, http://www.washingtonpost.com/yourmoney.

'I'm Afraid to Look'

When Cynthia Shank, 51, looked at her individual retirement account summary last December, she had $448,000. When she looked at it recently, she had $349,000. "I'm afraid to look," she said.

Shank, a Hagerstown resident, is not alone. More and more employers have stopped offering their employees pensions with fixed amounts and have instead moved them into defined-contribution plans that fluctuate with the stock market. Lately, there's been a lot of fluctuating, and Americans are increasingly watching their retirement cushions lose much of their padding.

Shank, who is single, is already stretching to meet her financial obligations. She has a mortgage, $9,000 in credit card debt and a $7,000 home-equity line of credit. Eventually, she will have student loans to pay off, as she is taking classes to get into library science, a career path that seems steadier than the one she is on now.

She is a technical writer working on a $63,000 contract that may or may not be renewed next year. Even the cost of gasoline is taking a toll. She has a 50-mile round-trip commute each workday. "That alone has been a killer," she said.

As of last week, she had negative $25 in her checking account, which makes her wonder: How is she ever going to live comfortably in retirement when she can't even live comfortably with a full-time job? And now, she has even less saved for retirement.

Shank wrote to us seeking advice on rebuilding her retirement savings, or at least stopping it from dwindling away. Right now, she has it all in mutual funds, with about 80 percent in stocks and 20 percent in bonds. "How should I reconfigure it now?" she asked.

Should she move money into certificates of deposit, which tend to be safer? But what is safe these days, she wonders. Money-market funds were considered safe until just a couple of weeks ago, when a major one foundered and the federal government had to promise to insure the rest. As for the money she has lost, "Am I going to recover it?" Shank asked.

Daniel P. Crimmins, founder and president of DPC Wealth Management in Ramsey, N.J., urged her to remain calm. "The timing of the stock market recovery is unknown, but investing in the equity markets requires a long-term perspective," he said. "An asset allocation mix of 80 percent in equities requires this long-term perspective and would be acceptable at her age if this amount is truly for her retirement."

That said, he did advise her to study her portfolio to make sure she has a diverse mix of stocks and bonds. "Unless she had a sizeable amount in her IRA, a loss of $100,000 since December seems to be the result of a less-than-diversified portfolio," he said.

Domenic DiPiero, president of Newport Capital Group in Red Bank, N.J., said she might want to consider keeping 60 percent in stocks and 40 percent in bonds instead.

As for the safety of bank CDs, the Federal Deposit Insurance Corp. will cover $100,000 or less. Money-market funds owned before Sept. 19 of this year are now insured by the federal government for one year.

But DiPiero warned against moving her money into a CD because even the highest-yielding CDs are not keeping up with inflation, which is above 5 percent. "You're going to go poor safely," he said.

Are You Sure It's Safe?

When it comes to picking financial institutions to take care of her money, Jocelyn Reed, 37, has had a string of bad luck.

She once had a CD at California-based IndyMac. That bank went under earlier this year.

She has a life insurance policy with American International Group. The company was recently taken over by the federal government.

She now has checking and savings accounts with Washington Mutual. The government seized that bank just last week and sold it to J.P. Morgan Chase.

"I'm hearing a lot of discussion about safe banks, and I'm not even sure what that means," said Reed, an Oakland, Calif., school psychologist who used to live in the D.C. area.

"It is overwhelming," she said. Her father, whom she relies on for financial advice, keeps telling her not to worry. "I am still concerned and want to stay on top of it because I need to take care of myself."

She wonders: How safe is her money at any bank?

Crimmins agrees with Reed's father. "Jocelyn should rest assured that her bank accounts and life insurance policy are protected," he said.

First of all, traditional bank accounts such as checking and savings accounts, as well as CDs, are insured by the FDIC for up to $100,000 per account holder per bank. Her IndyMac CD should have been fine because she did have less than $100,000 in it. As for her Washington Mutual account, she has nothing to worry about. All deposit accounts were transferred to J.P. Morgan. As long as her two accounts had less than $100,000, which they did, she was, and is, covered.

"In the 75-year history of the FDIC, no customer has ever lost money on an insured deposit," Crimmins said.

There are protections in place for her AIG life insurance policy, as well.

Life insurance policies are covered by each state's guaranty association. The amount of coverage you get if the company fails varies from state to state, but typically, you will be able to recoup up to $300,000 in life insurance death benefits, $100,000 in cash surrender or withdrawal value for life insurance, and $100,000 in withdrawal and cash values for annuities.

Keep in mind that AIG is a holding company for multiple insurers, and many of those subsidiaries are well-capitalized and can cover the policies without the state guaranty association's help, the advisers said. "While the parent company has issues at this point, most of the smaller parts that make up the company are fine and will be sold off to other companies," said Brian T. Jones, vice president of CJM Wealth Advisers in Fairfax. "And anyone who has owned insurance long enough remembers that companies buy companies in the life insurance realm. Happens all the time."

To Buy or Not to Buy

Eve Applebaum, 45, and her boyfriend, Scott Dominick, 31, thought they had found the perfect place: a new, two-bedroom, two-bathroom condominium in a dog-friendly, amenities-filled building in Brooklyn.

After some negotiations, they got the condo and a parking space for $520,000.

All seemed to be moving along until last week, when Wall Street and Washington went into a frenzy over failed investment banks, failed mortgages and failed economic policies.

Now Applebaum and Dominick are unsure whether it's the right time to buy a property. Family members have called to ask them whether they can truly afford it.

"One minute I'm confident. The next, my folks are freaking me out about how the Depression is coming and we're going to lose everything," said Applebaum, a social worker. "I mean, what happens if said Depression occurs and we all lose our jobs and we can't pay our mortgage and then nobody can bail us out?"

They can close the deal on the condo as soon as they want to. But Applebaum is "riddled with fear about this market." Dominick, a technician who does post-production work on films, is also confused.

Neither is saddled with debt, but they are not among the super-wealthy of New York by any means. While their jobs are stable for now, Dominick does not know whether his industry will take a hit at some point.

"A job loss between the two of us would be disastrous," Dominick said. "This is where my hesitance to buy now lies. On the other hand, one has to keep in mind that a job loss can happen at any time, good economy or not."

What should they do?

First, several advisers said, they need to assess their personal financial situations, recession or depression or not. If they don't have the money for a decent down payment that would keep the monthly mortgage reasonable, then they shouldn't do it. If their mortgage payments would take up a substantial chunk of their monthly income, to the point where they would be stretching to pay other bills, then they shouldn't do it. What they should do is steer clear of adjustable-rate mortgages that will balloon in a few years, the advisers said.

The couple is right to worry about the economy. "I completely understand their feeling," said Bryan Beatty, a partner and investment adviser with Egan, Berger and Weiner in Vienna. "I don't think there will be a Great Depression II, but I do believe there will be a recession. It seems that the government will make sure the system remains functional so that we will not see a dramatic amount of workers losing jobs, some but not a lot."

One thing is for sure. "The price of houses are in your favor," Beatty said. "The rates are good."

Mehdi Grayeli, an investment adviser at Grayeli Investment Management in Reston, said: "My suggestion would be to continue on with purchasing the condo, if of course the offered price is a fair market value price and you can still afford the mortgage payment, [and] you are not planning to sell the place for at least another three to five years."

In Search of the Midas Touch

Madeleine Dunn, 60, has always considered herself a conservative investor. But given the rate of inflation and many economists' predictions that a government bailout plan could hasten it, she's wondering if that's the right approach.

A senior legal assistant at Met Life Insurance in New York, she has a 401(k) account, which she has kept in a fixed-income fund with a 5 percent rate. "I don't invest any," she said.

She's got other money set aside for retirement: a small IRA with Fidelity, a savings account and a pension. But with the value of the dollar and the economy in such a precarious state, she wonders how much she will actually have when she retires.

"I was hoping to retire when I was 62, but I don't know now if I'll be able to," said the Manhattan renter. "I don't want to give up my job not knowing what my money is going to be worth."

She wonders: Should she move her money into another currency, or even precious metals? Gold has been doing pretty well, after all.

"What does someone like me do? Should I sit and wait?"

Don't start dabbling in investments that are difficult for even seasoned investors to understand, said Jeff Huber, director of research at Huber, Weakland & Associates in Ellicott City.

"Historically, non-U.S.-dollar-denominated currencies and precious metals, they have provided a hedge against certain inflationary environments," he said.

But, "non-U.S.-dollar-denominated currencies and precious metals are significantly more volatile . . . than Ms. Dunn's current investments. It would be difficult to recommend these asset classes to Ms. Dunn."

Given her low tolerance for risk and her very high fear of inflation, he urged her to consider Treasury Inflation Protected Securities (TIPS).

DiPiero agreed but said her approach was too conservative. "Staying 100 percent in the fixed account is not going to keep up with inflation," he said. "There's no diversification."

She should not go for the extreme of buying gold, but she should rebalance her portfolio so she has at least 20 percent in equities, the advisers said. You can't beat inflation without having some exposure to the stock market, they said.

Bring in a Tenant?

Kaniz Zafrin, 42, and her husband bought a home in Manassas in 2005 for more than $600,000. It is now worth about half that. Zafrin has a five-year, adjustable-rate, interest-only mortgage.

Combined, the couple make less than $100,000 a year. Their monthly mortgage is about $3,000. They have been making their payments on time, but with rising costs for their two children, rising gas prices, rising food prices, rising everything, they have had to make sacrifices. Gone are after-school activities, such as soccer, that the kids enjoyed, because the fees went up.

In two years, they will have to refinance their home and have no idea whether they will be able to because it has depreciated so much. Her neighbors vanished recently because they couldn't keep up with their payments anymore, Zafrin said.

To make matters worse, she works as a consultant at a travel agency, and business hasn't been all that great, so she worries about her job security.

"I am living paycheck to paycheck," she said. "In this situation, what are my options, what am I supposed to do?"

Should they refinance now or wait until 2010? Can they refinance at all if their house has lost its value? Zafrin said she fears losing her home.

"Unfortunately, if a home's value has fallen below the mortgage amount, the ability to re-finance is very unlikely. However, under some circumstances, lenders do work with troubled borrowers," Beatty said.

Beatty and other advisers said Zafrin should not wait until 2010 to deal with it.

"She should start to evaluate her options right now," said DiPiero. "What is a fixed-rate mortgage at now, what is refinancing looking like right now? She hasn't looked. She should start looking."

In the meantime, continue making the mortgage payments on time, the advisers said. The moment you think you might fall behind, contact your lender. Some of them have been willing to modify loans, but it's not an easy process. Once you've defaulted on a mortgage, it becomes more difficult to negotiate a workout.

Seek help from a nonprofit housing counseling agency or an attorney. Organizations such as NACA, the Neighborhood Assistance Corp. of America, have been able to persuade lenders to modify mortgages.

Beatty proposed one option to help with cash flow: "Consider a renter of a room or the basement to help with the mortgage . . . This is definitely a sacrifice but a real possibility."