Young, Gifted and Broke?
This is a tough time for young adults, who are starting out during one of the worst recessions we've had in decades. Unemployment is high and getting worse. Too many have back-breaking student loan debt. They have credit card debt.
If you're starting out and worried about how to make your money last through the month, there's a new PBS special "Your Life, Your Money" that you need to make time to watch. Even if you aren't young, watch the show or record it for someone who is. I'm going to record it for my niece, Lauren, who is heading to Columbia University for her graduate studies. The special, which airs Wednesday, September 9 from 9 p.m. to 10 p.m., encourages young adults to get their financial lives together or keep their finances straight. The special is hosted by the totally cute Donald Faison, who plays the wacky surgeon on "Scrubs" and starred in the movie "Clueless." Hip-hop mogul Russell Simmons is also featured. The special includes information on a range of personal finance topics including managing your credit, investing and budgeting. And no, it won't put you to sleep. It's an engaging program. You can watch a preview of the show on YouTube.
"I think it is important for all young adults to educate themselves on their finances," Faison says. "I am happy to be a part of something that brings attention to this subject for those just starting out." There's another great reason to watch the program: it features yours truly. Other personal finance experts in the program include New York Times best-selling author Beth Kobliner (Get a Financial Life: Personal Finance in Your Twenties and Thirties), and financial coach Peter Bielagus.
Watch the show and let me know what you think. After it airs, e-mail me your comments at firstname.lastname@example.org. Put "Your Life, Your Money" in the subject line. Don't worry, I'll remind you before the program airs. I especially want to hear from young folks.
I've been hearing a lot lately from people who have been informed that their credit cards are being canceled or their available credit reduced. Post financial reporter Nancy Trejos is interested in your experiences with such credit changes by your issuer. She read recently a question on Consumerist.com in which someone was offered a deal to lower her credit card interest rate, but only if the account was closed. The woman wanted to know how that would affect her credit score. Trejos wants to know if you've received a similar offer. Write to her at email@example.com, and tell her I sent you.
And by the way, I've written on this subject before. The fact is, closing an account does not necessarily lower your credit score. And contrary to bad advice out there, closing an account does not remove its good history from your credit reports. As I wrote in a column in April, the FICO scoring system considers the age of all accounts on the person's credit report, open and closed, when determining length of credit history. It doesn't matter who closed an account. By law, negative information must be removed after seven years.
Asset Allocation Questions Answered
Let's see, the stock market was up. Then it went down. You jump for joy. You bite your nails.
I know we aren't supposed to follow the daily gyrations of the markets but it's hard not to with all the focus on it. In the end, if you have a long time before you need your investment dollars (five years or more), one of the things that really matters is asset allocation.
And no, despite claims that asset allocation is outdated, it still matters. It can still help you weather economic storms that hit the stock market. It can't shield you completely, but it helps. In July for the Color of Money Book Club I selected "Asset Allocation for Dummies" by Jerry A. Miccolis, a certified financial planner and co-owner of Brinton Eaton Wealth Advisors in Madison, N.J., and, Dorianne R. Perrucci, a financial journalist. Here's the column if you missed it.
Miccolis and Perrucci joined me online recently to discuss the book and take questions. After the chat, the authors answered the following questions offline:
Q: Louisville, Ky.: I am trying to learn more about other options for investment besides mutual funds and CDs. What do you think about investing in Treasury notes or Treasury bonds? Also, what about annuities to add to income upon retirement?
A: Treasury bonds and notes are backed by the "full faith and credit" of the federal government, meaning that by law, Uncle Sam has to pay you back. Currently, long-term rates (7-, 10-, and 30-year) are paying 3 percent to 4 percent. You may also want to look at "TIPS" (Treasury Inflation-Protected Securities), which offer good protection against inflation.
We're not too keen on annuities, but they may be a good choice for you if you're an investor with a very low tolerance for risk and need a steady stream of guaranteed income in retirement. An annuity is basically an insurance product, and is an expensive choice as an investment. Expenses are usually quite a bit higher than what you find in investments such as mutual funds and exchange-traded funds (ETFs), and you don't get back your premium at the end of the term, as you do with the par value of a bond, for example. But there is a tax upside: Only part of the payment is considered taxable in the year you receive it. (The rest is considered return of your principal.)
Q: Rockville, Md.: I am 36, single, have no children, and my TSP is currently in the lifecycle fund, but I also have extra money to invest. What are the best asset allocation options? I already own my house and car so I am not saving for anything right now.
A: The "best" asset allocation options are the ones that work for you.
How do you find them? By knowing yourself and doing some homework. What are your long-term financial objectives? How much risk are you willing to take? What kind of cash flow do you need in retirement? What income bracket do you expect to be in? And don't overlook your investing time frame - your money may have to last another 20 years or more after you retire, and an overly-conservative mix won't help you live your golden years as comfortably as you had hoped.
Based on what you've told us about your age, and the fact that your TSP is invested in a lifecycle fund, it sounds like you are comfortable putting half or more of your extra money into equities. Or maybe not - you may want to take less risk with that extra money. You'll find help with putting together a successful long-term financial plan, and sample asset allocations, in "Asset Allocation For Dummies."
Choose from equities (stock and stock index funds), fixed income (bonds and bond index funds), and alternatives (commodities and real estate). But skip the fancy stuff - "forwards" and "options" and "swaps" that you may read about in the financial press. These investments are for VERY experienced investors, with VERY deep pockets.
Q: St. Paul, Minn.: In general, what are your views on converting a traditional IRA into a Roth for a 57-year-old?
A: A Roth Individual Retirement Account (IRA) may, or may not, make sense for you, depending on a number of factors (your age, longevity, withdrawal rate, present and future tax bracket, present and future living situation, etc., etc.). The best approach is to have some funds in both a traditional and a Roth IRA. The conversion rules in 2010 make this a particularly opportune time to convert some of your traditional IRA funds into a Roth.
Q: St. Louis, Mo.: I've pretty much ignored my 401 (k) for the past six years. When I signed up for it, my allocation was defaulted 100 percent to a Vanguard account and that's where it's stayed. I'm glad for this, since when everyone else was whining about losing 40 percent to 50 percent of their portfolio, mine remained stable. But I'm 42 and would like to be a little more proactive. What's the best way to go about this? Figuring I will retire around 65. How aggressive can I be at this point?
A: Being "a little more proactive" means investing in equities to some degree. If you are too conservative in your investments, you'll find yourself losing ground in retirement.
You have more than 20 years to save for retirement, but in your investment planning, don't overlook your investment horizon, which is the length of time you'll spend in retirement. You'll be drawing on those assets for at least another 20 years after you retire, if you retire at 65 years old, and are still in good health.
For sample asset allocations, and allocations for different stages of one's life, see chapters eight and 15.
Q: Chevy Chase, Md.: I'm 29 years old, and have worked with three different companies in the last eight years. As a result, I have a 401 (k) and two rollover IRAs -- all with different financial institutions. I want to consolidate them but I'm scared with all these companies folding lately, maybe I shouldn't put all my retirement savings in the hands of one company. Plus, my retirement savings with all three have depleted significantly. Maybe I should wait until they bounce back a bit more. Please advise!
A: Don't be scared, please. You're making the effort to inform yourself, which is an important first step to taking control of your financial security.
Consolidating accounts makes supreme sense, because it makes it easier to allocate your assets and periodically rebalance them. The fewer your accounts, the easier your job! There's no reason to wait.
You absolutely do not want to leave an old 401 (k) sitting in the account of a prior employer, but you do want to consolidate your money into one IRA. By rolling over your 401 (k) account to an IRA, you'll save on expenses (401 (k) expenses are typically large and hard to identify) and gain an expanded menu of virtually limitless choices in an IRA. Also, the rollover isn't taxed. So there's no downside in doing a rollover. Just make sure the financial institution where you decide to house your IRA is solid and reputable.
You are welcome to e-mail comments and questions to firstname.lastname@example.org. Please include your name and hometown; your comments may be used in a future column or newsletter unless otherwise requested.