Financial Futures

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Martha M. Hamilton
Washington Post Columnist
Wednesday, September 12, 2007; 12:00 PM

Washington Post columnist Martha M. Hamilton was online Wednesday, Sept. 12 at Noon ET to answer questions about paying for health care and making smart financial decisions while preparing for retirement.

She was joined by Marjorie L. Fox, a principal in the financial planning firm Fox, Joss & Yankee and a member of the board of the National Association of Personal Financial Advisors.

The transcript follows.

To read past Financial Futures columns, click here.

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Martha M. Hamilton: Hello, and welcome to the chat. I hope you saw the special section on folks 50 and older today in The Washington Post. It's a good read and full of useful information. My guest today is Marjorie L. Fox, who founded Fox, Joss & Yankee in 2006. She's also a member of the board of the National Association of Personal Financial Advisors. Lots of questions waiting, so let's get started.

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Warrenton, Va.: Ms. Fox,

I like to read a lot of financial books and magazines and I feel that I manage my money pretty well. I was looking into the requirements to be a Certified Financial Planner, and was wondering is it something you can do as a part time job? Does the time requirements of research and meeting with clients not lend itself to someones work in a full time job? My thoughts are that a lot of people are available only in the evenings, so this would make it easier to schedule.

Thanks for advice

Marjorie L. Fox: Yes, it is. Although I have only worked full-time as a financial planner, I know several folks who work part-time. However, those part-timers expect to make the transition to full-time position at some point, and work full-time at present in their current profession. As you probably know, it will take you longer to meet the three-year experience requirement of the CFP(r) designation, if you are only working part-time. And, you observe, research, preparation and meeting with clients takes time. The best of luck!

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Washington, D.C.: I hope this isn't a stupid question. I have heard over and over that when you have a mortgage at a low interest rate (let's say 6 percent), it is better to invest in the stock market and earn returns of about 10 percent than to make extra payments on your mortgage, where such payments would essentially earn a return of 6 percent(ignoring taxes for the moment). That makes sense.

But banks and mortgage companies are in the business of loaning money in return for 6 percent. If that return is considered a good one for them, why not for me? I assume part of the answer might be that a well-balanced portfolio includes stocks and bonds, and banks, through mortgages, are able to sell these sorts of securities. But if that's the case, when I diversify my portfolio, instead of buying bonds, could I instead just make extra mortgage payments? (Assuming I have enough cash that I would not need the option of selling the bonds to get cash.)

Sorry if this question is confused.

Martha M. Hamilton: Not at all. It's a good question. First of all, forget what works for the banks. You're not a bank. The question is what pays off for you in your situation. I had the same instinct, that maybe I should be prepaying my mortgage, but when I looked at my situation, I found otherwise. We'll attach a column I wrote on whether you should pay off your mortgage. It depends on your mortgage rate and whether it is low, your tax bracket and whether you have better uses for your money than paying off your mortgage. For instance, if you can get an employer match to money you put in your retirement savings plan, you want to do that rather than prepay your mortgage.

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Atlanta, Ga.: Your column today was great - and had a lot of information.

I think it's more important than ever for people to realize that working as long as they can work is really the best most viable option. No, I don't mean that that means 60 + hour weeks in a high pressure job. It means being creative and still working as you can - cause those bills will pile up as you get older and -can't- work.

There are plenty of jobs that people can take - consultant, day care substitute, temporary worker, substitute in public schools, etc, that would bring in some income, but not have one be dependent on it. It's just that having something is better than nothing, and really, as mentioned in the article, the only other thing many people will do with their time is spend money.

As in, if you have a hobby you love, but couldn't make a go of it to pay a mortgage adn for your kids, etc, maybe 'retirement' would be the time to make a go of it - and bring in a little income.

Just some other ideas - I mean, I wouldn't necessarily be making the same money when I 'retire' but due to my savings, etc, I shouldn't need it (i.e., no more college to pay for, hopefully house is paid off).

But we all have a responsibility to not have to rely on others as much as we can and when we don't work cause we don't care to - that means someone else is sometimes footing the bill - and that's not the most responsible way to live, in my opinion.

washingtonpost.com: Without Planning, Health-Care Costs Can Wreck Retirement (By Martha Hamilton)

Martha M. Hamilton: Thanks. I'm glad you found it useful. And I think the points you make are right on target (it's what I'm doing!). The other advantage of continuing to work is that you can postpone taking Social Security until later and get a larger payment. If you think the chances are good you may live into your 90s, that can pay off. Then the annual cost-of-living adjustment is on a bigger base, which will help with inflation.

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Takoma Park, Md.: Hi,

I am looking for advice on Treasury Inflation-Protected Securities (TIPS). My wife and I are in our late fifties and plan to retire in less than two years. We changed our asset allocation earlier this year to 50/50 stocks and bonds and are likely to continue that into the indefinite future.

My question is: what percent of our portfolio might you recommend keeping in TIPS? Our retirement planner, who recommended the overall 50/50 stock/bond split, said their research staff loves TIPS and recommends holding 25 percent of our total portfolio in TIPS, which would be half our bond holdings. We currently hold a more diversified bond mix with TIPS making up 10% of our portfolio (20% of our bond holdings).

Any thoughts?

Thank you very much. Love the chats.

Marjorie L. Fox: We (Fox, Joss & Yankee) typically recommend that clients position 25%-50% of their bond allocation to TIPS. As you probably observed, TIPs have been among the top performing investments during the recent market turmoil.

Of course, there is no "perfect investment". Although TIPS offer protection from both credit and inflation risk, their longer maturities do subject an investor to interest rate risk. Thus, we believe that an investor's bond allocation should also include short/intermediate corporate, goverment and municipal bonds.

Since TIPS are so tax-inefficient, we do our best to "locate" them in a tax-deferred account. Consequently, the ratio of tax-deferred to taxable dollars in a client's portfolio will determine whether the allocation to TIPS is at the low-end or high-end of the 25%-50% range.

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Southern Maryland: I work full time in Washington, DC now and will turn 62 in November 2008. I want to retire at age 62 (the commute is a booger), collect Social Security, and work part-time closer to home. I understand there is a limit to how much you can earn as a retiree on SS. Do you know how much that is? The difference you get from SS at 62 and 66 is too small to consider working and commuting another 4 years for it. I can make up the difference working a part=time job.

Martha M. Hamilton: There are limits on earnings until you reach full retirement age. In 2007, the limit is $12,960. For every $2 over the limit, $1 is withheld from benefits.

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Arlington, Va.: What's your take on long term care insurance. The companies that market this coverage emphasize the incredibly high costs of assisted living facilities, nursing homes and home care, but I have read other sources that suggest that this kind of insurance is overpriced and has so many exclusions as to be nearly worthless.

Also -- what are the requirements for insurability? If you have a chronic ailment, such as diabetes or if you are HIV+ can you even get long term insurance?

Thanks!

Martha M. Hamilton: From what I understand, it may be very hard to get such insurance with a chronic condition. We'll attach a column I wrote about when it makes sense and when it doesn't to buy longterm care insurance. For folks with a lot of money or those with very little, it probably doesn't make sense. If you opt for it, it's a good idea to shop around from agent to agent and company to company to get the best deal. It's a lot of work, but worth it when you consider the stakes.

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Southern Maryland: What is a financial planner ideal client? What is a client's ideal financial planner?

Thanks!

Martha M. Hamilton: Hah! I'll let Marjorie answer the first part. I think every client's ideal financial planner is different. Some people want someone who will just take control of their finances and send them statements. That doesn't appeal to me. I'd want someone who walked me through my choices and tried to educate me to make as many decisions as I could on my own.

Marjorie L. Fox: Thanks, Martha! If I had to choose just one characteristic that ideal clients of Fox, Joss & Yankee share it would be a willingness to partner with us. Our ideal clients come to trust us, they permit us to educate them and outline their choices, and then they make well-informed decisions that we assist them in implementing.

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Hyattsville, Md.: Hello,

How do you factot health care costs into your retirement planning? I will be able to collect a pension and health benefits in about a year.

The pension will be only about $2200 a month.

I am afraid of what rising health care costs will do to the value of the monthly check.

Martha M. Hamilton: You're right to be worried about health care inflation eroding your spending power. It sounds like you're ahead of the game in having employer-provided health care in retirement. Realistically, barring any major change in the way health care is provided in the U.S., all you can do is save more with that in mind. And don't skimp on preventive care. In the long run, that's expensive.

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Vienna, Va.: Can you address the difference between "working past 65-years of age" and "working a JOB past 65"?

It seems to me that many people believe that their most fulfilling years may still be ahead of them past 65. Unfortunately, they can't spend those years pursuing their life's goals because they're stuck in a job. What they want is a way to "make a difference", don't you agree? Magazine and TV ads showing gray/white-haired folks strolling down a Southern Living beachfront or hhitting a long iron on a beautiful golf course is not truly a way to stay "in the game of life". Doing something great, however, is.

Martha M. Hamilton: I couldn't agree more. It's a blessing if your situation in retirement allows you to work at something that is more than a job. It's easiest for those who have traditional pensions, who have a monthly check coming in and can afford to take lower paying jobs for the pure satisfaction of the work. I know of retired workers who have become teachers or pursued a dream abandoned years ago of acting. My friend Frank Swoboda left the Post and is now running the Herblock Foundation. Talk about a great retirement job! There are so many ways to spend your time making a difference--teaching adult literacy, helping to tend a beautiful public garden, becoming a mentor to a child, getting involved in politics. The best of all worlds is to construct your post-retirement life so that you have time for both meaningful, rewarding work and leisure.

But let's not forget, people who have the luxury of those types of decisions are the fortunate few. Many people, and probably an increasing number going forward, will have to keep working at that job because they can't afford to retire.

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Newington, Va.: Can you recommend information on finding qualified financial planners & what credentials should they & there company have.

Marjorie L. Fox: I would recommend that you only consider financial planners who have their CFP(r) designation and are members of NAPFA, the National Association of Personal Financial Advisors. NAPFA members offer comprehensive financial planning and investment advice, charging fees (not commissions) for that advice. For more information, check www.cfp. net and www.napfa.org. Hope this helps!

Martha M. Hamilton: I second Marjorie's recommendation to deal only with fee for services planners. I also suggest to people that they ask friends and colleagues for recommendation, but then: ask what they like about the person they're recommending. What they want may not be what you want.

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Oakton, Va.: Can you explain the retirement income implications if a widow returns to the workforce? Will she have to choose between receiving her Social Security or her husband's, or will she receive both upon retiring?

Marjorie L. Fox: Great question! A widow is eligible to begin receiving benefits based upon her spouse's earnings record at age 60. She may switch to a benefit based upon her earnings at age 62 or later, if higher. If she returns to the workforce, her benefits may be limited depending upon how much she earns. For a more detailed answer I suggest that you spend a few minutes at the social security adminstration's excellent website www.ssa.gov.

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Washington, D.C.: First all, thank you for taking the time to respond to my inquiry. I am concerned about the financial affairs of my parents whom are both in their early 50s but as of now do not have a dime saved for retirement. They still have about 120K left on their mortgage. Because they do not have any savings after my dad lost his job and putting four kids through school they have discussed worst case scenario would be to sell the house and downgrade in 10 years if necessary. They now both work descent jobs making about 45K each. What would you recommend they do now to start preparing to retire comfortably. Thank you.

Martha M. Hamilton: First of all, I would advise them to start putting some money into retirement savings. It's better to do so later than not at all. They might want to explore Roth IRAs to which their contributions would be taxable now but their withdrawals would not be in the future. And they may want to look into reverse mortgages. We'll attach a column I wrote on that subject.

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washingtonpost.com: A Timely Turnaround With a Reverse Mortgage

Martha M. Hamilton: Here it is.

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washingtonpost.com: Should You Secure Your Health Care?

Martha M. Hamilton: Here's the column.

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BC, Canada: I was curious about why financial planners so often use the 70 percent of pre-retirement income to calculate income needed at retirement. It has been our experience that we live very comfortably on less than this although we did move from city to country.

We also are enjoying a garden in which we grow edibles organically to eat through winter.

Martha M. Hamilton: You make a good point. I don't believe people should rely on formulas about how much they will need or how much to spend in retirement. The issue is: what are your needs and what are your resources, not some magic number. Your ability to live on less bodes well for your future and not running out of income. I have an organic garden, too, and freeze tomato and basil sauce and gumbo and other things for the winter. Saves a lot and gives you better meals, doesn't it? Sounds like you're enjoying your retirement.

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Laurel, Md.: Why wouldn't you pay off your mortgage early (if you can) so you don't have to use your retirement money to make that monthly payment? I guess most people feel that they will die with their mortgages; especially these days with 500,000 and up mortgages owed. But I believe debt is not a good thing and put any and all extra into paying off my debt. Don't get me wrong I also put money into my 401K and get the match but I think if you are over 50 your priority should be to pay off that mortgage. And Suze Orman agrees!

Marjorie L. Fox: I agree, as well. Think of the interest rate on the mortgage as a rate of return on the mortgage payment that is guaranteed (assuming it is a fixed rate). Then compare that rate to interest rate that you might earn on a safe investment such as CD. Since you can rarely make more on the CD than you pay on the mortgage, it makes sense to pay down your mortgage.

And, in my experience, clients are less comfortable with debt, any debt, in retirement than they are during their working years.

Martha M. Hamilton: It varies from individual to individual. If you are uncomfortable with any debt at all, pay it off if you can. But for others, weighing whether that's the best use of their resources makes sense. As I've said, I have the same instinct to be debt-free, so I had to remind myself periodically during my 5-year, no interest car loan that--no, it didn't make sense to pay it off early.

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Wilmington, Del.: I'm 22 years old and started saving for my IRA this past April. I have two questions. First, my company offers a 401K, which I will be eligible for very soon. The problem is that they don't match what I put in -- so is it even worth it to invest in it? Also, I started saving for my IRA this year. I have it in a money market that yields about 5%. Is it worth it for me to invest it in the market? Or should I keep it in the money market and wait until I have a significant amount before I start investing? Thank you so much!

Martha M. Hamilton: Martha M. Hamilton: First of all, good for you for having started saving so early. The only value to saving in the 401k over the IRA, I think, would be if you were maxed out in the IRA. As for investing in the market, you can start fairly small in an index fund such as the S&P 500 which gives you broad exposure to many different stocks or other broad-based mutual funds. At your age, you probably want to get into something with better returns than a money market fund pretty quickly

Marjorie L. Fox: Great advice, Martha. I might substitute a world stock fund for the S&P fund to gain exposure to non-US equity markets.

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Martha M. Hamilton: Thanks for joining us again today. As usual, lots of good questions and from Marjorie Fox, great answers! If you have ideas for future columns you can email me at hamiltonm@washpost.com. See you next time!

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