Financial Futures

Washington Post columnist Martha M. Hamilton was online Tuesday, Sept. 25 at Noon ET to answer questions about making smart financial decisions while preparing for retirement.

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She was joined by Christopher N. Brown, president of Ivy League Financial Advisors.

The transcript follows.

To read past Financial Futures columns, click here.

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Martha M. Hamilton: Hi, there, and welcome to our chat. We're fortunate to have Chris Brown, president of Ivy League Financial Advisers, with us today, and we've got questions waiting, so let's get started.

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Laurel: A lot of us dream about becoming "yearly cyclers" and live in the north from say, April-October and Florida in November-March. Considering the state of the condo market in may places, including much of Florida, is now a good time to act?

Christopher N. Brown: My advice would be to find a good real estate broker in the section of Florida that you're interested in and get the "pulse of the market that way". My real estate friends here tell me that Florida has been incredibly overbuilt and that there are "bargains" to be had. However, they have also told me that the foreclosures will probably peak in 18 months to 2 years--so there will probably be more downward pressure on the prices before they turn up again.

My guess (I'm not an expert on Florida real estate) is that you can take your time and there are more opportunities available if you are patient and wait a bit. But the best thing you can do is find a good real estate agent and work with them.

Good luck.

Martha M. Hamilton: And what a great retirement plan!

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Oviedo, Fla.: What makes financial sense for those of us without health insurance? To get a very high deductible policy - catastrophe only like spine surg. - and just pay out of pocket or routine care and rx? I pay nearly $500 month for an expiring Cobra policy that I rarely used. Could pay a lot less for bare-bones hospital/surg. only...hate to be Chicken Littled out of $6k per year.

Christopher N. Brown: I hate to see anyone without catastrophic coverage. It would only take one illness or accident to wipe many people out financially--so you need the catastrophic insurance. If you want to go with a high deductible policy, that would be fine--but make sure you have the catastrophic coverage. If you haven't hade a recent quote, you might also contact an insurance agent that specializes in health insurance to see what policies are available. You mentioned COBRA--my understanding is that COBRA usually offers coverage only for a limited amount of time--usually a year. Additionally, if you are a member of any groups or associations, they might possibly have some benefits available also. It can't hurt to try.

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Herndon, Va.: Hi Martha and Christopher, I have an account at Merril Lynch and I can't get a straight answer from them about fees. They keep saying the fees vary, which I could deduce on my own, but they won't say how much they're charging me in 2007. I'm in my mid-20s and don't have that much invested. My family has been doing business with them for a while so they got me a high yield money market (they call it CMA) account. I also have a Roth IRA with them. All totaling less than $15K.

What's the best way to go out figuring out the fees they're charging me? Thank you.

Christopher N. Brown: Fees can be very confusing. Technically as broker-dealers instead of Registered Investment Advisors, I'm not sure they have to disclose them.

That being said, you can look for the fees in several layers, depending on the type of investment:

1. Internal Costs of the mutual funds. This is known as the "expense ratio". You can typically look this up on Morningstar at www.morningstar.com.

2. Sales loads or charges of the mutual funds. This typically takes the form of front end loads ("A" shares), back end loads ("B" shares) or ongoing loads ("C" shares). If you hold mutual funds, you should see a share class, i.e. Mutual Fund XYZ, Series B. that tell you which share you have. You can then ask the rep the sales load or look that up on Morningstar also.

3. "Wrap Fees". Depending on the type of account, you may have quarterly or annual charges that are charged directly to you. Most brokerage firms have these in so called "wrap accounts"--these charges should show up on you statements.

4) Imbedded costs. Financial instruments such as annuities, insurance, have imbedded costs which take additional digging.

So basically the fees depend on the type of product and/or account you own--keeping asking until you get an answer you satisified with--or find another advisor who will disclose in advance and in writing what the fees are. I recommend using a finding a Fee-Only Advisor at www.napfa.org

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Washington, D.C.: Recently moved to D.C. and am amazed at the value of the government pensions. Your column Sunday mentioned a government couple with a guaranteed, inflation proof pension of $116K almost 2.5 times greater than the median income for US families!!!! With the average fed making over $88K-it's no wonder my friends are saying "Why work when you can get a government position and pension." It's clear, I'm not in Kansas anymore.

Martha M. Hamilton: The folks I've known over the years who work for the federal government work exceedingly hard, and so do teachers. And they often work for lower salaries than they could command in the private sector, something that good retirement benefits compensate for.

Christopher N. Brown: The previous retirement system (CSRS) that the Federal Government offered is no longer available to new employees. It was generous (maybe too much), and replaced with the FERS (Fedral Employees Retirement System) which incorporates a lower pension but incentives in terms of savings in the Thrift Savings program (TSP) similiar to 401(k) plans. I think this happened in the 80s.

But Martha is correct--these are civil servants (my father worked for the state of Virginia for over 30 years) who worked hard all of their lives when they probably could have made more in the private sector. The pension, in effect, was part of their benefits in lieu of a higher salary.

This is not too different from the private company pensions which workers had but which many companies no longer offer--also because they are too expensive. Also keep in mind that individuals who collect pensions in the CSRS system generally do not qualify for Social Security.

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Philadelphia, Pa.: Posting early and hoping and praying you will answer. My husband and I are 61 and anticipate retiring at 65. We have decided not to stay in our present home upon retirement. Our 401(k)s at the moment equal approximately $1.1 Mil (we each invest 15 percent)and we have a cash balance pension with a value of approximately $725,000 at the end of this year. Our home has a mortgage balance of approximately $65,000 (payment of $700). We will also have our social security payments which will be in the neighborhood of $3,000. We have 2 IRA's with a value of about $140,000. We are looking at 55+ communities with an eye toward retirement. In order that we would not have two mortgage payments I proposed that we should sell some stock that we have which would produce about $200,000 in our pocket after factoring in the taxes. I would also like to cash in the 2 IRA's and also use this money, along with the stock proceeds for a down payment. My husband hit the roof as far as cashing in the IRA's. My thought is that when we retired we would sell our present home and that money would then also be invested. Is my idea as far out of line as my husband has portrayed it?

Christopher N. Brown: One issue that you need to be aware of in terms of pulling money out of an IRA or 401(k) is the tax treatment. All of this money is generally taxable as income--which will be your highest tax rate. Individuals generally want to put off paying these taxes as long as possible, so they generally tap into their regular, or "taxable" accounts first until they are exhausted--then access the IRAs. Keep in mind that capital gains rates right now are very low --15%--so even if you have to liquidate so holdings in your taxable accounts, the tax rate will be lower than if you pull money from an IRA.

The best solution for you will depend on the specifics of the situation--the timing of the purchase and sell--as well as the relative costs of the properties.

Please get some professional guidance with this--you don't want to mess this up. If you do not have a financial advisor, I recommend finding a Fee-Only Financial Advisor--you can search for one at www.napfa.org. I know of several good ones in the Philadelphia area. Good luck!

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Columbia, Md.: I have a second home and have it on the market. In order to price it competitively, I will need to reduce the cost so that I am near a break even after two years ownership. However, every month I keep it, it costs me about 3000 in net interest, taxes and utilities. My thoughts are get out, even if it is only a break even, then take the monthly amount and invest it. Others say wait for the housing market to turn around - your thoughts? House is priced at $399,000.

Martha M. Hamilton: My own instinct would be to hold on and rent out the house until the market improves, but then you have the hassle of being a landlord. However, if you can't rent it for enough to cover your expenses, it wouldn't be worth it.

Christopher N. Brown: I think a lot of this will depend on your cash flow situation. If you can hold onto it and rent it out to pay for a majority of the costs, that is probably the best situation. The housing market is a buyers market right now, even in the DC/Baltimore area. Speak to a good real estate agent and find out what they think about the rental market, and then examine your cash flow and access your situation after that. You might also speak with a tax adviser about the implicaitons of renting out the house and/or selling it at a loss (if that will be the case) if you have not already done so. Good luck!

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McLean, Va.: The couple in the article is set in terms of being able to afford a second home. What about the possibility of doing a Reverse Mortgage on their current home, given that it is all paid off, but for a line of credit?

Martha M. Hamilton: They didn't seem to need to take that step, although it can be a useful tool for some retirees.

Christopher N. Brown: It can be a useful tool, but keep in mind I believe you have to be over 62 to qualify for it, and they didn't need the resources to buy the second house. The reverse mortgage tends to be used only when someone doesn't any other resources-it's a complicated instrument.

Thanks for your suggestion!

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washingtonpost.com: A Timely Turnaround With a Reverse Mortgage

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Chicago, Ill.: I have about $10-15k that I'd like to invest (non-retirement). I'm thinking about T. Rowe Price's new Africa fund (open to suggestions though). I have European and Asian funds in a 401(k). I'm not terribly concerned about liquidity, but I'm wondering if I should be concerned about the weak dollar - does this mean non-American/global stocks and funds are overpriced for Americans?

Christopher N. Brown: What's important here is how your investment fit together. I strongly recommend that you construct (either yourself or with the help of a good financial advisor) a well diversified portfolio in line with your goals and risk tolerances. A percentage of your investments should be in overseas/international funds, but first start with the overall allocation rather than trying to do this by pieces and hoping it fits together.

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Columbia, Md.: How do you suggest getting your adult children to get their financial house under control. My married daughter cannot seem to find a way to curtail her husband's spending, he just doesn't get it.

Martha M. Hamilton: That's a tough question. I'm not sure that this is a situation that you can control or fix. If you have a good financial adviser of your own, I suppose you could pay him or her to sit down for a session with your daughter and her husband. They might take advice more easily from a third party. We really need to do a better job of educating our kids about finances when they are young, and by we, I mean the schools, too, not just parents. I give my 31-year-old daughter financial advice when she asks for it, which she does from time to time. Occasionally I ask my older stepson and daughter-in-law questions like whether they have established 529 plans for their kids' college education. But my experience is that advice only works when it's asked for.

Christopher N. Brown: I agree with Martha on this. If you have a good advisor and they don't want to use him/her, offer to pay for an introductory meeting with another advisor that they find. This might make a good birthday or holiday gift--but talking about finances with loved one can be tough--good luck on this!

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washingtonpost.com: Preparation Can Make A 2nd Home Possible

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Potomac, Md.: Hello! I'm a 63-year-old single woman (may be marrying soon) who is about to retire. My father just left me enough money to pay off my $260K mortgage with a little left over. I want to know if that makes sense.

I also own a condo in a prospering area of Rockville - the mortgage is $68K - these were selling for $250K back in the spring. The condo fees are high: nearly $500 per month. I'd like to sell it in the spring when the lease runs out and take the proceeds (after cap gains and realtor fees) and invest them. But where - T Bills, tax free munis? or someplace else?

Other than this, I have about $150K in IRAs and TSP. I'm planning to take Soc Sec ($1160 per month) and have income from a renter ($800).

I would also consider for cash needs taking a reverse mortgage on my home. Does this plan make sense? Thank you! Barbara

Christopher N. Brown: Barbara-

You certainly have a lot going on. Congratulats on your possible nuptuals!

Okay let's take these one at a time:

1. Does it make sense to pay off the mortgage with your inheritance? Possibly, when I run the numbers for this question, it is almost better always to keep the mortgage because you can usually do better over the long term investing the money. However, paying off a mortgage is usually an emotional decision also--so it can get complicated. Please get some advice on this before you write the check to pay off the mortgage.

2. Selling the condo in Rockville and reinvesting the proceeds. The best advice I can give you here is to sit down with a good financial advisor and have them examing the situation and put together a strategy and portfolio that makes sense for you. Except for incorporating principles like diversification, there is no "one size fits all" advice that I can give. The advice depends on your overall goals and concerns and more importantly, your cash flow needs in retirement. This might all change dramatically if you get married also!

3. Taking a reverse mortgage on your home. You're old enough to do so, but do you need the cash flow and are your willing to live the the provisions of the mortgage. AARP offers some good information at http://www.aarp.org/money/revmort/and the federal government offers some information also at http://www.hud.gov/offices/hsg/sfh/hecm/rmtopten.cfm. Make sure you check these sites out.

Please get some help with these issues before you make a decision. If you do not already have a good financial advisor, you can find an objective Fee-Only advisor by going to www.napfa.org.

Good luck!

Martha M. Hamilton: We'll attach a column I wrote about when it makes sense to pay off a mortgage and when it doesn't.

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Ashburn, Va.: Hello Martha and Chris, Are you aware that the couple in Phila could use a Reverse for Purchase mortgage to buy the home in a retirement community using only the profits from the sale of their present home. This is not always the best answer, but it could work very well for them.

Christopher N. Brown: I'm sure that there are many possible solutions once a good advisor sits down and considers all the options, has a discussion with the clients, and makes the best decision.

Many times, though, financial instruments are used without knowing all the facts. These tend to be "solutions which are looking for problems" so I'm cautious of them until all of the facts are examined.

Thanks for your input.

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Ashburn: I am curious about your view of using a Reverse Mortgage for the couple in your article on Sunday. The funds would be tax free and therefore require 15 percent less to make the down payment

Martha M. Hamilton: But reverse mortgages have their own costs. And some people aren't comfortable with the idea of not being able to pass on the family home.

Christopher N. Brown: I agree. They have resources to buy the second home and expressed no desire to take out a reverse mortage on their primary residence.

Thanks for your comment.

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washingtonpost.com: Homeowners' Get-Out-of-Debt Instinct

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Atlanta, Ga.: re the woman with the husband with the bad spending habits:

Well, it would seem to me that there is something more wrong here than finances, and while a financial counselor MAY be able to help - they probably need marriage counseling. The husband needs to grow up and see why his spending habits matter, that he's in a marriage and that he needs to think of others before spending what they can't afford.

It is a marital issue, not a financial issue. So when people say: oh, more marriages break up over finances than any other reason, typically that's not true - it's maybe true in one sense, but in reality, the financial issues are masking other issues (lack of communication, being one of them, becoming an adult, etc...).

Just another thought...

Martha M. Hamilton: I think you make a valid point that financial issues may just illuminate other issues in a marriage, such as lackk of communication. But it's hard to judge someone else's marriage from a distance and from someone else's description.

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Chicago, Ill.: I had a Simple IRA with an employer. When I changed jobs five years ago, I left it as is instead of rolling it over, because I like the fund company (American Funds). Are there any risks in leaving it thus?

Martha M. Hamilton: If you're happy with it where it is, I see no reason to move it. If, eventually, you find yourself with multiple IRAs and 401(k)s, it might make sense to consolidate for ease of managing them.

Christopher N. Brown: I personally like the idea of consolidating all old Qualified Plans like 401(k)s etc. They are much easier to manage if they are consolidated into one account. In addition, you much broader investment options in an IRA with a discount broker than in any employer's 401(k) plan. The main reason that investors don't move them is just inertia--then they end up with several "old" accounts down the road. For housekeeping sake and for better investment options, I would recommend that you consolidate it into one IRA. Thanks for the question.

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Oviedo, Fla.: Re: questioner who may go the Florida snowbird route - I moved to Florida in '84, out of school, and have spoken to many snowbirds since then. Advise her (them) that there are lots of issues to address with the Florida condo. You don't just shut the door in May and bolt - someone needs to check the place, maintenance needs attending, hurricane-proofing must be done and maybe amped up as a storm approaches, the door needs to be cleared of fliers and mail and packages that get left, etc. Will other family visit in the summer - how will that work, who will clean it before and. To say nothing of where residence is established for tax purposes, to have a car or not and how it gets looked after, etc. It would make a good col. or two - ins and outs of two homes, two cars, two golf clubs, two drs.

Christopher N. Brown: Thanks for your comments. Owning a second home or being a landlord has issues which are more than just financial-related--they can really complicate your life!

Martha M. Hamilton: That's great advice, Oveido. Thanks for pasing it on.

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Alexandria, Va.: This is a question related too the column written a week. It is about investing for dividends. I have been retired for 15 plus years. I built my retirement income around an idea that I had 33 years ago. Invest in dividend paying stocks that have a history of annual dividend increases. today my income from this portfolio is more than twice my peak salary when I was working. And yet financial professional think this is not such a good idea. I had several professionals tell me this idea is somewhere between dumb and stupid. Could you give me your thoughts. David

washingtonpost.com: Spend The Income Or the Assets?

Martha M. Hamilton: I'm glad it's worked out well for you. I do think it's a good idea to have diversity in your portfolio even in retirement, rather than to invest for income only.

Christopher N. Brown: Congratulations on your success. Just make sure that your portfolio is well diversified and in line with your goals and risk tolerances. Different investment styles come in and out of favor during different time periods. That's why diversificaiton is important--what worked in the past may not work in the future.

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washingtonpost.com: Rolling Over Into Retirement

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Bethesda, Md.: Where do you place Parent Plus Loans in the pecking order of financing children's college expenses?

Christopher N. Brown: I would examine the total components of the finacial aid package--grants, student loans, work-study, etc, first and then decide what is the best loan for parent to take out based on current interst rates, etc. Other options that that people consider might be be to use a home equity loan or line or credit because of its tax deductibility.

The current rate on the Parent Plus Loan Program appears to be 8.5%. The right solution for you will depend on your current situation.

Good luck with this!

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Martha M. Hamilton: Thank you for joining us today and for all the good questions. And special thanks to Christopher Brown for providing his expertise. Remember, if you have suggestions for future columns, email me at hamiltonm@washpost.com. See you next time!

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