Martha M. Hamilton
Washington Post Columnist
Tuesday, December 18, 2007; 12:00 PM

Washington Post columnist Martha M. Hamilton was online Tuesday, Dec. 18 at Noon ET to answer questions about making smart financial decisions while preparing for retirement.

She was joined by Zvi Bodie, professor of finance at Boston Unversity and author of "Worry-Free Investing," to discuss her recent column, Two Options to Fight Off Inflation, and other related topics.

To read past Financial Futures columns, click here.

A transcript follows.

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Martha M. Hamilton: Hello, and welcome to our online chat. We're extremely lucky to have as our guest today Zvi Bodie, who is a professor of finance at Boston University School of management and also the author of the very good book "Worry-Free Investing." And we have lots of questions already, so let's get started!

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Financial advisor: Martha,

How does one go about finding a qualified, objective financial advisor? The only ones I've met are from my bank or brokerage and they're usually pushing their products. What kinds of questions should I ask to determine if the adviser is the right fit? And how does one ensure that the advisor is working for your best interest versus just making more commission/fees for themselves? Thanks!

washingtonpost.com: Blind Dates With Financial Advisers (Financial Futures, Nov. 5, 2006)

Investment Candy From Strangers (Financial Futures, Oct. 1, 2006)

Martha M. Hamilton: The best way to make sure that an advisor isn't pushing products to earn higher commissions is not to do business with anyone who works for commission. Instead, look for a fee-for-services financial advisor. There are a few web-sites where you can find the names of planners in your area. Try www.napfa.org or fpanet.org. And there is good advice about questions to ask financial planners at http://www.sec.gov/investor/brokers.htm. Also, ask friends or coworkers whom they use, but, if they recommend someone, ask what they like about him or her. For instance, they may love an advisor who takes over their finances, but that may not be what you want.

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Pikesville, Md.: I have equal amounts in my 403-b funds and non deferred accounts.I'm 62 and would retire at 66. Should I bonds or TIPS be placed in either or both types of accounts?

Also, what do you think of the target retirement funds?

Zvi Bodie: You cannot hold I Bonds in your retirement accounts. TIPS mutual funds are available in most 401k and 403b plans, but not TIPS as individual securities. This makes it impossible to match the maturity of your TIPS to your goal. Some plans are now making inflation-protected payout annuities available. BU is one such plan.

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Spokane, Wash.: Dr. Bodie,

Your book "Worry Free Investing" made a lot of sense to me (it was the first investment book to do so by the way). I have been investing in I Bonds for retirement because I find that investing in TIPS in my retirement accounts is very difficult - either they are not an option (403b) or require brokerage fees (IRA). Unfortunately, TIPS mutual funds just seem like a way to take a great idea and convert it into a risky asset. Now that the Treasury Department is going to restrict I bond purchase to $5,000 per year (buying the paper bonds is difficult since many employers don't offer payroll deduction programs and just try to buy them from banks) what is a "Worry Free" investor who wants a safe investment for their most important asssets to do? Thanks and please keep writing for those of us without financial degrees.

Zvi Bodie: I share your frustration over the way the US Treasury has made it difficult to hold individual TIPS in IRAs, 401k, and other such retirement plans. I have tried to influence the Treasury to help us out, but the investment industry lobby is too powerful for a little guy like me to win.

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Fort Washington, Md.: Zvi,

You have proposed some new innovative financial products for retirement. One product you have proposed combines an inflation-linked life annuity with a LEAPS equity index call option. Would you explain this financial product in more detail? Is this idea close to becoming an actual financial product?

You have also proposed that a safe target date fund be offered to 401k participants. Would you explain this financial product in more detail? Also is this idea close to becoming an actual financial product?

Finally, I think all individual investors owe you a debt of gratitude for always offering sensible financial advice, instead of the usual cacophony of nonsense that often passes as advice in the investment world.

Zvi Bodie: Thanks. It is good to know that someone out there actually is reading what I write. The most important idea is to start by creating a safe inflation-protected long-run layer of retirement income to supplement Social Security when you retire. On top of that you can invest spare money in LEAPS, penny stocks, or any other speculative investment that appeals to you, secure in the knowledge that your safety net is in place.

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NW, D.C.: I am one of the people that have had my credit card rate go from maybe mid-teens (14) to 28-percent! I did not miss the payment for the card, I forgot a student loan payment and paid double the next month. I am really fed up with this card and I'm at the point where I almost refuse to pay it anymore. I pay my bills, never have defaulted, but I might be a day or so late paying online. I don't understand how/why get treated like or worse than higher credit risk. I don't want to file bankruptcy over one card, i assume the bank would sue and it is found i have assets to pay off the debt. What are those credit settlement companies about? I am at the point where I realize my retirement and savings are more important to me. I was duped by the attractive balance transfer rate, and penalized after one prior lates, again not more than 5-days tops.

Martha M. Hamilton: If you haven't already, put that card in a drawer and leave it there. Don't add to that debt, and scrimp on what you have to in order to get rid of it, though it may take awhile. Credit card companies count on people forgetting payments or being late for other reasons or spending so much that they can't pay off the balance each month. You've learned it the hard way, and the best approach is to work your way out of the corner you're in and then look for a lower rate card. Some organizations that bill themselves as helping to restructure debt aren't reliable. I'm checking with someone I know to see if she has an organization in this area she would recommend. When I hear from her, I'll post the answer in the chat.

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Woodbridge, Va.: Here's a bond-buying tip. A few years ago, my wife and I decided to take $5k and invest in I-bonds. You can buy them online, using a credit card. So I used my Discover card, and purchased them at the beginning of the billing cycle. That means I didn't have to actually move the money out of my account for 60 days (30 days billing cycle plus 30 day grace period). Add the 1 percent cash back to the interest I earned on the money while it was still in savings, and it more than overcame the 3-month interest penalty if we had to cash the bonds early.

Zvi Bodie: The U.S. Treasury ended this option several years ago.

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Rockville, Md.: Thanks for your article on TIPS/I-bonds. It complemented an article in Money Magazine about high dividend-paying stocks in that both investments' payouts tend to rise over time (I-bonds with inflation, stocks with dividend increases) thereby providing a reasonable and return compared with regular bonds/CDs and non-dividend stocks.

A few questions:

Question 1: has the finance professor compared the return of I-bonds versus TIPS over various time intervals? I own a TIPS fund and individual bonds; it's difficult to compare their relative returns.

Question 2: what is the difference between a bond's "yield" and "rate?"

Question 3: why would someone buy a regular EE bond over an I bond? I used to buy both but the EE bond was always inferior in terms of the rate.

Question 4: why does the government offer I-bonds? Was it not attracting enough money before?

One thing you might have pointed out about the advantage of I-bonds is that they are tax free if used to fund education (and I think housing?). I like to buy mine through an automatic payroll deduction. I like their federal tax-deferral feature.

Thank you!

Zvi Bodie: The after-inflation rate of return on I bonds is fixed for 30 years. If you buy one between now and May 1, 2008, your rate of return will be 1.2% every single year. This is because the US Treasury guarantees that whenever you wish to cash it in, you will receive the original principal plus the accrued interest. This is not the case with TIPS. The US Treasury pays a fixed coupon rate on TIPS semiannually and pays back the inflation-adjusted principal at maturity. If you want to terminate your TIPS investment before maturity, you have to sell it in the secondary market at whatever price you can get. The year by year rate of return on a TIPS is reported using the market price at the end of each year. It is therefore much more volatile than the rate of return on an I Bond.

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Arlington, Va.: Hi Martha and Zvi,

Thank you so much for doing this very timely chat. I'm 24 and am working in my first job out of college. The pay isn't good, but I'm a disciplined saver and contribute 12 percent to my 401k, have maxed out my Roth for 2007 and have a 6 month emergency fund. I intend to max out my Roth for 2008 as well.

One of my New Year's resolutions is to invest in a taxable account. I've saved $5k to start, but I'm at a loss on where to begin. Between index funds, ETFs, regular stock I get lost in the variables and feel paralyzed by all the choices. I'm especially concerned about where to begin my account so it won't be eaten alive by fees.

Do you all have any tips for the very new investor and good resources on where to begin? I have some time over the holidays to do lots of reading/research.

Thank you so much and Merry Christmas!

Martha M. Hamilton: You're doing a great job. You might want to take a look at I Bonds as an investment for your taxable account. For one thing, you can control when you pay the taxes on them, and they're not taxable at the state and local level. Sunday's column was on this subject (with a big assist from Zvi).

Two Options to Fight off Inflation

Zvi Bodie: The place to begin is with safe investments that are matched to your investment goals. I wrote a book on how to do this simply and with no fees. It is called Worry Free Investing: A Safe Approach to Achieving Your Lifetime Financial Goals. I would be happy to send you some free chapters if you send me your email address.

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Washington, D.C.: Thank you for taking my question. I recently sold my house and profited over low 6 figures. It's all in my savings account. I will need to use $40K for a down payment in 2 months; what should I do with the rest to make it grow? I'm in my early 30's.

Martha M. Hamilton: If you don't already have an IRA,I would suggest opening one, especially a Roth IRA, if you qualify. At least in the short run while you make other investment choices, you may want to look at some of the online money market rates, such as Emigrant Direct and ING. They'll probably pay better than your savings account.

Zvi Bodie: Whatever I think I will need in the short run-- one year or less, I keep in the highest paying CDs I can find. For longer periods I start by buying I Bonds. In my retirement accounts with Fidelity and Vanguard I hold TIPS in mutual funds. In my self-directed Keogh account I hold TIPS directly matched to my time horizon. Right now 90% of my investments are in safe inflation-protected I Bonds and TIPS. The other 10% is in various speculative positions in equities and real estate.

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Washington, D.C.: Given the increasing number of retirees using only defined contribution plans, how should they go about getting retirement income? Immediate Annuities, systematic withdrawals, etc.

Martha M. Hamilton: I think a single premium fixed annuity can be a useful source of retirement income. And the good news is that they are being designed with improved features, finally. There is one that allows you to invest now for payments down the line after retirement. For instance, you might buy at age 60 for a payoff at 85. Because not everyone will collect, the rates are better than for an immediate annuity. Also you can find inflation adjusted annuities now.

Here's a column I wrote on annuities:

Two Options to Fight Off Inflation (Dec. 16, 2007)

also Shopping Tips

Zvi Bodie: Check out www.incomesolutions.com and then click on the videos. You will see my friendly face explaining the ins and outs of inflation-protected payout annuities.

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San Antonio, Tex.: I recently read that the U.S. Treasury is planning on restricting purchases of I Bonds to $5,0000 per year. This would seem to restrict their utility in planning for retirement. Any recommendations?

Martha M. Hamilton: As I understand it, you can buy $5,000 through Treasury Direct and $5,000 in paper bonds, but I'd better defer to Zvi on this answer.

Zvi Bodie: I am not sure about whether the limit will be $5,000 or $10,000 -- if you include both paper and online purchases. In either case, you are certainly right that this new restriction is bad news for those of us who planned to stash away more in this form. But I suspect that for many people $5,000 or $10,000 per year is more than they save outside of their IRA or 401k.

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Martha M. Hamilton: For the reader looking for consumer credit help, try Consumer Credit Counseling in Maryland.

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Princeton, N.J.: With all sorts of banks and brokerages being affected by the sub-prime mess, I am concerned about keeping my investments safe. Most brokerages and banks say that investments are protected up to $100,000. I am lucky enough to have over $1 million in IRA/401-K rollover accounts. Does this mean I must spread the funds among 10+ different institutions? How do I balance administrative sanity with security? Is the FDIC contemplating an increase in the $100,000 limit?

Zvi Bodie: The FDIC will probably increase the limit, but I keep the bulk of my money safe by investing in TIPS and I Bonds.

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Harrisburg, Pa.: Are you familiar with the "random walk" theory of the markets and, if so, what do you think of it? If the future of the markets is uncertain, how should investors handle this uncertainty?

Zvi Bodie: The future of the market is definitely uncertain. Stocks are risky both in the short and the long run. If you want safety, consider TIPS and I Bonds.

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Fairfax, Va.: As a total novice to financial planning and investment but also as a recent widower with about five more years of work who needs to build a trust fund for my disabled adult son I have been trying to pick the best approach to take. An investment counselor often seen on PBS says they can buy into highly diversified investments that are usually only available to large institutional investors and that such investments are better because they cover all asset classes and spread the risk. Those investment companies charge high one time fees (called a wrap?) but do they really provide a safer and higher return than say an investment company that can't get into the same class of investments that the big institutional investors have access to?

Zvi Bodie: Do not pay high fees for access to diversified mutual funds. There is no evidence that paying higher fees contributes to performance. If you have a child with special needs, I would see a trustworthy fee-only financial planner. Visit www.napfa.org to find a planner who does not take commissions from sellers of financial products.

Martha M. Hamilton: Here's a column I wrote about planning for retirement when you have a special needs child:

Special Planning for a Child With Special Needs (May 25, 2007)

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Washington, D.C.: I had planned to start investing in I-Bonds, as a conservative young person looking to be able to put in $30,000 a year and defer taxes for several decades. I could open an account with $30,000 before Jan 1, but given the low fixed rate on the current investment, and especially knowing that future investments would be limited to only $5000 a year, suddenly that no longer seems like an attractive option. What do you think? Chris

Martha M. Hamilton: I'm not an expert on investing, but if it were me, I'd put in $5,000 now and wait to see what the rates are in six month intervals ahead.

Zvi Bodie: If you put the entire $30,000 in now, you can always take it out later if rates go up in the future.

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Bethesda, Md.: Is investing in I-bonds a good idea?

Zvi Bodie: It sure is.

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Friendly MD I-Bonds for joint filers: We file jointly and buy I Bonds. How does this affect us? Can we buy $10,000 worth of bonds?

Thank you

Zvi Bodie: As I understand the rules, each person can buy up to the limit under his or her own name. But if you buy jointly, I think you cannot buy more than $5000.

Martha M. Hamilton: The annual limit is $5,000 per Social Security number.

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Franconia, Va.: Zvi Bodie,

Why, in today's technology and free flowing real-time information age, do we rely on an antiquated private institution like the Federal Reserve Bank to artificially manipulate market rates and control liquidity? This is no longer 1913 (when the FRB was created), this isn't even 1983, we have the internet now. The market potentially could be more efficient than ever if we allowed it to act on its own as opposed to being strong-armed by ordinary men and women acting in who knows who's best interest.

Your thoughts?

Thanks!

Zvi Bodie: Although the Fed sometimes makes the situation worse rather than better, it also can prevent a major collapse of credit markets. On balance, I am happy that the Fed is around now to inject liquidity into the financial system.

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Takoma Park, Md.: Hi Martha,

Love your column.

My wife and I are planning on retiring in about a year and a half and feel pretty comfortable with a diversified portfolio somewhere around half stocks and half bonds. We buy mostly index funds--we're not trying to gamble much for higher returns. Our retirement planner recommended that we keep half our bond holdings (25 percent of our total portfolio) in TIPS. Does that sound like a reasonable percentage?

Thanks very much.

Zvi Bodie: I would put all of your bond holding in TIPS. As you approach retirement, consider converting to inflation-protected payout annuities. Visit www.incomesolutions.com for more information.

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Reston, Va.: In the Washington Post article on Sunday, Zvi Bodie suggests that I Bonds might be a good choice for emergency cash. Since the minimum term of ownership is one year and there's a 3 month interest penalty for cashing the I-bond before 5 years are up, it seems that one would have to set up a ladder of I-bonds by purchasing some every year until one had enough money in I-bonds for emergency needs. According to the Treasury Direct website, as of January 1 2008, purchasers of I Bonds will be limited to $5K per year. Therefore each rung of the ladder would have to be no more than $5K. And if this is so, it might be good to buy some this year (2007) and again next year, and so on. Is that what you would suggest?

washingtonpost.com: Two Options to Fight Off Inflation (Financial Futures, Dec. 16)

Zvi Bodie: Yes that is what I would suggest.

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