Friday, September 19 at 1 p.m. ET
What the Financial Market Meltdown Means for You
Friday, September 19, 2008; 1:00 PM
Every hour seems to bring a new financial crisis to the fore on Wall Street. Certified Financial Planner Barbara A. Warner, president of Warner Financial, Inc. in Bethesda, Md., was online Friday, September 19 at 1 p.m. ET to discuss guidelines for how to handle your personal finances amidst the turmoil.
Warner has been a financial planner for twenty-five years and specializes in investment, estate and retirement planning for high-net worth individuals, families and retirement plans. She served as president and chairman of the National Capital Chapter of the International Association for Financial Planning. She was one of the first financial planners to be admitted to the Washington D.C. Estate Planning Council. She is a lecturer at meetings and seminars on subjects related to financial planning, has been quoted frequently in national print and television media outlets, and was acknowledged in Washingtonian Magazine as one of the top financial planners in the Washington, D.C. area.
The transcript follows.
Barbara A. Warner: Welcome to the chat today -- this is Barbara Warner. I have been guiding people through the process of financial planning for 25 years: through massive tax law changes, various presidential elections, natural disasters, roaring bull markets and stock market catastrophes, the near-disappearance of pension plans in US corporations, and the undeniable global changes from the rise of the emerging markets. We'll try to put some perspective on the upheaval in the financial markets this week. I look forward to your questions.
Durham, N.C.: Hi. I'm a bit confused about the security of my mutual funds and stocks I have with my investment bank (which is not one of the ones going under -- at least yet). What happens to those funds and stocks if the bank goes under (none of the funds contain investments in the bank, and none of the stocks are stock in the bank itself)? Thank you!
Barbara A. Warner: The bank or brokerage firm you use is just serving as a 'custodian' of those stocks and mutual funds, and you can generally pick up those assets and move them to any other bank or brokerage firm that you like. If the bank disappears from the landscape, you still own your shares in those funds and the stocks, and they will travel with you either to the bank's successor or to any other firm that you choose.
Laziness is working for me for once.: Several months ago, a generous relative gave me a large some of money and I never got around to putting into my Roth IRA which is very diversified. I figure now is a good time to invest. Thoughts?
Barbara A. Warner: Everyone seems to understand that this is a good time to buy real estate, because the prices are down. They may not have hit rock bottom, but they're certainly lower than they were a year ago. Same principle applies to the stock market: why wait for the prices to climb back up before you buy? If you don't want to commit a large sum all at once, begin gradually buying on a regular monthly basis, but then stick with that plan. Take emotion out of the process.
Potomac, Md.: Barbara, I've been putting off getting a financial planner for years now, but after the recent market roller coaster, I feel that it's finally time. However, I've done little research into what characteristics and qualifications I should be looking for in a planner. Could you give me some insight this? Thank you.
Barbara A. Warner: Seek out someone who has the Certified Financial Planner designation, to know that your planner has spent the time and energy to be educated about the subject matter. Find someone who has years of experience dealing with other people in circumstances similar to yours. Meet with the planner and understand very clearly how they will be compensated for the advice that they supply, and know what services will be provided to you over the years. Trust is one of the most important elements in your relationship with a financial professional.
Arlington, Va.: Barbara, I recently started a new job that matches the first 5% of my deposits into my 401k. Does that 5% count against the federal limits ($15K, I believe) or do the limits only apply to what is actually taken out of my paycheck?
Barbara A. Warner: Your employer's contribution is over and above the amount that you may contribute. Matching 5% is a great deal -- be sure you contribute as much as you need to get the full employer's match!
Arlington, Va.: Barbara, I guess my question is: where is all of this bail-out money coming from? Are we going to be hit with huge tax increases to fund them?
Barbara A. Warner: I don't think there's much question that we're going to have to pay for this somehow! How 'huge' the tax increases will be and who will have to pay them remains to be seen.
Austin, Texas: How much money should I have in cash? Where should I keep it? Bank or Money Market?
Barbara A. Warner: The conventional wisdom is that you should have 3-6 months of your after-tax living expenses in cash, which we consider to be a liquid savings account or money market fund. If you want FDIC insurance, keep it in the bank. If you want a higher rate of interest, use a money market fund. Given the news today about the 'new' insurance the government plans to supply for about a year on money market funds, we'll have to see how that is implemented.
Alexandria, Va.: Barbara, I have my savings in a small bank in Michigan, where I am from. I've always felt very secure keeping my funds there, but now I find myself wondering if it's false security. In general, what are the safest institutions for keeping savings? Are smaller banks a bad bet? Mine has locations in three states, all in the Midwest. But it's not a national entity like Bank of America or anything like that. Am I being smart or stupid?
Barbara A. Warner: The local and regional banks in this country have fared very well through the crisis this week, and you are probably just fine.
Arlington, Va.: My husband and I are saving for a house. At the moment, we own one condo that is upside down and another one that is not upside down but is also our main residence. Ultimately we want to sell them both and put the proceeds (if there are any) into our down payment for a bigger place. Is the current financial craziness on Wall Street going to translate into crazy high mortgage rate percentages? If so, I fear we may be destined to live in our tiny condo for life.
Barbara A. Warner: There are plenty of predictions and prognostications being made by reputable economists and analysts this week, and the most common sentiment I have heard on the subject of mortgage interest rates is this: in order to get the housing market moving again, interest rates will hopefully be dropping over the next year. The most important thing you can do is to continue saving, which is what you said you are doing.
Rockville, Va.: I currently hold my cash in an online savings account paying 3%. So why does anyone own a short-term T-bill paying 1-1.5%?
Barbara A. Warner: Lots of people are uncomfortable with the idea of 'online' banking institutions and are willing to accept the lesser yield on Treasury bills in order to sleep well at night.
Potomac, Md.: I became a stay-at-home mom a couple years ago and living on one income wasn't really working but we weren't starving. I started selling on eBay and pretty much treated it as a garage sale - sold things around my house I no longer needed. Well the first year or two I didn't make a lot (maybe $250) but I didn't do it consistently either. In the past few months I've been selling every month and have made a considerable sum. When do I have to start reporting this income to the IRS? Meaning, a friend told me if you make less than $800 a year you don't have to report it to the IRS. Anything over $801 you have to report. Is that right? Thanks.
Barbara A. Warner: As a U.S. citizen, you are required to properly report all of your income, and pay income taxes. As a self-employed business person, you may have opportunities to deduct business expenses from your income, in order to calculate the proper amount of income on which you should be paying taxes. Trying to outsmart the IRS is a bad idea. Get help from a good accountant who can help you calculate your income properly, and will give you a schedule for paying your taxes.
Bowie, Md.: I just found I'm getting a raise that would put my income over the limit to make full-size ($5000) Roth contribution for this year, which I've already done. If I increase my 401k withholdings, are those effectively deducted from modified AGI, to keep me below the threshhold?
Barbara A. Warner: The Roth income limits are based on your AGI, so whatever you can do to lower your AGI (like contributing to your 401k) will improve your chances of qualifying to make a Roth contribution.
Anonymous: I have a fair amount of money in mutual funds, but very little in individaul stocks, so I am not too worried about the latest downturns in the stock market, but the actual and possible demise of more banks makes me a bit nervous about bonds held with Citicorp and Wachovia. The bonds don't mature for several years. I wouldn't want to sell when the market is down, and doubt the banks will go belly-up, but, then people with Washington Mutual bonds probably said the same. I feel more confident about bonds I have with Freddie Mac and Fannie Mae since they seem okay -- for now.
Barbara A. Warner: Your question highlights the risk of holding individual stocks or individual bonds: you accept the risk that the company may not remain viable in which case the stockholders (like Lehman stock owners) may lose their total investment, and the bond holders may or may not be repaid in the liquidation. If you keep the bonds, then you accept the risk that you may (or may not) be repaid when the bonds mature.
Potomac, Md.: Hi, I would like to generate income from my investments and feel uncertain about where to put my money to obtain about a 5% return, without little risk to principle and no lock-in rules that come with CDs. Short-term Treasury bonds seem to be doing the best right now. How will these investments be impacted by the ongoing turmoil?
Barbara A. Warner: Short term Treasury bills are paying less than half the 5% return you are seeking! Without some risk to principal, and without some handcuffs on your investment (like a CD), a long-term fixed 5% figure is hard to come by these days.
Fairfax, Va.: This market is terrifying me! Should I start putting all of my 401k contributions into a money market fund instead of investing them in stock funds until the market turmoil settles down?
Barbara A. Warner: If you are investing in your 401k to prepare for retirement, and that retirement is many years off, then this market is giving you the chance to 'buy low', which is precisely how people make money when they buy assets like stocks or real estate. Washington Post editor Steve Levingston recently wrote a column quoting a Morningstar analyst who pointed out how much money investors could have made by investing during recent downturns in the stock market. Don't sit in money market funds in your 401k account.
Bethesda, Md.: Hi Barbara. I switched jobs this year and came away with a $23K pension pay-out that I need to roll over into something else. I am considering going with a fund from Northwest Mutual but I also currently have an account with T.Rowe Price. Is there an advantage to going with one firm over the other? Do they do different things or is it more of a Coke vs. Pepsi choice? I have a Roth IRA with T.Rowe Price presently. I also need to decide what to do with my old 401k. I can either leave it with my old company, roll it over to my 401k with my new company, or invest it in a stand-alone account with T.Rowe Price or Northwest Mutual. Any thoughts appreciated!
Barbara A. Warner: While I can't comment on the particular companies you ask about, your question does highlight two issues: when you are investing with an insurance company, be very clear about whether you are investing in mutual funds or annuities, since they are very different investment products. And it is generally not a good idea to leave money behind in old employer 401k accounts. We see some people retiring (or dying) and they have money buried in half a dozen or more old company plans; trying to track down all the paperwork from all the HR depts is a nightmare. Keep your retirement funds consolidated, either by rolling them from employer to employer, or by rolling them out and building them up in an IRA account.
Bronx, N.Y.: Hi Barbara. This might be a basic Investing 101 question, but I still don't get it: with all the bad news coming from Wall Street and predictions that we have a ways to go before the economy rebounds, why doesn't it make sense to pull all of our money out of stocks and put it into money market funds or savings accounts? Then when the economy rebounds, we invest it again? Just seems like the logical thing to do!
Barbara A. Warner: That would be like selling your house now, though the price is down, and sticking the money in the bank while you wait for the real estate market to 'rebound', and then buying back when the prices go up! Trying to 'time' the markets is tough: you need to get out and the right time and get back in at the right time, and most people can't be right twice.
Ashburn, Va.: Hello, what would you suggest for an investor in his or her late 30s to do who has $100,000-$150,000 parked in CDs, assuming he/she has a stable job, for long term investment? I have been waiting for more than an year (since August) for the right time.
Barbara A. Warner: You need a properly diversified portfolio, which means you've made a deliberate decision about how much to keep in cash and bonds and stocks (preferably in the form of mutual funds or ETFs -- not individual stocks and bonds), and then divided again among different categories of bonds (government or corporate) and different categories of stocks (large, small, international, emerging markets, etc.) Please get help with this process if you are not confident to go it alone.
Rockville, Md.: We are in the midst of a major remodeling at our home and have been caught off guard by how high prices have risen on everything from food to gas to, well, just about everything. Are there any good resources for people who want to get some personal financial guidance but can't afford to spend even more money to get that advice?
Barbara A. Warner: Although I haven't tried to use it, I know some young people who use www.mint.com to try to get some financial guidance and budgeting assistance.
Arlington, Va.: Barbara, this might sound strange, but I am really worried about how all of this financial turmoil is going to affect my father. He's 84 years old, lived through the Depression, was a company man for one of the car companies for 36 years, and retired 20 years ago with lots of money in the bank and in stocks. He follows the markets religiously and I am worried that this recent turn of events is going to weigh on him to the point that it'll affect his health. Any advice for how to talk with an older person about what's happening on Wall Street these days? I don't believe my dad is in any financial trouble, but the fear of being broke/in debt/etc. has lingered with him since he was a child.
Barbara A. Warner: Hopefully your dad doesn't have a greater percentage of his portfolio than he can afford riding on the roller coaster of the stock market. If he will discuss his finances with you, can you show him that he has enough money to take care of his living expenses? Do you have a financial planner who would be happy to talk with you and your dad?
Bethesda, Md. again: Thanks for answering my question about what to do with my pension and 401K from my last employer. Can you tell me what the difference is between a mutual fund and an annuity? Is one a better choice than the other for someone who is mid-thirties and married?
Barbara A. Warner: Can't say that one or the other is necessarily "better" but they are very different products. They have very different tax consequences when you cash them in, they have entirely different internal fee structures, and they sometimes have surrender charges if you change your mind and want to make a different investment. Be sure your investment person is clearly explaining the options and the differences between the products.
Gaithersburg, Md.: I participate in a 401k and my employer matches my contributions up to 3%. Should I contribution a percentage of my income or a dollar amount?
Barbara A. Warner: You should contribute as much as you possibly can, depending on your budget, but if your employer matches 3% you want to be sure to contribute at least 3% or more, to be sure you don't leave any money on the table!
Barbara A. Warner: Thanks very much for your questions today.
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