Archive for Oct, 2012
Question: I lost my job several months ago, and have exhausted my savings. However, I have some money in a 401(k) Plan from an old employer. I need to get to some of it to pay my rent, but I don’t want to pay tax on the entire amount in the Plan. What is the best way for me to get to a portion of it? I am under the age of 59 1/2 and would be faced with the 10% withdrawal penalty in addition to income tax.
Answer: The first thing you should do is to make sure that you are living on a minimalist budget, so that you take out only the small amount that you really need. Next, contact your investment professional and ask him/her to open an IRA account for you, and to execute a trustee-to-trustee transfer of your funds into the new IRA. Tell the investment person you need to have some money sent to you right away after the funds clear and are deposited into your IRA. Doing it this way will ensure that their is no automatic tax withholding to your 401(k) Plan, as there would be if you asked your Plan’s provider to just send your money to you in check form. Also, this way gives you control of when to take money out, and how much to take–just based on your needs. Also, as the year end approaches, this gives you a way to spread the tax due over a couple of tax years.
Question: How should I invest the money?
Answer: If you are having financial difficulty and are not sure if you will need more of the money, then you don’t want to invest the money for the long-term nor pay any sales charges to invest or contingent deferred sales charges (CDSC) to pull the money out. Short term investments such as savings accounts or FDIC-money market accounts are suitable because the principal is guaranteed by the FDIC not to lose any value. Avoid annuities or mutual funds until your situation is more stable, you have adequate savings, and you can resume planning for the future.
Question: Is there any way around paying the 10% pre-age 591/2 penalty?
Answer: Some expenses of your family may be deemed to be immediate and heavy, including certain medical expenses, costs relating to the purchase of a principal residence, tuition and related educational fees and expenses, payments necessary to prevent eviction from or foreclosure on a principal residence, burial or funeral expenses, and certain expenses for the repair of damage to your principal residence. For more information, go to IRS.gov.
Question: What are some other issues to be aware of?
Answer: There are too many to cover in this article; however, be sure to ask your financial professional about all of the issues that pertain to you, including the tax issues. Be sure to plan for the extra tax that you will owe on the IRA or 401(k) distribution. If you need the money very quickly, you might ask the current 401(k) Plan to send you some money now, but to execute the trustee-to-trustee rollover on the balance.
You probably hear about GDP on the evening business news all the time, but do you wonder what it means and what it indicates about our current economy?
GDP stands for gross domestic product, and represents the output of goods and services produced by labor and property in the United States, and is used as an indicator if our economy is shrinking or expanding. GDP tracks the size of our economy by calculating the total dollar value of all goods and services produced over a specific time period in comparison to the previous quarter.
What has GDP been historically?
Since the recession officially ended June 2009 our economy has been expanding, but at different rates. GDP growth was at 4.1% about 9 months ago, this year it slumped to 2% in the first quarter, and 1.3% for the second quarter. The Bureau of Economic Analysis early estimate is that for the 3rd quarter of 2012 that it increased at an annual rate of 2.0 percent.
Do you think we are headed for a double-dip recession in 2013? Technically a recession occurs when business cycles retract, evidenced by down consecutive quarters of GDP, or a 12 month 1.5% or more rise in unemployment. The most recent recession officially started December 2007 and ended June of 2009. I blogged about this topic about a month ago, but in light of the coming election and some new financial statistics I wanted to cover it again.
This past week it has been reported that home sales continue to increase, that is a good sign. However, America’s largest companies are getting ready to report lower quarterly sales, is very concerning. Manufacturing output is a good indication of how industry is doing, and was modestly increasing this past winter, leading to some guarded optimism, but for almost the last 6 months it has decreased to Spring 2009 levels. So this new estimate is really bad news. Gross Domestic Product (GDP) tracks the size of our economy by calculating the total dollar value of all goods and services produced over a specific time period in comparison to the previous quarter. GDP growth was at 4.1% about 9 months ago, this year slumping to 2% in the first quarter, and 1.3% for the second quarter. A couple of good indications: US Consumer Spending is currently at 84.00 compared to 64.00 a year ago, a 31.25% increase. For 2012 we have seen a general increase, peaking at 96 in March, then it was erratic with a sharp drop in July, since then we have seen a gradual increase. Economists watch consumers spending trends to try to track their confidence in the economy. The more confidence consumers have, the more willing they are to spend money. US Household Debt Service as a percentage people’s disposable income is at 10.69% (June) and has been steadily decreasing from its 10 year high of about 14% in the 3rd quarter of 2008.
It seems as if American consumers are borrowing less and saving more, however the Federal Government doesn’t seem to be catching on to reality yet: the Federal Deficit which for 2013 is projected by the Congressional Budget Office to be $1.1 trillion for 2013, this will make 5 years in a row it has exceeded $1 trillion, and this doesn’t include all the money our Federal government borrows, adding to the US National debt exceeding $16 trillion. The outcome of the presidential election is being closely watched since both candidates have different approaches to solving these recession pulling financial issues.
From last Friday’s article about unemployment, these mixed numbers don’t bode well for the economy either:
- Positive: Unemployment DECREASED in September to 7.8% from 8.1% in August: Is this a good indication of improvement? Any indication of positive change is good, and this is lowest rate since January 2009. However, this ‘Official Unemployment’ rate only tracks those who are without jobs and have actively sought work within the past 4 weeks. Since this statistic does not track all people who are not working, some websites report that the ‘Real Unemployment’ rate is about 15% when all able-bodied people of working age are considered. For a historical perspective: The unemployment rate during the Great Recession peaked at 10.10% in October 2010. In 2012 it has varied in the range of 8.10% – 8.30%, so we are not seeing a lot of change this year. It could be worse when you consider that during the Great Depression it peaked at about 25% in 1933.
- Positive: Monthly change in non-farm payrolls INCREASED: 114,000 jobs were added in September, compared to 96,000 new jobs in August, and 141,000 in July.
- Negative: Initial Jobless Claims for Unemployment Insurance INCREASED: 365,500 4 week rolling average from 364,750. Looking back 12 weeks, the average was 366,250; 6 weeks ago it was 375,750. This number is much better than it was in 2009 when it peaked at over 650,000. In 2010 we saw a decrease from nearly 500,000 early in the year to the low 400,000′s. In 2011 the claims were in the low to mid 400,000′s, but since October of 2011 they have been below 400,000. The lowest we have seen this rate in 10 years is 282,000 in January of 2006, and the earlier part of the last decade we saw the average similar to what we are seeing now. During the Great Depression from 1929 – 1941 there was not the same level of unemployment insurance that we have today, although unions may have had some. It wasn’t until the Social Security act encouraged it in 1935. Today we have the Federal Unemployment Tax Act (FUTA) tax to fund state agencies.
In conclusion, I remain optimistic about our overall economy in the long run, based on what I read and hear, yet in the short-term, we may have some economic setbacks. What do you think?- please give us your feedback by commenting below.
When you buy a car, what is most important to you: purchase price, cost of ownership (regular maintenance, repairs, insurance, MPG, depreciation), utility, performance (how fast and how well it handles), safety, image or the green factor? Maybe you consider them all, but some prioritize the list differently. Strangely, many people do little research and wander into a dealership and are talked into a car by a salesperson.
For those people very concerned about cost of ownership, miles per gallon makes up most of the annual costs. Kiplinger recently published its list of the most fuel efficient cars for 2012. Fuel efficiency is very important for many people’s budget’s since gasoline can cost them several thousand dollars per year, so this article is worth checking out. However, in my opinion Kiplinger’s list isn’t all that helpful, since it just rates them by class, but it serves as a useful reminder when making considerations in different car categories.
Kiplinger’s highest MPG rated cars for:
- Cars under $20,000 the Scion IQ: 36 city, highway 37. This is a tiny car, and there are other ones bigger and close to the same MPG rating
- Cars $25,000 – $20,000 the Toyota Prius 2. city 51, highway 48
- Cars $25,000 – $30,000 the Mitsubishi iMEV ES, city 126, highway 99 all electric limited range
- Cars $30,000 – $40,000 the Nissan Leaf, city 106, highway 92, all electric limited range
- Cars $40,000 – $50,000 Audi 2.0T Premium, city 25, highway 33
- Cars $50,000 and up Infinity M35h, city 27, highway 32
- Sport cars $50,000 BMW Z4 sDrive28i, city 22, highway 34
- Small cross overs, $31,000 Ford Escape Hybrid, city 34, highway 31
- Midsize and large Crossovers, $46,000 Lexus RX 450h, city 28, highway 32
- Truck Based SUVs, Cadillac Escalade, Hybrid (TE), $75,000, city 20, highway 23,
- They rated the Chevrolet Tahoe Hybrid and the GMC Yukon the same as the Escalade, since they are are similar to it but they cost $20,000+ less
- Mini Vans, Honda Odyssey LX, $29,000, city 18, highway 27
- Wagons, Toyota Prius V Two, $27,000, city 44, highway 40
When I have purchased new cars I rely on comparisons published by various automobile magazines, like Road & Track and Motor-Trend. These two regularly compare models and you can see side-by-side price, utility (e.g., trunk size), performance, image and green factors. My local library has back issues, and I can easily find the comparisons by first a quick Internet search.
What do you do if you want to compare safety beyond braking ability, anti-lock brakes and number of airbags. Then you have to go the Insurance Institute for Highway Safety or IIHS. You can also look at cars reviewed by U.S. Department of Transportation at SaferCar.org. Some rely on acceleration for accident avoidance, and some magazines publish lane change and cornering ability- good to check out for clues about how easy it might rollover or loose control when you have to react quickly.
What about the other factors of cost of ownership besides miles per gallon, and regular maintenance costs? Consumer Reports magazine is the only place I know to check those costs out, for that you will need to subscribe to their magazine, or online, and get online access to their records, but it might be worth the cost. Also, be sure to call your insurance agent to get an estimate for the car you are considering.
Those are the logical reasons, however humans are not very logical Spock like creatures. We are very emotional and image driven, so a lot of people are attracted by the brand image that shows they are frugal, well-off or classy. Many men buy a car for the sporty image, or tough look of masculinity. Sometimes we bi-pass looking at these things, and we buy a particular brand we like, one that we feel offers the things we want, or a brand that has been good to us in the past- brand loyalty has always been important to car manufacturers. Avoid emotional decisions, as they can be costly sometimes. I’ve written about used cars to avoid in prior articles. To get the best deal, do your research first.
What do you think are the most important things to consider when purchasing a car, motorcycle, truck or SUV?
Most financial articles are self-help so I thought it might be good idea to discuss how to help others. I suspect most people can’t fix their own finances without some kind of help from someone else. Yes, ultimately it is still up to each individual person to apply financial wisdom, but they need your help.
- Encouragement is one of the best gifts you can give to someone. Encourage means to give courage. Tackling financial problems isn’t easy, and people feel defeated. You can help them by telling them they are smart, intelligent and creative people- because they are, everyone is, in their unique way. You can encourage them by telling them how you struggled or avoided it, and how you clawed your way out. Tell them they can do it, and to keep trying. Few people totally succeed with their first few efforts and encouragement really helps.
- Financial study is key. Tell them how particular authors, blogs, or financial personalities helped you. Great writers and speakers like Mary Hunt and Dave Ramsey too where nearly, or were bankrupt, and they learned from others how to dig their way out. Point people you know towards these writers.
- Taking classes is essential too. We lead two Financial Peace University (FPU) classes each year, because they work. They work because Dave Ramsey’s video lessons teach everything people need to learn to get their house in order. In addition, they have small group breakout discussions so that people can get extra help and accountability. Go to www.daveramsey.com to search by zip code for classes nearby- they are offered all over town, and start soon. If someone lives hundreds of miles away from civilization, they can pay a little more and get the do-it-at-home course.
- Sponsor someone to take the class, but don’t pay the entire amount. Most people need to have some skin, or investment in the game. If people don’t invest a few dollars into it, then they will not be committed to the class. Some people don’t like help, but come up with a creative way to pay some of the cost (usually around $100), or babysit their kids while they are in class.
- Help them budget. If you know someone who is having a tough time, tell them you will sit down with them and show them how to manage their income and expenses so that there is money left over at the end of the month. Research says 70% of people live paycheck-to-paycheck, but most people don’t know how manage their monthly finances or balance their checkbook. Use simple paper and pencil forms, or great software like www.ynab.com, on their PC or mobile device.
- Lead a FPU class, if you have already taken the class. Leading FPU is easy, they provide all of the ‘how-to’s’. Lead a class in your neighborhood, apartment complex, church, work lunch break, or local community center.
- Be a good example, by being wise with savings and investments, and spending. Have a good attitude and tell people who helped you. You can have a lot of nice things, but don’t flaunt your wealth. People around me have been lifelong examples for me of managing money wisely.
- Be generous. Give to organizations helping others with their finances, jobs and other essential lifestyles skills. Help others with basic needs if they are going without food, or utilities. However try to offer it with humility, along with offers to help them budget and take financial classes if appropriate. If people are making bad decisions, and you don’t provide wisdom along with cash, at least at times you might be hurting them more than helping them.
- If you are in the position to start a business, consider doing so. Nothing helps people financially more than a good job with benefits.
- If you are a leader in business, get behind offering financial education classes to your employees. Several studies have shown that they help people with their finances, and help them be better employees.
- Lastly, teach your children how to manage finances at home, and lead financial classes for youth at church. Some financial institutions have sponsored financial classes in schools.
Helping others will be good for them and you. It is satisfying, and character building to do the hard work to help others carry their burdens.
Interesting articles worth checking out: Homeowners qualifying for new mortgage after short sale. Auto purchasing and the various fine print costly add-ons. Estate planning: Naming a trustee for your trust, and living wills. Roth IRA escape hatch, for those that already converted, but now regret it.
- Buyers are Back After Foreclosure. They didn’t have to rent forever.
- How Much is that Auto in the Window. Surprise, the dealer is adding on a lot of fees!
- A Matter of Trust: Naming a Trustee. Tricky issues are discussed when choosing a trustee.
- Roth IRA Escape Hatch, for those that already converted, but now regret it.
- A New Look at Living Wills, no one wants to talk about death, but dealing with pulling the plug has many issues to deal with.
A new study shows that prior to the current economic crisis, it was the highly educated people that were more inclined to have unmanageable levels of debt. The percentage of Americans with more than 40% of their income going to debt payments increased from under 15% in 1991 to 27% in 2008.
You would think college-educated people would be less likely than those without a college degree to make this mistake, but the study showed more of them exceeded 40 percent. The study provided some clue as to why this happened–optimism. College educated people with large amounts of debt were more optimistic about future economic conditions. Did they think they were immune to economic problems because they had advanced degrees, so they had less fear when they borrowed? That is the conclusion Sherman Hanna, co-author of the research and professor of consumer sciences at The Ohio State University, reached.
It wasn’t that those with advanced degrees didn’t understand debt as well as those with less education, but perhaps they thought economic conditions would always get better for them.
What caused the economic crisis? There is no one group to blame, but you could probably categorize them two ways: institutions and people. Institutions are guilty, especially those in the sub-prime industry (including the lenders), mortgage security issuers (investment bankers), and rating agencies. Some people place blame on the government’s excessive borrowing, and for not watching the institutions closely enough. At the end of chain are the consumers. We were borrowing too much and not saving enough. Can we blame one group of people more than the others? Some have opined that it was the lower-income and less-educated people that borrowed for mortgages too much.
However, the study found that the debt crisis wasn’t caused by homeowners who took out mortgages, since 35% of renters had heavy debt compared to the debt that 21% of the homeowners had in 2007. They concluded that we can’t blame the uneducated, the homeowners, or the educated.
How can I use the information, I ask myself. It provides more information when recession conversations come up. More personally, it forces me to examine my own thoughts about my financial plan. What do you think–comment below, or tweet or Facebook others if you found this interesting.
60 Minutes ran a piece last Sunday night about a near monopoly on a eye glass company. The story highlighted the largest company in the industry Luxottica, they severely inflate the cost we pay for eye-wear for corporate profits. Eye glasses and frames only cost the manufacturer about $30 but our end cost can easily hit $300 – $500 from their companies (below).
I’m all for profit making capitalism, but when a company controls the market like Luxottica, I get pretty angry, especially when I see so many families scratching to get buy in this global economic crisis.
Consider Luxottica owns:
- Pearl Vision
- Sunglass Hut International
- Sears Optical
- Target Optical
- JC Penny Optical
- 10 other retail establishments, AND
- EyeMed Vision Care insurance
This past summer I got new prescription sunglasses and lenses for my regular glasses from Pearl vision. My wife’s employer has EyeMed, and they pay a premium for the coverage. EyeMed paid for part of the lenses, and we had to pay the balance. It seems pretty crazy to me that the same company that controls the insurance also sells the glasses, at exorbitant rates.
A year ago, I got a great deal with Pearl, they were running a frame, lens and coating special. When I went there this year the prices were double. I should have gone to Walmart, Costco, or a store front discount chain like I have done in the past, and I would have paid much less, even considering the insurance. There are many Internet companies that sell great frames and lenses for a great deal too.
Luxottica also owns Ray-Ban and Oakley. They purchased Oakley after their stock price plummeted. And oh yea, their price plummeted because Oakley didn’t sign a contract with Luxottica that would have paid them a large percentage of their profits, so Luxottica didn’t any longer carry their frames in their stores- they do now.
Also, the Ray-Ban frames that I have are only 1 1/2 years old and a screw fell out. I went back to Pearl to get a screw popped in. They didn’t have any of the special very tiny screws. They referred me to an eyeglass repair firm. This independent company couldn’t acquire the special screw because they were not an authorized Ray-Ban dealer. I had them repaired with new temples for $50.
It is time to break up this monopoly, in the meantime I will think twice about what and where I buy.
Over the last 4 years we have seem an epidemic of people that have been late on their monthly debt repayments. Many of these borrowers have never been late on payments before, however during the recession people often have to deal with multiple problems. It used to be common that someone just had to work through unemployment, and get hired within a short period of time. Now unemployment usually lasts longer, savings runs out sooner, and money invested in stocks dropped in value, like it did when it plunged more than 40% in March 2009. Unemployed people are especially vulnerable to financial setbacks, since often they can’t obtain or afford health insurance, face inflating prices on gas and food, and many stressed out couples go through money stripping divorces.
The debt collection industry, either organized with massive call centers or as law firms, often buy the outstanding debt from the original lender. The lender’s collection department, or the collection companies have to follow strict guidelines and regulations outlined by the Federal Trade Commission, but they often break the law in their efforts to collect.
The Columbus (OH) Dispatch ran an article last May investigating the problems with the credit rating agencies, and this month is extending their Credit Scars series about collections firms. The Dispatch is running what I have found to be one of the best series of articles on this subject in the entire country:
- Credit Scars: A Dispatch Investigation
- Debt collection a top consumer complaint
- Primer on debt collections
- Debt deception
- Take fast action if a debt collector comes calling
- First Credit Scars article brings action