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August 28, 2008

Retirement, taxes and Roths

You know, a Roth IRA makes tremendous sense for many people saving for retirement. I think the tax break in retirement will be worth much more than a tax break now.

That's because federal income taxes today are lower than what I expect they'll be in the future, as the government confronts the problems of Social Security, Medicare, the deficit and all the other ills. We simply can't face these issues if the government's running on empty.

Here's an Associated Press story out today with some good advice on retirement savings....

AP Business Writer

Making decision about retirement savings can be complicated. Many workers may see recent drops in the value of their employer-sponsored 401(k) programs and question whether they should be making changes.

Following are some answers to common questions about 401(k) programs and saving for retirement.

Q: My employer matches 50 cents for every dollar I contribute up to 6 percent of what I put into my 401(k), but I am putting in 8 percent. Is there a better use for that additional 2 percent such as a Roth IRA?

A: It depends on whether you want an immediate tax break, or a tax break in retirement, said Chad Terry, director of retirement solutions at Principal Financial Group, a provider of retirement and investment services.

Money in your 401(k) plan is contributed before taxes, which helps reduce your taxable income now. It's growing tax-free but you will pay taxes when you take it out in retirement. Money contributed to a Roth IRA is put in after taxes. The earnings on the account and withdrawals in retirement are tax free if you wait until 59½ to take withdrawals, and the money has been in the account for at least five years.

A Roth IRA is generally most appropriate for people who will be paying more taxes in retirement than they are now, which some advisers say is not that unusual. For example, many retirees could end up paying more taxes as they lose their home mortgage deduction when they pay off their home, and they lose the tax benefit of setting aside money in a 401(k). What's more, at 70½ they are required to start taking 401(k) distributions, which are declared as income and, when combined with other income, could push them into a higher tax bracket.

A retirement calculator provided by Financial Industry Regulatory Authority can be found at its Web site at: alc.aspx
FINRA is the largest non-governmental regulator for all securities firms doing business in the United States.

Q: With the recent downturn in the stock market and the resulting dip in my 401(k), I'm telling myself I haven't really lost anything and I should just leave the money where it is to be poised for a rebound. Am I kidding myself or should I consider some reallocation/withdrawal of funds?

A: Your investment strategy should remain consistent based on your risk tolerance, savings goals and length of time to retirement.

``Even though it may be difficult not to react to the market, remember that saving for retirement is a marathon, not a dash,'' Terry said. ``History shows that the pain of a down market doesn't last forever. Losses from market declines are merely paper losses until the asset is actually sold.''

Withdrawal from a 401(k) prior to age 59½ will make the paper investment loss real, and result in a 10 percent penalty on top of the taxes that must be paid.

Yet there are times when it makes sense to capture a capital loss, usually when an investor wants to offset short-term capital gains.

A recent study released by Putnam Investments, a Boston-based money management firm, indicates investing for the long term makes sense because bull markets historically last much longer than bear markets.

The research measures each bull and bear market as a period of at least four consecutive months of continuous gain or decline, as measured by the S&P 500. It found that over the last 60 years, there have been 12 bear markets, lasting an average of 14 months and declining a total of 22.4 percent before recovering.

By contrast, the 12 bull markets since 1948 have lasted an average of 45 months, each growing an average of 123.9 percent.

The study found that a $10,000 investment in the S&P 500 in 1988 would have grown to $72,932 by June 30, 2008, despite the 43 percent downturn of 2000-2002.

``Whether the current bear market has reached a bottom or not is unclear, but one thing we know from this study is that market gains have more than made up for losses for those investors who stayed invested over the long term,'' said Elaine Sullivan, head of retail marketing.

``The market has always recovered but by trying to predict the best time to buy and sell, investors may miss the market's biggest gains.''

Q: What is the appropriate amount of investment risk for someone approaching retirement or beginning retirement?

A: Investment risk differs for people based on their tolerance for volatility, level of savings, health, and income needs. One should review investment risk and asset allocation annually.

A detailed investment strategy review should be done within three to five years of retirement.

Most people want to cut back risk as they near retirement but a strategy that places savings in a guaranteed account may not result in the further growth potential that's needed to sustain the account for the rest of your life.

With increasing life expectancies, some retirees live 30 years beyond retirement. Investment risk should be considered along with other factors including how long you expect to live, the purchasing power of your money in retirement and interest rates need to be considered. There are several asset allocation calculators online that can help you begin to think about mapping out an appropriate investment plan.


POSTED IN: Retirement (9)

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August 27, 2008

Not covered

In Florida, there’s been very little progress in reducing the number of people without health insurance over the last three years. That’s distressing, especially if you look forward. Poverty is increasing among Hispanics. Unemployment is rising. And huge medical bills are one of the main reasons people file for bankruptcy.

Here are some numbers the SunSentinel’s data base researchers John Maines and Dana Williams pulled out of the Census Bureau’s most recent report.

In Florida,

In 2007, the number of people without health insurance was 3,648,000 or 20.2 percent of the state’s population.

In 2006, the number 3,828,000 or 21.2 percent.

In 2005, the number was 3,616,000 or 20.2 percent.

In 2004, the number was 3,382,000 or 19.4 percent.

In 2003, the number was 3,071,000 or 18.2 percent.

In 2002, the number was 2,843,000 or 17.3 percent.

In 2001, the number was 2,856,000 or 17.5 percent.

In 2000, the number was 2,620,000 or 17.3 percent.

Florida’s rank among states, by percent not covered:

2007 3
2006 4
2005 3
2004 3
2003 10
2002 9
2001 7
2000 8

POSTED IN: Economy (42)

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The story behind the story on uninsureds

The Census Bureau report on poverty, incomes and insurance had a surprise: There were more than 1 million fewer uninsured people last year than the year before.

The story behind that is distressing: More than a million new people were added to Medicaid, a health insurance program for the poor that taxpayers pay for.

A real decline?

No. But here’s what declined: The Commonwealth Fund, a private foundation, reported that health insurance coverage through employers shrank. Employer-based health insurance last year covered 59.3 percent of the population, down from 59.7 percent.

The staff of the Joint Economic Committee of Congress figures the ranks of the uninsured have increased by 7.2 million since 2000.

The lack of insurance can easily be a precursor to poverty.

And poverty, when you look closely at it, is a dire thing. The Census says 37.3 million people were living in poverty in 2007. Of those, 13.3 million were children.

The poverty level for a four-person family in 2007 was $21,203.

POSTED IN: Economy (42)

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August 25, 2008

It's not the election....

Did you hear that 15,000 reporters are going to be in Denver to cover the Democratic National Convention?

To cover a story for which we all already know the ending.

In a time when the news media is under such financial constraints.

If you gave me 15,000 reporters, I could get to the bottom of the sub prime mortgage crisis, the housing bust, the credit crunch, the auction-rate securities meltdown, the shadowy world of derivatives ----- every place where light needs to shine in the financial world.

It's not the election, it's the economy that needs some real reporting today.

POSTED IN: Economy (42)

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August 21, 2008

More on IndyMac

The FDIC tells me that 597 Florida homeowners will be included in the first round of offers to modify IndyMac loans. That's about 15 percent of the 4,000 total letters that are due to go out by tomorrow.

If you are an IndyMac borrower -- meaning the failed bank either made your loan or serviced it -- you may be eligible for the loan modification program that the FDIC announced yesterday. You can call 1-800-781-7399 to talk with the bank's customer service staff.

Here's the part some borrowers might not like. IndyMac, which made tens of thousands of loans in Florida, was known for making Alt-A loans, which required little or no verification of a person's income. In other words, liar loans.

To qualify for the FDIC loan modification program, you have to do it the right way this time. You must show proof of income.

POSTED IN: Mortgages (30)

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August 20, 2008

IndyMac borrowers get a do over

Trying to set an example for the mortgage industry, the Federal Deposit Insurance Corporation Wednesday said it would offer new mortgages to thousands of troubled homeowners whose loans came from or were serviced by IndyMac Bank, which failed in July.

In Florida, that means some of IndyMac’s thousands of borrowers could be getting the offers, starting this week. According to National Mortgage News, IndyMac originated 30,223 loans in Florida in 2006, the most recent year for which statistics are available. The loans were valued at $6.3 billion.

IndyMac was a major originator of what are called Alt-A loans, which required little or no documentation of the buyer’s income.

While a greater proportion of sub prime mortgage borrowers are in trouble as the nation’s housing crisis deepens, distress is growing in the Alt-A category. According to First American CoreLogic, a mortgage data firm, 12.79 percent of Alt-A loans nationwide are 60 days or more behind in payments. That compares to 3.4 percent in May, 2007, and 1.38 percent in May, 2006.

The FDIC said it will send modification offers to 4,000 IndyMac borrowers by the end of this week and “thousands” more in following weeks.

“We hope to be a model for other servicers,” FDIC Chairman Sheila Bair said at a press conference.

The new loans would be fixed-rate mortgages, with payments for principal, interest, taxes and insurance equal to no more than 38 percent of the borrower’s gross monthly income.

To make the payments affordable, Bair said the agency would first consider cutting the loan’s interest rate for up to five years. Next, the loan’s length might be extended. A third tactic would be principal forbearance, in which the payment would be calculated only part of the full amount of the principal.

Interest rates on the new loans would be capped permanently at about 6.5 percent.

The new loans, however, would not forgive the debt or any part of it.

“Borrowers should understand that this modification program is for people who want to stay in their homes and to promote long-term home ownership,” she said.

The FDIC took over IndyMac in July, in the second largest bank failure in U.S. history.

At that time, the bank serviced or owned more than $184 billion in home mortgages for an estimated 740,000 borrowers.

For more information on the FDIC’s loan modification program for IndyMac borrowers, call 1-800-781-7399 or visit the FDIC website, or the IndyMac website,

POSTED IN: Mortgages (30)

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More on the auction-rate securities mess

The Secretary of State in Massachusetts today pressured Fidelity Investments to buy back auction-rate securities that it sold to investors. Those investors now can't cash out of what they probably were told were very liquid securities.

Good for Massachusetts. Fidelity should, as they say, join in the solution.

This mess is huge. So far, state and federal regulators have pushed and prodded the big firms to buy back billions, but this doesn't seem to be the end of it.

You can see me on PBS tonight discussing what lessons can be learned from the auction-rate securities market failure. I'll be doing a commentary on The Nightly Business Report, which airs locally on WPBT, Channel 2, starting at 7 p.m.


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August 19, 2008

Students and the credit crunch; They use their credit cards for what?

College classes in South Florida are starting a little later than usual this week, thanks to Tropical Storm Fay. Which gives me time to remind you of a survey last spring of 1,500 students done for the U.S. Public Interest Research Group. They found that one out of four had paid tuition with a credit card.

A credit card? With those rates?

Calling that a “silippery slope” that will accelerate a slide into big debt, Peter Mazareas, vice chair of the College Savings Foundation, noted in an e-mail today that only long-term financial education can counter that bad decision. “Parents and students need to consider a strategic mix of savings and student loans,” he wrote.

I hear, too, that the student loan situation may not be as bad as has been reported. Ed Mierzwinski, consumer program director at U.S. Pirg, highlighted this story in his blog, here.

POSTED IN: Saving for College (1)

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August 18, 2008

Are you falling farther behind?

Here are my "numbers that don't add up" for today:

Average pay increase expected this year: 3.8 percent, according to the compensation experts at Mercer.

Current inflation rate nationwide: 5.6 percent. And the local rate's likely to be higher.

Where does that leave you? Falling farther behind.

But it's not expected that workers will complain, because jobs are harder and harder to find.

In late July, more than 215,000 Floridians were filing for or receiving unemployment compensation. Florida has lost more jobs than any other state in the last 12 months, even the depressed auto industry's home state of Michigan.

Is Florida getting hit harder than the rest of the nation? I can't quite prove it in numbers, but it feels like it. Doesn't it?


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August 15, 2008

If you're in the market for a new laptop

Laptop computer prices have come down and down.

Richard Shim, research manager at IDC, a San Mateo, Calif., firm that gathers market intelligence on the consumer technology market, says the decline has been at an average rate of $200 over the last four years. I can't think of any other consumer good that's knocked so much off its price.

But those fast falling days may be coming to an end. His prediction: Look for price cuts of half as much in the near future. The reason is that the raw materials in laptops such as nickel, cobalt and resin, have risen dramatically.

Computer-makers won’t be able to absorb the cost increases much longer.
The thing is, he’s not predicting laptop prices will go up. Just stop going down as rapidly.


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August 14, 2008

Hello, Inflation.

The Consumer Price Index shot up at an annual rate of 5.6 percent in July --- and the newswires are buzzing about how that’s the highest rate in 17 years.

But it is what is inside the index that’s really high.

On an annual basis, year over year, today’s report from the Bureau of Labor Statistics says cereal and bakery products have increased in price by 12 percent. Fruits and vegetables, up 10 percent. A category called fats and oils, up almost 16 percent.

Gas, the kind you use in your home, and electricity, are up almost 15 percent.

Thank goodness Floridians don’t need to heat our homes with fuel oil, which is up 61 percent.

And the big kahuna, gasoline, up almost 38 percent since last year.

The upside? Not sure what it is, but if it makes you feel better, let’s consider what gasoline-like price surges would mean in the rest of our daily lives.

If haircuts had gone up as much as gas, a $20 haircut last year would be a $27.60 haircut this year.
A $50 pair of shoes would be a $69 pair of shoes.

A $75 dinner at a restaurant would be a $103.50 dinner.

At least we don’t have those kind of price spikes across the board, yet.

Or, do we? Where have you seen inflation hit hard? Which prices?

POSTED IN: Economy (42)

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August 13, 2008

You may be able to get your money back

It looks like investors who bought auction-rate securities before that market froze in February are no longer flat out of luck.

A multitude of settlements, spearheaded by state regulators, plus some individual company decisions have resulted in plans to buy back almost $37 billion of these securities.

Florida's regulators were crowing over the good news Tuesday, while brokers were telling the trade publication Investment News that they were relieved.

Auction-rate securities were long-term securities whose rates are reset at regular auctions, sometimes weekly. As the credit-crunch that began last summer spread, buyers didn't show up for the auctions anymore. Investors who thought they had purchased something like a money-market fund found themselves unable to cash out.

But it's not entirely over.

Although Citigroup, Merrill and UBS have said they'll buy the securities back for individual investor accounts, the probes continue. This week, St. Petersburg-based Raymond James Financial said it is under investigation by the SEC and the New York attorney general over $1.3 billion in auction rate securities that its brokers had sold.

I can't tell you exactly how to apply for part of the settlement money. That procedure has not been laid out yet.

For more information, look here:


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August 6, 2008

First-time Homebuyers, We need you. News about a tax break

Here’s a thought:
Maybe first-time homebuyers can rev up the housing market.

After all, the housing bill that President George W. Bush signed July 30 gives them a nice $7,500 refundable tax credit against the purchase of their home. They have to use the credit right away, because this provision expires next July 1.

They’re an important group, by the way. The Florida Association of Realtors said than in 2007, first-time homebuyers accounted for 38 percent of all sales. Young people ages 25 to 34, presumably the group that includes the most first-time homebuyers, snapped up almost half the homes sold in Florida last year.

What does a young person need? A job, some savings and now, we’re going to hand out a little cash to help with the purchase.

Ara Hovnanian, the CEO of builder Hovnanian Enterprises, said on CNBC this morning that a much smaller tax break for first-time homebuyers in the 1970s “really worked.”

For more on the housing bill, look in the paper on Sunday. In my column, I’ll discuss the help it offers struggling homeowners to refinance their loans.

POSTED IN: Mortgages (30)

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August 5, 2008

Foreclosures and the spin

“Foreclosure Prevention Rises 136 percent in Florida”

So said the press release.

But read on and you’ll find that it’s just so little help for so many people in trouble.

Lenders say they are willing to work with troubled homeowners, but are they?

The release from Genworth Financial says that in the second quarter 276 Florida borrowers completed loan workouts – a catchall word for deals in which terms of a troubled loan are changed so that the borrower can afford to repay it.

Great. It’s not a big number, but it’s something.

In June, almost 5,000 homes in Broward and Palm Beach were in some stage of foreclosure.

The 276 Florida buyers who Genworth Financial helped may have been the lucky ones.

Or may not.

The release says one in four in Florida who did get a workout lost their home anyway.

POSTED IN: Mortgages (30)

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August 4, 2008

It's a cycle

A lot of you don’t give a fig about whether we’re in a recession or not. You’ve told me, in response to my Saturday story in which another economist said Florida is in one.

You may not realize it, but I really don’t care either.

I don’t care what we call it. We all have a very personal experience with this economic downturn. It’s real. It’s troubling. It’s going to last for a while. And the only question is how we’ll be when we get to the other side of it.

Because these things end. Average recession length is 10 months. Last two have been only eight months. And we’ve already been in this downturn for a while.

One thing I remember from one recession in the past was that stock markets usually turn up six to nine months before the recession ends. It’s worked that way in the past. I hope it works that way this time.

So I’m looking for that.

We’ll still have gloomy economic stories and headlines. I’ll probably write my share of grim news. But it’s a cycle. And it will end.

POSTED IN: Economy (42)

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About the author
You've got the job of managing your money. No one in school taught you how. But you and I, we can teach each other, how to handle it, how to save for retirement, how to make money last, how to educate the kids, how to make a budget work. The conversations I have with my readers are fun. Money's important, but discussing it does not have to be boring.

Harriet Johnson Brackey Harriet Johnson Brackey, the personal finance columnist for the Sun Sentinel, is an award-winning business reporter. Her columns for 2008 were named "The Best in the Business," a national award chosen by her colleagues at the Society of American Business Editors and Writers.

Brackey has worked at Business Week magazine and at USA TODAY, where she was a founder and part of the original staff of the Money section at the country's first national newspaper. After nearly 11 years there - spent covering the 1980s bull market, the insider trading scandals, the 1987 crash - Brackey left Washington, D.C., and came to The Miami Herald. She spent the next decade writing a column about personal finance that chronicled the stock market's Internet boom and bust, as well as the popular Money Makeover features.

Brackey also has done commentaries for Marketplace Money, which airs on National Public Radio and The Nightly Business Report which is broadcast on more than 250 PBS television stations nationwide. She also has been a radio guest on WLRN’s Miami Herald News.
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