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November 25, 2008

Q & A: Should I buy a house?

My husband and I are living in a small townhouse and we’re debating whether we should buy a house. Together, we earn six figures. From the sale of my previous house, I have saved $100,000 that I want to use for a down payment. But my husband is afraid. He does not want to commit to a larger mortgage right now because he is concerned about the overall economy and the possibility that one of us could lose our income if we got laid off. My feeling is that our financial position is strong. My car is paid off and I have no credit card debt and neither does my husband. He’s supporting one child in college. My only bill is a $7,000 student loan. What should we do? I feel this new home would be an incredible investment.
-Janet Baker

Here are two ideas that may surprise you: You’re assuming you know something that no one can know. And, price is just one part of picking a home.

Let me explain:

You can’t pick the rock-bottom of the housing market or the stock market or anything else. You won’t know until the bottom has been hit and prices begin to bounce up. A house becomes “an incredible investment:” only if you bought low.

But first, lets' get specific.You plan is to take on double the mortgage debt that you have now. You need far more information than just the home price before you decide to act on that plan.

“The smart answer is that there’s a lot of work involved,” said Certified Financial Planner Steve Pomeranz of Pomeranz Financial Management in Boca Raton. . “Fortunately, you can calculate this type of answer.”

Figure out not just the price and the potential mortgage payment, but realize that your property tax bill will go up along with your homeowners insurance premium. Do a “worst case” scenario to see what you could afford if you or your husband lost a job.

Next let’s talk about your cash situation. You have enough to make a substantial down payment. But my concern is, that’s all you have. If you bought this house and a pipe inside broke, it doesn’t sound like you have anything else to handle emergencies. If you buy double the house you have now, the problems that arise will be more expensive than you may expect. “The big issue is what is your overhead going to be relative to your income,” Pomeranz said. “Are you going to be house poor?”

And finally, you have to make this decision based on peace in your home with your husband, which is just as important as the well-established idea that owning a house is a great way to build wealth. At least, that's how it works under normal circumstances.The housing market has been anything but normal for the last couple of years.

There’s no reason to think it will stay this way forever. Just choose carefully, budget very specifically and you’ll come out okay.


Send your personal finance questions to helpline@SunSentinel.com.

POSTED IN: Your Money (256)

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November 20, 2008

No, this is not the next Great Depression

Today’s Economic Crisis is. . .

Like the Great Depression

-The crisis hit Florida before the rest of the nation
(It started here with the 1920s land bust)
-Everyone is invested. Today through our 401(k)s. Back then, through tips and gossip when stock trading was essentially unregulated.
-We suddenly realized there was a whole financial sector that was unregulated (Back then it was Wall Street, today it is credit default swaps and mortgage-backed securities) and that the people running these crazy investments are threatened our stability.
--The Depression was a time of great creativity in literature, photography, music, film and in creating regulations to deal with Wall Street. I predict a lot of creativity is going to be required soon in Washington. I predict Congress and the Obama administration will set off on the greatest explosion of financial regulation since the 1930s.


Not Like the Great Depression
-We have regulation of banks and Wall Street
(The Securities and Exchange Commission was created during the Depression, as were the rules that Investment Advisors, brokers and brokerages must follow, plus all the regulations on what companies have to disclose, plus insurance for brokerage accounts.)
-We have the Federal Deposit Insurance Corp.
(Which went into business Jan. 1, 1934. Since then, not one dime of FDIC-insured deposits has ever been lost.)
-We have a tuned-in Federal Reserve and executive branch
(In the Depression, they raised interest rates instead of cutting them and that made it worse. President Hoover refused to admit the importance of Wall Street’s crash, which pretty much paved the way for a financial disaster to affect the entire economy.)
-We magnify all the issues through the lens of the Internet and the 24-hour news cycle, which can affect public moods but also create demands for solutions that are so big they can’t be resisted. In the Depression, the people were beaten down. And they didn’t have the Internet to use as their loudspeaker.

By the Numbers

Then
9,000 banks failed
26 percent unemployment
Stocks lost 90 percent of their value

Now
22 banks failed this year
6+ percent unemployment
Stocks are down about 40 percent
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November 18, 2008

Q&A: Is your annuity safe?

Send your question – or your strategies for coping with a financial crisis – to Helpline@SunSentinel.com.


I have my money in a fixed annuity with New York Life. I called the company and they say it is safe, but I’m worried. Should I be?
Bob Bergman, Tamarac.

I retired more than 20 years ago. I have five fixed annuities from Allianz. From what I was told, if the market was bad I probably will not make money, but would not lose my initial capital. I hope they are fairly safe.
-Morton Schwartz


Before considering whether annuities are a “safe” investments, it’s important to understand a little bit about them. An annuity is a contract you buy from an insurance company that promises to make payments to you either immediately or at some time in the future. Usually, people buy them to save for retirement or just as they retire, to ensure that they have regular income.

When you buy an annuity, the financial strength of your insurance company is important. Equally important is the strength of state insurance regulation. Regulatory agencies monitor insurers’ financial health and they will act if a company’s position deteriorates. They step in, demanding the companies shore up their financial position.

If regulation and monitoring don't keep the company strong, there’s a backstop.

In Florida and in all the states, there is a guaranty association. Any insurer who does business in the state must be part of it. If one insurance company fails, the others must pick up the coverage and continue it, up to certain limits.

This does not happen often, but it does happen. You can protect yourself if you know how this works.

First, let’s deal with life insurance and the guaranty association. If your policy is not an annuity but is pure life insurance, then the death benefit is protected up to a $300,000 limit per insured life in Florida. The cash value of life insurance is protected up to $100,000. Those are the Florida guaranty limits for policies issued by companies regulated by the state of Florida and for those policyholders who were Florida residents at the time the insurance company is declared to be insolvent or liquidated.

The limits are per person and per company.

Now, to the question of annuities.

If it is a fixed annuity, the Florida limit is up to $100,000 in cash value for a deferred annuity that is not currently making payments to the policy holder. If the policy is making payments, then up to $300,000 is covered.

If it is a variable annuity, the same limits apply, but you may not be covered for losses caused by a decline in the value of your investments.

The rules depend upon whether your insurance company guarantees your principal. If it does, then the guaranty association covers it. If the principal is not guaranteed, then that would not be covered by the guaranty association, according to William Falck, executive director and general counsel of the Florida Life & Health Insurance Guaranty Association.

If you have an equity indexed annuity, a portion of your interest might also be guaranteed and therefore both principal and that part of the interest would be backed by the guaranty association.

"A good way to remember it is if it's guaranteed by the company, it's likely guaranteed by us," Falck said.

Because the $100,000/$300,000 limits on annuities are also per life and per company, that means, if you had a $100,000 annuity at one company and $100,000 at another, you’d be covered for both policies.

If an insurer gets into serious trouble, the guaranty association liquidates the assets of defunct insurance companies over the years, to get its money back.

State law governs who gets any funds that are recovered. Policyholders have first priority.

And the guaranty funds have in the past reimbursed some policyholders above the guarantee limits, but you shouldn’t count on that happening again.

These can be large, long-winded efforts, too. A huge insurer, Executive Life, became insolvent in 1991 and Falck said the Florida guarantee association expects to be handling payments to policyholders through 2060.

There are two main lessons in all this:

Know that some variable annuities can put you at risk.

And, the best way to stay safe is to stay below the limits.

If you need more insurance than that, buy more than one policy, from different companies, to avoid getting entangled in an insurer’s troubles.

For more information, take a look at www.nolhga.com.

POSTED IN: Your Money (256)

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November 11, 2008

You should know


Way too much worry is making the rounds -- in the wake of Florida's adoption of a gay-marriage ban -- about whether unmarried people, gay or straight, can make health care decisions for each other.

They can. It’s governed by Florida law, says William Bell, general counsel for the Florida Hospital Association. The law says a person can appoint another person to be a health care surrogate. It doesn’t say that person has to be one’s spouse.

If the patient hasn’t executed one of those, then the law spells out who can be assumed to be a person’s health care surrogate. That lists includes spouses, but it also includes “a good friend.”

You don’t have to be married to do this.

Bell noted there’s also no provision in federal law that bans non-spouses from visiting each other in the hospital. “Unless the patient says I do not want certain individuals to visit me, the hospital visitation policies would apply,” he said.

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November 6, 2008

Q&A: When should I stop saving for retirement?

Here's my newest Q&A. Send your questions to helpline@SunSentinel.com


Question: I’m 68 years young. Should I still have savings for retirement deducted from my paycheck, even though in three years, I’ll be taking those required distributions from my 401(k) account? Lynn Sklar, Plantation

Answer: The craziness on Wall Street may have you spooked. You're probably thinking, why put money in there, when it seems to evaporate daily?

But the thing is, investing your money somewhere is the way to make it grow. With your lovely upbeat attitude, you are probably going to have a nice, long retirement someday. I’d suggest you keep saving.

You can’t control the market, but you can control how much you fatten up that account with contributions.

And here’s some really great news for you: If you are still working at age 70 and a half – and you told me that’s your plan – you can put off taking the required minimum distribution until April 1 of the year after your retire.

Of course, there are a few technicalities to that.

This rule applies to anyone who is not the owner of 5 percent of the company where they are employed. And it only applies to your retirement account sponsored by your employer. If you had an Individual Retirement Account outside of work, you’d still have to begin taking those required minimum distributions by the April 1 of the year after you reached 70 and a half.

So keep working and you can keep saving!


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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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