Personal finance chat with Cheryl Costa
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Cheryl Costa, a financial adviser at Family Financial Architects in Natick, answered readers' questions about investing after Monday's market decline. Here's a transcript of the discussion.
PL4242__Guest_: I'm 69 years old and currently have enough portfolio to live on. There is no positive news around and I'm nervous that my portfolio will continue to "bleed." I'm considering doing a large cash-out to preserve what's left. Your thoughts please.
Cheryl_Costa: I don't know enough about your personal circumstances to offer specific advice, but I would urge you not to panic and make any big decisions because of what has happened in the past few days. I know it is difficult but the best thing you can do for yourself is remain calm. As we speak, today's market is up slightly so that is a piece of good news.
Al__Guest_: FAs will tell you it's a bad idea to sit on the sidelines "in cash only", indicating that I may miss the train when things turn around....agree?
Cheryl_Costa: Generally yes. Certainly keep enough cash to be able to weather a financial setback. Make sure you have an adequate emergency fund. But if you won't need money for at least the next 5 years, investing in the market is likely to be your best bet. If you try to sit on the sidelines and only move into the market when it "improves" you will likely miss a large upswing. If you can stand the volatility, this is really an incredible buying opportunity.
30yearfixed__Guest_: Will mortagage rates drop and is now a good time to refinance a 30yr fixed mortgage?
Cheryl_Costa: Mortgage rates have been dropping for several weeks now. Rates for a 30 year fixed mortgage are now in the ballpark of 5.5% with no points. My feeling is that this is a very good time to be mortgage shopping and I am hopeful that rates could go even lower in the coming weeks.
BostonMama__Guest_: How much should I expect to pay for a family financial plan for my husband and I? Our finances are basic and uncomplicated. Thanks.
Cheryl_Costa: I would go with a ballpark of $2,000 for a relatively uncomplicated plan. That would likely include a cash flow and debt analysis, college funding projections, retirement projections, a review of your insurance policies (home, auto, life, health, disability and personal liability), and an investment review. The plan would also likely include a review of your taxes and your estate documents.
nocash__Guest_: $130,000 in fidelity IRA - should I have any worries about it?
Cheryl_Costa: The Securities Investor Protection Corp (SIPC) protects investors accounts up to $500,000 and most places like Fidelity and Schwab, etc have additional coverage in place. It is important to note that the coverage does not protect you from market losses.
raw__Guest_: most basic question - should you keep you money in your 401K and rotyhs or do you take it all out and put it in a saving acount?
Cheryl_Costa: I think you are asking if you should liquidate the mutual funds you have in your 401(k) and your Roth and move to cash and my answer to that is "no". You should never be making important investment decisions based on your emotions at the moment. If you are 30 years old and saving for retirement, Monday's drop in the market will be nothing but a blip on the radar when you look back on it in a few years. I vividly remember the Crash of 1987 when the market lost 22% in one day. At the time, things looked incredibly awful. Now, when we look back, that "black monday" is barely detectable. I urge you to hang in there.
Jane__Guest_: I have a small annuity with AIG (approximately $11,000). Tried calling them today to close the account (4% penalty) but could not get through (no surprise). While you may not think this is a huge amount, it is to me and I do not want to lose it. Any suggestions?
Cheryl_Costa: Keep calling if you are definitely committed to liquidating the account. Start with people you have talked with before. It is usually better to try to get someone in a local office as opposed to the National 800 number. It might take many, many tries but I'd keep calling. Good luck. When you reach someone, make sure you are making an informed choice, be sure that you know exactly what penalties may be involved.
CC__Guest_: Hi Cheryl, I've been out of college for three years and currently have two loans to pay off, a school loans and an auto loan. Would it be better to concentrate on paying those off as fast as possible, or should I continue to gradually pay them off and allocate my extra cash flow towards my 401(k) and Roth IRA? Thanks.
Cheryl_Costa: My vote is to spread the money around. Assuming the interest rates on the student loans and auto loan are not sky-high and that you are not feeling overly burdened with debt, I like to get started on saving in 401(k)s and IRAs as early as possible. Starting early gives you a great head start. If you can save 10% for retirement as soon as you start working, you will be off to a strong retirement.
Worried1__Guest_: I have a $250K CD at a local credit union. Would you recommend I split that out over 3 different institutions for FDIC insurance purposes?
Cheryl_Costa: It might be a good idea. Alternatively, you could get more than $100,000 at a single bank by titling your accounts in different ways. Also, if this CD is an IRA, it is fully protected up to $250,000. Check out fdic.gov for more information on this important coverage.
broke_anyway__Guest_: I really don't have much in terms of assets, a house with 25 years left on the mortgage, a healthy 401(k), a cash emergency fund, and an account that will eventually fund the 529 I plan to open. I assume now is a good time to fund the 529, right? Buy low? But aside from that, I don't feel like this huge downturn yesterday will really change my life much - am I too optomistic?
Cheryl_Costa: Yay! I am glad to hear that you are hanging in there and, no, you are not being too optimistic. This latest crisis on Wall Street is not something that should be causing a lot of angst for people in your situation. If you are well-diversified and you have an adequate emergency fund, this is absolutely a great time to be out buying. Starting a 529 plan now is a great idea. My favorite quote of all time is by Warren Buffett: "Be fearful when others are greedy and greedy only when others are fearful"
copley_square__Guest_: Do you think the Giants will repeat this year with Strahan and Osi?
Cheryl_Costa: I like the Colts and Peyton Manning.
Guest_1__Guest_: I am 50 years old and wonder if you think its better at this stage to keep picking my own funds or get into one of those Freedom Funds that manage your money for you depending on how many years you have until retirement. I am losing alot right now but have also made alot in the past. Thanks.
Cheryl_Costa: The Freedom Funds are a great alternative for someone who wants to put their retirement savings on auto-pilot. I think you can do better if you are willing to devote some time and attention to building a portfolio specifically suited to your needs but if you know that you are unlikely or unwilling to do that, the Freedom Funds are a good alternative. You should however look into all the target date funds available because Fidelity's will be different from T. Rowe Price, who will be different from Vanguard. Even if they are all targeting the same year, the proportion of equities in each could vary dramatically.
WJMARS__Guest_: Do you think the 529 college plans are the best way to save up for college for your kids.
Cheryl_Costa: I do really like the 529 plans. Check out Fidelity's UFund and the College Savings Plan of Nebraska and try to buy directly from the provider.
Michael__Guest_: how long do you think one should wait before refinancing with the newly low interest rates?
Cheryl_Costa: If you see a great rate now, I would be inclined to grab it. The speculation is that rates might go a little lower but we never know.
Somerville_Mom__Guest_: I have two children in college. In about two years time I will need $40,000 or so to pay their last two years of tuition. I had thought that I would use a home equity line since I no longer have a mortgage and therefore my house is a source of lots of equity. But now I'm thinking that my home with no mortgage is one of the best financial resources and I would be better off evaluating my stocks and selling them to pay tuition bills. What would you keep in mind when comparing those two routes?
Cheryl_Costa: It's really hard to make this call now. You won't need this money for two more years and a lot can change in two years. Selling some of your investments may very well be the right thing to do assuming those investments are not earmarked for retirement.
David__Guest_: If I have a $1 million life insurance policy with AIG, should I be trying to find a new company?
Cheryl_Costa: It is my understanding that policies are protected up to certain levels but I believe the protection is only for upt to $300,000 in death benefits and $100,000 in cash surrender value. I would suggest contacting your agent for more information and you might want to check out www.NOLHGA.com, the National Organization of Life and Health Insurance Guaranty Association to learn more about the protection that is available.
Woody__Guest_: Over the past few years I have been creating a rainy day fund made up exclusively of cash in a money market. The balance is approximately 150K. Are there any opportunities in this down market to move some of this cash into.
Cheryl_Costa: Money Market rates are generally quite low. I would consider a laddered CD structure which should increase your overall interest rate.
BostonMama__Guest_: Would you advise investing in real estate for the long term? RETs or possibly a vacation home?
Cheryl_Costa: There is no doubt that real estate prices are down, interest rates are down and it is a buyer's market. So the indications are that it might be a good time to buy. However, I have to ask why you are buying. I generally don't think of vacation homes as investments --people generally buy vacation homes for a more personal reason. If you simply want exposure to real estate as an asset class, then REITs are a good alternative.
Cheryl_Costa: Sorry everyone, we have run out of time. I will try to answer the remaining questions in my personal finance blog, Managing Your Money. Thanks for writing in!