Terry Savage

I'm 58 and divorced. I have a 10 year mortgage (almost 4 years into it) at 6% with $20,000.00 left to pay and a home equity priced a Prime minus 75bps. I save 13% of my income in 401(k)and have about $6,000.00 on credit cards. Is it a good idea to pay off my mortgage with my home equity LOC, which is now 4.50%? Or pay off credit card debt? Or both?

SAVAGE SAYS: Both is the correct answer! Your credit card debt is probably at a higher rate. It should go first. But eventually mortgage rates,and HELOC rates, will rise -- as we've created enough liquidity to build future inflation. You don't want to be caught with an adjustable rate loan when rates start rising! (But don't stop contributing to your 40lk either!)

Terry, I am about 3 years away from retiring (my husband is already retired).Our plan was to stay in our home until I retired, then sell and downsize to something more affordable on our retirement income. We need to do some work in the house prior to putting it on the market and are wondering which would be best, a home equity loan (another monthly payment would be difficult for us) or should we refinance, taking the money needed from our equity. Our home is worth approximately $375,000 (although who knows in today's market) and we have about $200,000 in equity. We have a very favorable interest rate of 5.85. We'll hold on to the house longer if the market does not improve as we need to get top dollar for the house to pay for our retirement home. If we refinance (I'm leaning toward this option) is now the time to do it or should we wait to see if the rates go down in light of yesterday's drop in the prime rate.

SAVAGE SAYS: You're putting yourself in a box with this plan -- and the box is your HOUSE! This is tough, for several reasons.
First, I hate to see you put more money into the house, money you may not get our of it if the housing market continues to be soft for a couple of years, which I think it will be.
Second, I hate to see you give up a 5.85% mortgage at a fixed rate -- that's a great deal.
Third, I hate to see you take on a variable rate HELOC, because while rates are low now, and may drop a bit farther, I see inflation coming -- and with it, higher rates!

So my best advice is to not do anything to your home -- unless absolutely necessary, such as a new roof. And if you do make repairs and need to borrow, plan to pay it off within a couple of years using that home equity line of credit. And don't count on selling your house for "top dollar."

Terry My wife and I just came into a small amount of money $8,000.00 We have very little debt. Where would be the best place to put it if we dont need it for several years? Tom

SAVAGE SAYS: Well, you haven't told me whether you're already saving for retirement in a company plan. If not, I'd suggest you each open a Roth IRA. Go to one of the major mutual fund companies, such as Fidelity, Vanguard, T. Rowe Price. If you don't know which fund to choose, use their Target retirement fund -- with a date that matches your hoped-for retirement. Then they'll invest appropriately.

You can each put in $4,000. But if you have no liquid savings, you might want to first pay off your credit card debt, and then set a little aside in savings, in case of emergency.

Should we refinance from a 30 year fix of 5.75% remaining balance of $102,345 to a 5% 15 year fix (assuming in the next week or two the rates will drop) rolling in any closing close into the balance or just keep current loan? Will retire in 6 six and will sell the home (worth $350,000) before or maybe after retirement. Thanks in advance for your respond and great blog.

SAVAGE SAYS: Well, you might look around to see if you can find a better deal than your current 5.75% -- but I think that will be tough to beat. This week's national average for a 30-year fixed is 5.98%, although some banks are certainly below that rate. Meanwhile, you have a great deal.

And if you're planning to sell in 6 years, you probably don't need to build the excess equity in your house at this point, by converting to a 15 year. Instead, consider contributing more to your retirement account.

Terry, great job in educating us all! I am 61, planning to work till I am 65, and then take my retirement which will be about $42,000/yr, plus social security of about $20,000/yr. I am currently saving $16,000/yr in a 457b program. I have a 15 year mortgage at 4.75% with about 10 more years to go. I have about $200,000 in equity in the house, also have a long term care insurance policy, and a $200,000 term policy. We are empty nesters......and yet I am still VERY fearful of out living my funds......any thoughts?

SAVAGE SAYS: You're doing a great job. We're ALL fearful of outliving our assets (yes, including myself!) It's just a frightening thought. Go to www.choosetosave.org, and click on their "ballpark estimator" if you want to figure out the actual possibilities.

But you're doing everything the right way, especially the long term care policy which would offset the greatest potential financial disaster.
So now that you're doing everything possible, relax and enjoy every current moment that you're healthy, that our country is still the best place in the world, and that you have someone to share that joy.

I have 120,000 in CD,s at Countrywide. This bank is about to be sold to Bank of America. I,m sure my principal is safe, FDIC insursed, but can Bank o America arbitrarily change the interest rate as my CD,s are higher a much higher rate than what is currently offered

SAVAGE SAYS: As I recall from the last go-round of failed banks, the acquiring back has the power to change the terms of the CD. Then you have a short time, about two weeks, to withdraw your funds without penalty if the rate or other terms of the CD are changed by the acquiring bank.

Terry, I have a question about IRAs. I am 59 with a standard IRA, considering a switch to a Roth. The account has $40,000. Would I have to pay the IRS tax table guide amout of $7,000 in tax now, or is there a lower formula? Is this a good idea? I don't plan to take any withdrawals for another 10 years, but don't want the heavy tax burden at that time.

SAVAGE SAYS: You'll have to add the amount in your IRA on top of your ordinary income to find the percentage at which your withdrawal will be taxed. Be sure to wait until you are age 59-- AND A HALF -- so you'll avoid the 10% early withdrawal penalty. Then all future growth in your Roth will come out tax free.

Please note: You may only do this type of conversion in a year where your AGI (adjusted gross income) is less than $100,000. That number applies whether you're filing an individual return, or married filing jointly.

There will be a complicated exception for that income rule for conversions done in 2010, but the tax law is likely to change by then.

Finally, it only make sense to convert and pay the taxes now, if you're assuming you'll be in a higher tax bracket later during your retirement.

Hi Terry, I would appreciate your advise. I bought my house about 15 yrs
ago, My Mother and sister passed away, I had to take my Dad in and I look
after him. I had to renovate my house to bring my dad in. to make a long
story short. Now my renovation is done and it cost me about $200.000. I
need to refinance to bring my rate down, everything is new in jy house now.
How much do you think I can get after having this done to my house?
Thank you,

SAVAGE SAYS: You left out all the important stuff:
What's the likely appraised market value of your house?
How much do you owe now (first mortgage) and how didyou finance the remodeling?
What's your income? Is your credit good?
Where are your existing mortgage(s)?

That's what determines "how much" you can get.

Separately, did you use any of your Dad's money to remodel? You want to be careful that this is not considered a "transfer" out of his estate -- just in case he needs to go to a nursing home, and you want Medicaid to pay for it. They "look back" to see if money was transferrerd in order to qualify for Medicaid. The lookback period is anywhere from 2-5 years. So if the money came frmo your Mom's estate, you'll want to substantiate that -- and also make sure that this home is NOT considered his assets, ie not put his name on any mortgage --

And, by the way, in case anyone forgot to thank you for going through all this, you're doing a great thing for your father!

Dear Terry,

Today I read that my brokerage firm, UBS, is also up to it ears in subprime mortgage debt. My husband and I are small investors with most of our money in mutual funds and CD's. What does this mean for us? Do we and others like us need to worry about the health of our brokerage firms? So much of what is written seems to apply to institutions and the very wealthy. What do average people with a lot to lose need to know about protecting their investments in these wierd financial times?

Thanks.

SAVAGE SAYS: Your investment accounts are protected up to $500,000 by SIPC -- the Securities Investor Protection Corporation. That's roughly the equivalent of FDIC insurace, which covers deposit accounts up to $100,000. The SIPC coverage is a lot higher, reflecting the fact that people may have more money invested in stocks, bonds, mutual funds.

Of course, in a wave of financial or brokerage failures, there could be delays in accessing your money, or selling your stocks. That's exactly why the Fed stepped in to "rescue" the institution of Bear Stearns (not the shareholders).

So unless you exceed those levels at any brokerage firm, I wouldn't worry.

Terry,

I'm 36 and already have about $50,000 saved in a 401K. The rule of thumb I hear for saving for retirement is 10%. Does that 10% include my employers match or just the amount I contribute? I currently put in 7% and my employer matches 4% so I'm saving 11% combined.

SAVAGE SAYS: You're off to a good start! I never heard of anyone complaining about having TOO much money in retirement.
Here's how to figure it out for your own personal situation.
Go to www.choosetosave.org -- and click on the box marked "ballpark estimate." Then you can fill in your current information (age, savings rate, current income, etc) and see how well you are doing, to get to your personal goals. It's really a great calculator -- and much better than asking for an opinion, or making a guesstimate!

Am I able to care for a family memeber and be paid by her without that payment counted against her by a nursing home in the 5 year look-back period in event I need to place her in a nursing home. This payment would be comparable to the going rate for in home care . The family member lives with me and has moderate/ severe Alzheimers.
Thankyou Gordon

SAVAGE SAYS: I can't guarantee it, but I would think that if you declared those payments for care as income, on your income tax return, that they would not be considered a gift/transfer of assets.

Terry:

I'm a 73yr old widowed retiree, living on social security, a small pension,and proceeds from mutual fund investments. I also have stock from J.P. Morgan and I did get long term insurance about 10 years ago.

I see the proceeds from the mutual fund investments dwindling and for the first timer since my husband died- two years ago; I'm afraid I'll out live my money.

The monthly particulars are : 1331.00 social security
997.00 IMRF pension
800.00 Mutual fund proceeds
300.00 Deferred income account
This is my income. 3428.00

I also have J.P. Morgan stock that I inherited many years ago and that is worth about 58,000.00. I reinvest the dividends.

I think I may only have about 10 more year of the Mutual fund left, if I continue to take out $800.00 a month.

I know the $300.00 Deferred account only has 3 more years left till it's depleted.

Should I take some of the stock money and buy C.D.'s - It doesn't seem wise to have one-half of my assets in just one place .

I own a condo and intend to go into a retirement home when that becomes available,but I'll need an income of around $3000.00 a month to live there.

My health is great fortunately, but the stock market funding my retirement isn't.

I would think many people depending on Mutual Fund Retirement must be in the same position.

Do I have too many eggs in one basket?

SAVAGE SAYS: Yes, your instincts are correct about too many eggs in one basket -- even if it appears to be, and is, a very good basket. What you need now is individual financial planning advice to get an overall perspective on how you should invest, and how much money you can withdraw so there's a reasonable likelihood that your money will last as long as you do!

Since you live in Chicago, can you come to the Harold Washington library down town next Monday-- April 21st at noon? I'll be giving a presentation that is open to the public. And the Financial Planners Association will be there answer questions at individual conferences. Look for my friend Ellen Rogin, one of the financial planners who will be there. Bring the same info you just gave me, and I know you'll enjoy talking with her.

I have accumulated IRA money invested in a mutual fund through LaSalle Bank/Jackson National and it is doing very poorly, even compared to my at work 40lK investments handled through Prudential. My question is what is more important - the investment company (Jackson vs Prudential) or the specific funds your money is actually invested? I have tried to diversify similarly in both plans with a mix of investments but am getting socked in the LaSalle account. Should I look for another place to move the account - any recommendations?
I attended a women's conference last year where you were the keynote and it was very motivating and inspiring. Thank you.

SAVAGE SAYS: It seems obvious that the choice of fund objectives is a critical ingredient in performance. If you've had a tech fund or a small cap fund, your performance has certainly suffered in relation to better performing fund groups, such as precious metals or REITs this year.

And simple diversification is not the answer It depends on HOW you diversify. It's not just enough to have "different" funds -- unless the fund objectives are balanced. For example a precious metals fund might be a hedge against a bond fund. Precious metals typically rise in response to inflation, while bond prices fall since interest rates rise during an inflationary period.

Go to my website, www.TerrySavage.com and click on the blue box in the middle of the home page for a free one-year trial of FinancialEngines.com -- a site that is designed to provide individualized mutual fund investment advice.

Hi Terry,

I heard you on the radio Sunday morning and I think you do such a great job educating people about MONEY.
I listen to other radio/television money advisors as well and recently heard from one (Dave Ramsey) that using CCCS shows up on your credit report like a foreclosure. My credit is ruined enough from late/slow pays, but I am having a hard time paying the minimum on the 8 cards that I have that total $50,000. CCS ran the numbers and said that they could get me out of debt - on $40,000 of it in 5 years at $1,000 per month. Should I try to do this on my own - I am looking into a part-time job to supplement my income - or since my credit is shot anyway use CCCS. I know that you are a strong proponent of their services - but now I am not sure and also they want to take the payments out automatically - this is through Money Management International. Are these people the same as CCCS? They want to charge me $40.00 per month as well.

Thanks,

Drelis Crossley

SAVAGE SAYS: CCCS has two different services. If you just go in and talk with them, get advice, and pay your bills directly according to their plan, there is NO IMPACT on your credit report.
But, if you enter into a "repayment plan" with them -- where they notify your creditors, who agree to accept smaller payments, and reduce your interest rate, then it DOES go on your credit report.
But at that point you're in so much trouble already that even though this will stay on your credit report until the repayment is completed, at least it shows you made the effort to repay -- instead of declaring bankruptcy. And you'll feel a lot better about solving your problems without going bankrupt; that's for sure.

CCCS is made up of different local agengies that all belong to the same organization. In the Chicago area, the local agency is Money Management, Inc. You can trust them to give you good advice,and I hope you'll take advantage of their service.

I am paying a student loan. Right now, my payment is $160 a month, with a 7.75% interest and $13,330 left in principle. I was reading the fine print on the back of my bill, and it said that extra money sent in is applied to the interest, not the principle! Is there any point to paying extra on my student loan if it isn't paying off the principle? Is there any way to avoid the $5000+ in interest that I will pay over the lifetime of the loan?

SAVAGE SAYS: Good for you for reading the fine print! Have you consolidated? If not, this spring will be the perfect time. Rates on adjustable rate student loans will probably drop July 1st. We'll know that in a couple of weeks, so keep reading my column. When you consolidate you'll have a new loan --and be sure to check that you can prepay principal.
If you've already consolidated, contact the lender and request written confirmation that they will allow you to prepay the principal, in part or in full. If they won't do tihs, please write back to me. It will make a great column.

What criteria should you use to pick a financial advisor? There are so many out there, there are so many financial firms that offer this service, how do you determine the good from the bad?

SAVAGE SAYS: Please read the column posted last week on my website, www.TerrySavage.com. It describes how to find a financial advisor, and what questions to ask!

Terry we are semi retired (59 and 56 yeras old) we own evrything home, cars, with no debt.
We have about $200K in mutual funds, Vanguard Total Stock Market index and Total Stock International Index and another $100K in individuals stocks Berkshire Hathaway Class B and Microsoft stock
We have $260K in CD's coming up for matuity in June that were paying a Rate of 5.21%.

Where do you recommend that we invest the $260K...should we put in another CD ?

SAVAGE SAYS: It looks like you have a well-diversified portfolio and are comfortable having a "cash cushion" for emergencies. So I'm not going to tell you to increase your exposure to stocks. This is your "chicken money." That limits you to bank CDs (not all in the same bank!)or to buying Treasury bills direct from the government at www.TreasuryDirect.gov.
My advice is to stagger the maturities of either CDs or T-bills, so that some are coming due at different times. If you're buying "jumbo" CDs, remember that the interest that is growing will be above the insured limit. That's probably not a problem if you stick to the major banks,and then "scrape off" the interest every 6 months as the CDs mature.
To find the best rates go to www.bankrate.com.

Hi Ms Savage,

I have a question regarding variable adjustable life insurance. I am 29 year old married woman with no children and a 32 year old husband. We have an annual income of 147,000 per year. We are currently maxing out our 401k's and our Roth IRA's. We have an extra $1500 per month additional to save. My financial advisor has recommended that I save around a thousand dollars a month into a variable adjustable life insurance policy. I already invest $230 per month into this policy but my financial advisor suggests that I put in more. The reason he suggests it is because of my tax bracket. He showed me how after 20 years the val policy will have more money in it than a mutual fund exposed to taxes. Also, my advisor suggests not paying off my mortgage but instead investing my money (my mortgage interest rate is 6.75% 30 yr). Right now I fall in a 25-28% federal tax bracket with additional 7% state tax. I really appreciate any advice you can offer.

Thank you,

Jennifer

SAVAGE SAYS: Get a new financial advisor!
I can't put it more bluntly.
Basically, I disagree with all this advice -- and it's up to you to make the decision on what to do. But I'll give you my reasoning.

Right now, you don't need more insurance. And unless you have children, you won't need more life insurance. So why pay for the insurance, just to get the tax deferral??

As I pointed out in a recent column (see my website, www.TerrySavage.com) you might not want to defer taxes on additional investments. The current tax rates might be the lowest you see in your lifetime -- if you listen to the candidates! So maybe you're better off investing outside a retirement account with some of your assets.

Or if you do want tax deferral, and some guarantees, invest in a tax-deferred variable annuity -- the kind with guarantees that you'll be able to ultimately annuitize based on the highest value of your investment account. (There are many different types of plans like this -- some carry huge fees, so be careful in your choices.)

Finally, I've obviously fought a losing battle for years, trying to convince people to pay down their mortgages! Now you see what's happened when people leverage their homes. All I can say is that I put my own money where my mouth is, and I'm typing this with a fully paid roof over my head -- and that makes me feel great.

If your mortgage is paid off by the time you retire, or (if you have children, by the time you need to use income to pay for tuition bills), you'll be glad you took the conservative route!

If you give your money to this advisor to put into high cost variable life policies or otherwise invest instead of paying down your mortgage, you're going to be funding his/her retirement -- not yours!
Those are my opinions, anyway. Terry

terry,
Your battle has not been entirely lost. I share your joy of being debt free,in part, thanks to your advise.
You make an imperative observation regarding advisors. Buyer Beware! I feel the best source of advise should come from a neutral party i.e. Terry Savage etc... There are no issues of conflict regarding who is to profit from that advise.
What ever happened to common sence? I have seen little of it from our gvmt, our society, and individuals who did not consider consequences of their actions. There is an enormous amount of blame sitting on our representatives but also on us as well. There is no free ride in life. That is what I value about Terry's advise and follow it. I was amazed at the frenzy regarding real estate when it was at it's height. People seemed to beleive it was an open spigot to wealth. No such creature exists.{Unless you own an oil company}

I live in Illinois have a 20 months old daugher. Thinking about using
Economic Stimulus rebate for 529 Education Savings plan. I do not know
more about 529 Plan (only thing I know money you put in 529 can be
used to pay college tution).

Radio here has frequents ads about illinois bright start but few years
ago what I heard that IL 529 (BrightStart savigns was worst in the
nation)

Any advise would be appreciated.

SAVAGE SAYS:
Illinois Bright Start program (www.brightstartsavings.com) was named one of the BEST in the nation by Morningstar a few months ago. (They made some big changes in investment choices over the past two years.) I highly recommend it as a place to save for college --

Hi Terry,

As I stated before, I switched to "chicken money" recently. My account is with 'Diversified Investment Advisors' On their website there is an option for auto-rebalance. Good idea, or any thoughts?
As allways,
Thank You

SAVAGE SAYS: There is never a need to re-balance "chicken money." It should automatically renew, or roll-over in the case of Treasury bills.
So if you have an investment that needs to be "rebalanced" it is NOT chicken money!

Just wanted to ask regarding the disaster of the mortgage industy, wasn't (pmi) private mortgage insurance supposed to prevent this collapse from happening? Not that every mortgage out there had pmi but what good was it for people to pay for it then & was it a total waste of their money?

SAVAGE SAYS: I posted that issue in a column recently, haven't had any responses from the bankers. PMI was supposed to protect the bankers!! I'll check again.

Dear Terry,

I'm a 21-year-old college student that is drowning in debt. I have medical bills, credit card bills, numerous of parking tickets, old cellphone bills, student loans and many other things that is destroying my my credit score. About a year ago I loss my job, so therefore I couldn't pay any of the bills that I owed, as a result I had got very sick on top of that. All of the bills has been written off and sent to collection agencies. I can't even finance my education or let alone get an apartment because of my horrible credit score. I just don't know what to do because I think that I'm rather young to have so much debt.It's really stressing me out. What should I do?

SAVAGE SAYS: Relax a little, you're certainly not alone. First thing to do is call Consumer Credit Counseling Services at 800-388-2227. That will connect you to the nearest local office. You can talk to them on the phone or go in for an appointment.
They'll help you sort through your bills and other obligations. I don't know how long it will take you to get your degree, but it's a worthwhile goal. And while you may not be able to rent an apartment, certainly student housing will be available if you're still enrolled in school.

I hate to see anyone go bankrupt at such a young age, and if the bills have already been written off, it may not be necessary. CCCS can help you with that decision.

One thing to keepin mind: even if you go bankrupt it wouldn't remove your obligation to repay student loans.

So take a deep breath, get some professional trusted advice,and please do write back and let me know how you're doing. Terry