To Pay New York Pension Fund, Cities Borrow From It First

Cities and counties throughout New York are using an unusual arrangement through which they can manage their rising pension bills by borrowing from the very same pension fund to which they owe money. It is estimated that local governments will borrow $750 million this year to finance their pension contributions. “The number of municipalities and public institutions using this new borrowing mechanism to pay off their annual pension bills has tripled in a year.” The growing desire to borrow is a sign of the degree to which municipalities are struggling to meet pension obligations given a combination of budgetary constraints, low interest rates and years of sub-par returns.

I may be well skilled in the art of finance, but you don’t have to be a rocket scientist (and I apologize to our two clients who actually are!) to know that borrowing to get out of debt is like digging a hole deeper to create a way out: the chances are slim and very dangerous that it will work out. Believe it or not though, the above strategy may actually work in a few situations:

Mortgage refinancing- If you have not reviewed your mortgage in the past 6 months, I vitally urge you to do so. I’ve written in the past on my two goals of refinancing: lower your monthly and annual costs, and lower the time it takes to pay off your mortgage. If you have 11 years left, find a company to issue you a ten year. Definitely go from a 30 to a 15, and shop, shop, shop! While it may be easier refinancing with the same company, using another company may be in your best interest and worth the additional work. It’s borrowing, but it’s fiscally resourceful.

Car Insurance- You may not know it, but there is a car insurance price war going on. I just personally, with very little effort, reduced my own car insurance bill a whopping 56%: and my insurance is with a top insurer- the same insurer I’ve been with for 30+ years. In short, the public (just like you and I) is fed up with the high cost of…well …everything, and looking at all places to cut expenses. The insurers are finally buckling to the pressure of high rates, and if you fall into certain categories, have a clean driving record, are accident free for 3 years, you may qualify for lowered rates. Give your Property and Casualty agent a call…you usually don’t get what you don’t ask for.

Credit Card Interest Rates- I’ve written on this many times in the past. Oftentimes the interest rates will creep up on your MasterCard or Visa without you knowing. Be sure to check your latest statement to see what you are paying if you have extended credit, and don’t be shy about calling the company to get a better rate. The best policy is a debt free policy, so if you can get them paid off, do so. If not, switch them to another card with a lower rate. Again, it’s borrowing to pay a debt, but it’s done in a responsible way.

There are lots of ways to cut your expenses. Feel free to hit the comment bar and share with our readers your ideas- this is a time to help each other out!

Happiness Quote of the Day

We tend to forget that happiness doesn’t come as a result of getting something we don’t have, but rather of recognizing and appreciating what we do have.

Frederick Koenig

It’s something about mortality, or that applying for life insurance or drafting a will is the beginning of the end. The fact is really, if you don’t have up to date financial and estate planning, you may leave behind devastation and heartbreak. When it comes to life insurance, it’s important to remember that it’s not for you: it’s for those you leave behind. That includes being able to continue to live in the house you so lovingly turned into a family home, to make sure your children make it to college whether you are alive or not, and the basics like food and clothing. “Buying” life insurance and forgetting about it isn’t enough: life changes, and so are your family needs. Additionally, the life insurance industry has changes radically in the past ten years: it’s possible that you could reduce or eliminate your annual payments all together, or be able to get more coverage without more premiums. Life insurance should be reviewed at lease every five years- for your family’s sake, not to mention the possibility of cutting down costs in this economic environment.

There’s an old saying:”where there’s a will, there’s a way.” Trust me- if there’s no will, it’s a terrible mess for your loved ones left behind. The legal process is a nightmare, and the time and money can be huge depending on the size and complexity of the estate. The worst thing is that the assets can be frozen: I’ve seen estates worth millions, and the family couldn’t get their hands on it for months because there was no will. A will is a document that says who gets your stuff when you are gone. This changes- and so the will must be updated.  Grandchildren are born, children fall out of favor, addiction, in-laws, and a multiple of reasons surface every few years that may necessitate a change in your will. The will is a transitory document, meaning it can be changed at any time. Have you given it any thought since you put it in that dark place you hide things you don’t want to look at again? It’s time for it to see the light- bring it out and read it. You just may be surprised at what you thought you wanted at the time, but now seems like it belongs to someone else.

Family succession planning is not a one-time job…it has to be reviewed periodically to make sure it conforms to your current needs and wishes. If you can’t remember when the last time you looked at your life insurance or will, then it’s time. For your family’s sake…

Happiness Quote Of The Day

“Love is when the other person’s happiness is more important than your own.”

H. Jackson Brown Jr.

The definition of success is different for everybody. Some base it on money, some on love. Some define it by how much you own (he/she who dies with the most toys wins) and some don’t define it at all- they just live in the moment. I am a great believer in quality of life: do the best you can with what you have to work with. Money does not necessarily dictate how you live your life, although I agree, it does help. As a Trusted Advisor and Certified Financial Planner(tm), I am asked the question “How am I doing in comparison to everybody else” relatively often. I point out that we are all individuals, with individual lives and circumstances, and that it’s not a contest. We all have a different standard of living, and varied expectations of what we want out of life, financially speaking. A lavish vacation for you may be a long weekend for another, a “big” house for one may be far too much room for the next person. We are all different- it’s not a competition. I do however, point to three basic rules that I believe apply to everybody for their quest for financial success coupled with a great quality of life. Consider the three (yes, three- ask Rick Perry to count ‘em!)

1. Be Debt Free. Setting aside your mortgage and car payments (if you have them) this is the year to be debt free.  Think carefully about whipping out the charge card this year, and be sure to pay more than the minimum payment. Although it may seem very low, the reason is relatively low interest rates.  Here’s the secret- take advantage of it. Every dollar you pay above the low minimum payment goes to principal. This allows you to pay off the card much faster than if the interest rate was higher- more of your payment goes to principal. If you have more than one card, use one as sparingly as possible, and put the others away. Look at the outstanding balance and divide it by 11- here’s your new fixed payment for the rest of the year, assuming you don’t use that card in 2012. Why divide by 11 payments? Each of the next 12 payments will be a little higher than if you divided by 12, allowing for the interest. If you can pay more, do so. And don’t forget to celebrate when you pay off a card- give yourself the time to feel good about getting rid of the creditor.
2. Max Out your Annual Retirement Contribution. If you are enrolled in a 401(k) plan, 403(b) plan or any other company retirement plan, inquire with your administrator or Chestnut Planner and make sure to contribute the maximum. If your employer matches, Oh Happy Day! If not, nobody is more responsible for your wellbeing in your golden years than you. If you do not have a company plan, make the maximum contribution to your Tradition or Roth IRA, taking advantage of the additional contribution. The maximum contribution limits for a 401(k) and 403(b) participant for 2012 has been raised from $16,500 in 2011 to $17,000 in 2012. For IRA’s, the contribution limit remains at $5000 per year with an additional $500 if you are over age 50. Consult with your tax advisor as to what plan is most advantageous for you.
3. Create an Emergency Fund. You should have a side account in a local bank or institution equal to 3-6 months of your household expenses. This will cover you for unexpected wage interruptions, such as short term disability or other unexpected income stoppages. Keed it liquid: you never know when you need a doctor who won’t operate without an upfront payment, or the immediate need for a refrigerator or furnace.

If you’ve got the above three covered, feel free to breathe and live. Always remember to enjoy each day you have- and sing at the top of your lungs just as if nobody was listening!

Happiness Quote Of The Day

“If you’re going to live, live well.”

Judge Judy Sheindlin

Investing, in general, is as different for all of us as we are all different. Risk has many meanings and definitions: risk of losing, inflation risk, purchasing power risk, interest rate risk…well, you get the picture. In addition, we all have our own view of losing: a few dollars or a few thousand- it’s different to all of us. So how do we keep our sanity in a world that seems to be unraveling at its very core? Calmly, for starters…

Let’s go back to the times where the markets were sane and rational. A few points up or down meant a normal day. What was your risk tolerance then? Where you a growth investor, with no need for income, or an income investor who was utilizing your portfolio to subsidize your income? The first step is to determine what your goals and objectives are of your investments, and the reason you are investing. If you have a retirement fund, how many years do you have to retirement, and will you continue to make contributions? If a college fund, how old is the child and how many more years until its freshman time? It’s time for a reality check: take a breath and look at the big picture. While I can’t tell you how to adjust your portfolio, I can advise you to take a good, long look at why you are investing in the first place, and remind yourself of your basic goals and objectives. Don’t be hasty, risky or out of character. Speak with your financial professional to review why you started investing and the discussions of previous meetings to remind yourself why you are (hopefully) saving on a regular basis.

With Greece and now Italy involved in a massive restructure, the Euro in jeopardy of disbanding, Spain next in line (and don’t forget there are 17-count ‘em 17 countries involved in the Eurozone) unemployment above 9% here, housing the worst it’s been in decades, try to remember that this too will pass. When, I can’t tell you. But take it from me… keep on course- brighter days are coming.

As a Certified Financial Planner™ since 1991, my professional role for the past 20+ years has been financial and estate planning. I see a new responsibility forming in my profession- “Longevity Planning:” the task being helping folks plan for the long haul. Quitting work at age 62 is not far from a myth for most, and working long into their 60’s or 70’s has become commonplace in today’s working world.  I am a great believer in keeping the mind busy and challenged every day. As an example, look at the team at the CBS News program 60 Minutes: most are in their 70’s, some in their 80’s. Andy Rooney just retired at age 94. I am in awe of the sharpness of their minds and the great articulation of their speaking; they retain their sharpness even into their “advanced age.” Why? I believe it‘s because they chose to keep their minds sharp by reading and seeing information to process though their brains on a daily basis. It’s akin to the phrase “use it or lose it.”

Longevity Planning (as I call it) is the practice of looking higher on mortality tables and that our generation is just fixed on living longer, planning is not just about retirement- it’s about providing money to fund a longer lifespan.  While living longer is nice (hey…it beats the alternative) there are some pitfalls that come with it.

Ill health can impede the plan. If the plan is to live longer, chances are that health maladies may cut into the plan. While there have been massive amounts of studies about diet, exercise and ways to stretch your lifespan, the fact is that genealogy has a lot to do with our health.  With ill health come heath care costs-the biggest facet of expense for the retirees of these United States. Many struggle with the conflict of quality of life vs. paying for healthcare. It is truly a dilemma that I hope you never have to deal with.

Once you reach the age of 65 you qualify for Medicare. However, there is a big (huge) gap between what you expect to be covered, and what actually is. To bridge this gap, most retirees at age 65 purchase Medigap Insurance to cover these very gaps in Medicare coverage. In order to avoid older Americans taken advantage of by unscrupulous insurance agents, a standardized plan was put into place many years ago so that all companies can only sell the same plane, with the plans names “A-N” (currently).  While the companies may be different, every companies “Plan A” is exactly the same: the only difference is the company and the cost, but the coverage is exactly the same. This allows for a standardized choice for the proposed insured to pick from, with no riders or variations. While the plans have varied throughout the years, when there is a change, it is a change for all companies as the plan is dictated by Uncle Sam, not the individual companies, hence the continuity of coverage. Just pick the company you want to deal with, and “Plan A” is “Plan A” regardless. Currently, the plans offered are individual Plans A, B and C, – F, K and L, – or M and N.

Do your homework before your 65^th birthday. Keep on saving- and get ready for the best time of your life!

Some may say yes- those that are in the camp that feel that the decisions that are being made by big government and municipalities put us in a place of wait and see: it’s up to them. I disagree. By standing around waiting you are letting opportunity pass you by. Understanding the basic mechanisms of what causes specific situations create those same situations to be taken advantage of. For example: the market volatility. No longer is the US market an entity of its own. The global markets are tightly held together by a common thread: money. Currently we have been hearing about the problems in Europe: Greece, Ireland, Spain, etc. The banks in Spain and Greece as well as most of the European banks are tied to New York.  They loan money to companies in the US. If they go into default there will again be less money in the US for companies to expand and loan to small business as well as individuals like you and I. It’s a chain reaction of events which is global in nature, far above our heads. What can you do, you ask? Thanks for asking!

Keep contributing to your retirement plan. Each month you contribute while the stock market is down, stock and mutual funds in general are cheaper, depending on the funds you are invested in. Now, more than ever, is a time to open and review your statements. Take a look at what you are invested in, and do some homework. Look at the performance, and how you are allocated. Life is different now- it’s your job to watch your retirement account- nobody else is responsible but you. If you are feeling a bit queasy about the markets, perhaps you may choose to move into less volatile choices. Either way, keep saving- you can never go back in time.

Watch your spending, and look at your spending habits to see if you can reasonably cut down. Look at your utility carrier and your insurance expenses. Buy in bulk (Can you say Costco?) Think before you drive-you can pool your errands. Don’t stop living- just live more sensibly, for the time being. I know you’ve heard this all before, but how much action have you taken? Really?

Have you looked at the mortgage rates today? A 30 year is at average 4%, a 15 year at 3.5%. Can you believe it? Here may be your chance to cut your expenses and cut years off your payments at the same time. It’s like a gift from Bernanke!

The market crash of 2008 was primarily centered on the sub-prime mortgage issue and TARP: adding to that theme was the demise of Lehman and Bear Stearns. The markets dropped by 40% or so in that year, approximately.

This year the issues are vastly different and varied. The debt ceiling issue, possibility of a double dip recession, interest rates (which Chairman Bernanke pledged to keep unchanged until mid 2013), already unstable markets- just a plethora of unkind news. But wait- there’s more! Now add to that possible defaults in Spain, Portugal, Ireland, and most of Europe and you’ve got a pile of bad news. I’ve tried to get my crystal ball to tell me the ultimate outcome, but it seems to be on the fritz. While I can’t tell you how to manage your money or how to allocate your portfolio, I can share with you some pearls of wisdom.

Keep in touch with your trusted advisors. Now more than ever is the time to lean on them and use them for their knowledge and tenure in their field. Call your Certified Financial Planner™ or broker and go over your portfolio. Revisit your goals and examine your investing style to see that it comports with your long-term plan.  Make adjustments along the way, but don’t lose sight of your overall objectives. This too shall pass, and life will go on. If you are losing sleep over the markets, a re-evaluation of your allocation may be at hand. Speak with your accountant and see if there are any changes you may make to save on taxes, or to benefit from any tax advantages available to you. Take the time to do an insurance review of your property and casualty insurance, meaning your home, car and umbrella policy. Is it up to date? Are you over or under insured?

Open your statements when they come in the mail- don’t be afraid. The smart investor is an informed investor. Now, more than ever, is a time to know what you have, and if any changes are at hand. Unless your psychic abilities are better than mine, you can’t tell much from an unopened envelope. Ignorance is not bliss.

Keep your eyes open, your ears tuned and then make smart, well thought out decisions. We have no control over the markets, but we do have control over how we react to it. The more you know, the better off you are…and if you don’t know, ask someone you trust that does.

Happiness Quote Of The Day

“The best way for a person to have happy thoughts is to count his blessings and not his cash.”

Author Unknown

Raising the debt ceiling is akin to running your charge card to the max, and instead of concentrating on paying it off; you just raise your borrowing limit. While this may have happened to more than one of us (me included) at some time in our lives, it just is not the way to fix the problem. The purpose of this blog is to be quick and concise: if you max out a card, don‘t further extend your credit limit- it will only put you further in the hole. If you find yourself in a position to be fully extended, meaning that you have utilized all your credit, instead of extending further (raising your personal debt ceiling), it’s time to sit with you financial professional or accountant and set up a plan to reduce your debt.

Taking money out of your qualified plan (IRA, Roth, Pension plans) is not the answer as all funds taken out will be fully taxable as ordinary income, and depending on your bracket, you may lose as much as 35% of what you take out to taxes: not a very palatable option. Borrowing from your 401(k), while it is an option and you feel like you are borrowing your own money, will only put you further in the hole as you have now created another debt to pay off. Yes, it’s yours, but you have an obligation by virtue of the plan provisions to pay it back thus creating more pressure on you.

We are in a difficult time in life: think clearly, utilize your trusted advisors and make sound financial decisions. Be sure to open your account statements and review your accounts monthly- ignorance is not bliss. Be on top of your situation- knowledge is power.

Happiness Quote Of The Day

“The best way to cheer yourself up is to try to cheer somebody else up.”

Mark Twain

At age 94, Ms. Gabor is near death, as a result of a bad accident 10 years ago and natural aging. While she is tended to by nurses around the clock, her heirs from her past marriages(8) are already lining up staking their claim to her vast fortune, including her 15 million dollar house in Bel-Air- while she is alive and still living there.  On one side (her side?) is her ninth (yes, you heard me…ninth) husband, a 68 year-old masseur turned aristocrat named Frederick Prinze Von Anhalt. (What do you think he was known as before Zsa? Freddie the Rub-Down Guy?) On the other side, her only daughter stand-up comedian Francesca Hilton, aunt of the (famous?) Paris Hilton.

The issue: outdated and multiple legal documents, like wills and trusts. Apparently, Zsa Zsa has changed her wills many times, as well as the terms and beneficiaries. It is now unclear as to who will get what, the sad thing being that the battle has begun even before she has passed on to the great stage beyond. It is sad to think that they may be arguing right in front of her, a mere shell of a person unable to defend herself or straighten them out, unable to tell them how she really feels. The main issue and lesson is to keep up on your legal documents, review them regularly, and update them with a qualified advisor to prevent this calamity and heartbreak from happening. Families are torn apart when money is involved, and the sheer tragedy of remaining family members losing their love to dollar signs is a common occurrence. If you have your wills and legal documents done, a full review should be done every 3 years or so to reflect any changes you may have in the period: new grandchildren, ,losing someone named in your will, bequests, charities- any life changes. It’s your money- you have the right to disburse it of your own choosing.

The lesson in all this? I could not impress upon you more the importance of keeping your wills, trusts and legal documents up to date. Your children and heirs will have a tough enough time dealing with the loss of your presence- please don’t leave them a mess to clean up. Let them love…not fight.

Happiness Quote Of The Day

“Happiness is not being pained in body nor troubled in mind.”

Thomas Jefferson

When thinking about refinancing, I have two main rules to go by:

• You want to lower your interest rate by a minimum of 1.5% and/or
• You want to lessen the time remaining to pay off your mortgage and own your home outright.

While each situation is different and advice cannot be offered in this blog, it is meant as a guideline for further discussion with your trusted advisors to see how and when refinancing may be appropriate for you.

Let’s tackle interest rates first. In the past 5 years or so, we have seen interest rates decline in a steady downward direction, going from 7% or so to the current 4%, depending on the type and length of the mortgage, which can also be affected by your credit rating. If your current mortgage is a 30 year conventional and your current rate is 5.5%, the goal would be to reduce your interest rate to 4%. Additionally, if you can reduce the number of years to pay, you’ve got a double bonus- and that’s the ultimate goal.

There are a plethora of mortgage options available to you- 30 year conventional, 15 year conventional, Adjustable Rate Mortgages (ARM), Bi-Weekly- and a host of variations invented by the banks and lenders. Let’s look at the basics:

Both the 30 and 15 year conventional work the same way: with a fixed interest rate for the term of the mortgage, you get the same payment every month. The only thing that varies is the time you pay. With the 30 year, your payments will be less, but your overall payout over the 30 years will be substantially more than the 15 year conventional- but again, the monthly payment will be less. Interest rates may be more than an ARM, but it offers stability of rate and payment amount.

The ARM comes in a variety of timeframes: a 3/1 means your interest rate is locked in for the first 3 years, of which then it will adjust to a pre-determined factor (1 year treasuries, a libor rate, prime plus a few points, etc). It may be 3/1, 5/1, or any variation of timeframes. Interest rates will vary over the life of the loan, which may work for you (lower rate at renewal) or against you (higher rate at renewal. Changes may involve rates, amounts, terms and principal balance due, depending on the terms of the loan. Be aware that the opening rate is usually low, and can be construed as a “teaser rate” to bring you in, but depending on the interest rate cycle, may work against you at renewal.

A home Equity Line of Credit is a line of credit using your house as collateral. While it may seem a good way to access cash, be aware that the HE loan is usually a variable rate, and may strap you when interest rates go up and you can’t pay it off.

Our goal is get all of our clients to live debt free. Don’t take out any additional money at refinancing if you can help it- it will cost you more monthly, and reduce the equity you have in your home. Never roll you credit card debt into your refinance- essentially it means you will paying off that card for 15 or 30 years, and you will pay, with interest, 3-5 times your debt with interest. You will be paying for that couch long after it’s been threadbare and gone.

While there are a vast variety of other options (graduated payment, balloon, interest only) the above are the most commonly used. It is crucial that you tread on this issue with caution, use your advisors wisely, and take your time before settling on your new mortgage. Be sure to think ahead: today’s panacea may be your renewal nightmare.

Happiness Quote Of The Day

“Happiness is the feeling that you’re feeling when you want to keep feeling it.”

Author Unknown