TURN THE
WORST
OF TIMES
INTO THE
BEST
OF TIMES
FOR YOU
For additional valuable Wealth secrets
at Bottom Line’s very useful site . . .
www.BottomLineSecrets.com
902486
Contents
1 • Investment Smarts
2 • Credit Smarts
Money For Life: A Fresh Look at Annuities................ 1
How to Check Out the Creditworthiness
Of Your Brokerage Firm............................................ 3
Billion-Dollar Mistakes: What We All Can Learn
From Hotshots Who Lost Big................................... 3
The World’s Smartest Investor on Seven
Ways to Protect Yourself in Today’s
Dangerous Market .............................................. 5
Safe Money-Market Funds............................................ 6
“Closed-End” Funds Can Be a Good Value............... 7
How to Get the Help You Need NOW…to Steer
You Through Today’s Financial Turmoil................. 7
Still Scared? Seven Ways to Overcome Your Fears
And Get Back Into the Market Now........................ 8
Shorting the Market..................................................... 10
When It’s Your Broker’s Fault.................................... 10
How to Build a Business
Warren Buffett Would Buy..................................... 11
When to Sell a Stock................................................... 12
The Stairway to Higher Returns................................ 13
Don’t Wreck Your Retirement!
How to Overcome Your Financial Fears
and Disagreements................................................. 13
Borrow Better—How to Get the Best Deal
Now on Every Type of Loan...................................15
How to Get Rid of Debt Collectors............................17
You Need Higher Credit Scores Than Ever—
Our Insider Secrets...................................................19
Don’t Forget These Basic Ways to Protect
Your Score................................................................ 20
FDIC Information........................................................ 20
Negotiate Better Terms on Your Credit Cards.......... 20
Checking That Pays More........................................... 21
3 • Consumer savvy
Pay Less for College ................................................... 22
Go Green and Save $8,000 a Year............................ 23
The 10 Most Affordable—And Desirable—
Places to Live in the US........................................... 25
Painless Ways to Save $2,000 a Year on
Your Energy Bills..................................................... 26
4 • Retirement Smarts
Rescue Your Retirement—How to Get Back
On Course in This Volatile Market........................ 28
New Law Makes Reverse Mortgages
More Attractive......................................................... 29
Strapped for Cash? How to Raid Your
Retirement Accounts................................................ 30
Divorced? You Could Be Entitled to Much
More Social Security................................................ 31
5 • Tricky Times
Why Tricky Times Are Good Times to Start a
Business—You Can Do It Yourself for Less
Than $5,000.............................................................. 34
Bulletproof Your Job and Ride Out the
Rough Times at Work.............................................. 36
Yes, You Can Find a Job In Tough Times—
But the Usual Methods Don’t Work…................... 37
How to Handle a Tough Conversation:
Skip the Sugarcoating and Try These
No-Fail Strategies..................................................... 39
How to Reduce Stress in Tough Times..................... 41
Tricks to Keep Burglars Away from Your Home—
Former Jewel Thief Reveals His Secrets................ 43
Where to Hide Your Valuables.................................. 44
E-Mail Account Smarts................................................ 44
Copyright © 2013 by Boardroom® Inc.
All rights reserved. No part of this publication may be reproduced, scanned, distributed or transmitted
in any form, by any means, electronic or mechanical, without permission in writing from the publisher.
First printing
Bottom Line Books® publishes the advice of expert authorities in many fields. These opinions
may at times conflict as there are often different approaches to solving problems.
The use of this material is no substitute for health, legal, accounting or other professional
services. Consult competent professionals for answers to your specific questions.
Telephone numbers, addresses, prices, offers and Web sites listed in this book are accurate
at the time of publication, but they are subject to frequent change.
Bottom Line Books® is a registered trademark of
Boardroom® Inc.
281 Tresser Boulevard, Stamford, CT 06901
www.bottomlinepublications.com
Bottom Line Books® is an imprint of Boardroom® Inc., publisher of print periodicals,
e-letters and books. We are dedicated to bringing you the best information from the most
knowledgeable sources in the world. Our goal is to help you gain greater wealth,
better health, more wisdom, extra time and increased happiness.
Printed in the United States of America
WEB/am
1
Investment Smarts
Money For Life: A Fresh
Look at Annuities
A
nnuities have long been considered an investment that insurance
salesmen push on unsophisticated
clients, not something that smart
investors seek out. While ­annuities
may offer tax-deferred earnings and, often, a
relatively secure stream of retirement income,
many of them also tend to feature steep fees
and commissions, inflexible distribution rules
and impenetrable complexity.
Example: Many investors who purchased
“variable” annuities in the 1990s thought they were
obtaining an ultra-safe investment…until they endured steep losses from 2000 through 2003, when
the stock market plunged.
Yet some annuities can have a place in a wise
investor’s portfolio. They can serve as a welcome
safe haven in a time of stock market and real estate volatility. They can reduce the odds of outliving retirement savings in a time of shrunken
nest eggs. They can offer an opportunity to defer
taxes. And in ­recent years, several of the more
reliable insurance companies have made a few
changes that tackle some of the ­drawbacks.
Instead of simply relying on the advice of a
commissioned insurance or investment professional, start by reviewing the various types of
annuities listed below. If any seem like they
might help you reach your financial goals, shop
for the best terms using the buying strategies
provided here or hire a fee-only financial planner to help.
Annuities often are discussed as if they were a
single type of investment. In fact, there are several different types of ­annuities, each appropriate
for ­different investors and investment goals…
VARIABLE ANNUITIES
What they are: Variable annuities essentially
are a way to invest in mutual funds except that
Robert Carlson, JD, editor of Retirement Watch, a personal finance newsletter based in Waldorf, Maryland. He is
chairman of the board of trustees of the Fairfax County
Employees’ Retirement System and author of Invest Like a
Fox…Not Like a Hedgehog (Wiley). www.retirementwatch.
com.
■ Turn the Worst of Times Into the Best of Times for You ■
the funds’ earnings are tax-deferred and withdrawals can be scheduled as monthly payments
that are guaranteed to continue for as long as
you (or your spouse…or someone else designated) live. Many of the variable annuities sold
these days also feature a component that limits
potential capital losses. This feature is an attempt
by insurance companies to attract investors who
were scared off by the losses suffered in variable
annuities a decade ago. Unlike some annuities,
variable annuities do not offer a guarantee about
the amount that you will receive during retirement when you purchase the product. The size
of the distributions depends largely on the performance of the mutual funds you select within
your annuity.
Problem: High fees. The typical variable annuity charges annual fees in the neighborhood
of 2%, and some charge 3% to 4%. Onetime
commissions of 5% or more are common, too,
as are surrender fees of 5% to 6% or more if
you attempt to withdraw money in the years immediately after investing. Also, investment gains
within the variable annuity are taxed as income
when the money is withdrawn, not as capital
gains, and withdrawals made prior to age 59½
are subject to a 10% penalty.
Appropriate for: High-tax-bracket investors
younger than 55 who have maxed out 401(k)s
and IRAs for the year, who wish to do even
more tax-­deferred investing and who will not
need this money for at least 15 to 20 years. It
takes decades of tax-deferred growth for the advantages of variable annuities to outweigh their
additional fees.
Buying strategy: If you do purchase a
variable annuity, do so through a large, low-fee
mutual fund company or discount ­broker, such
as Fidelity Investments, Charles Schwab or Vanguard. These tend to charge lower fees and commissions than do commissioned agents. Select
aggressive investments within the variable annuity, and do not withdraw this money for at least a
decade, preferably two decades or longer.
IMMEDIATE ANNUITIES
What they are: Immediate annui­ties operate
much like traditional pensions. In exchange for
a lump-sum payment, you will receive a fixed
amount each month, quarter or year for the rest
of your life…or the rest of your spouse’s life…or
for some pre­determined number of years, depending on the distribution option you select.
Problem: Low returns. The fixed payment
you receive from an immediate annuity is based
in part on prevailing interest rates at the time
the annuity was purchased—and interest rates
are extremely low right now. A 60-year-old man
who puts $50,000 into an immediate annuity, for
instance, currently could receive a monthly income of just $270 for the rest of his life.
Immediate annuities also are likely to reduce
the size of the estate you leave to your heirs, particularly if you die relatively young. Some immediate ­annuities do make payments to heirs when
the annuity purchaser dies within a predetermined time frame, but adding such a provision
further reduces the size of the distributions that
the annuity owner receives during his/her life.
Appropriate for: Retirees who want an ultrastable source of income with no market risk
and/or retirees who fear that they might outlive
their savings, perhaps because they come from
families whose members tend to live long.
Buying strategy: If the security of an immediate annuity appeals to you, wait to buy. Interest rates are likely to rise in the coming years,
increasing the distributions offered by immediate annuities. The distributions you receive also
will increase the older you are when you purchase your annuity.
If you don’t want to wait, at least “ladder” your
way into presumably rising rates, putting only
20% of the total amount you intend to invest into
an immediate annuity this year, then adding an
additional 20% in each of the coming four years.
One place to obtain annuity quotes is www.
immediateannuities.com.
Alternative: Longevity annuities, a relatively
new product that has become available in recent years, are similar to immediate annuities.
Rather than make payments immediately upon
the purchase of the annuity, however, longevity
annuities do so only when the annuity buyer
reaches some advanced age—­often 75, 80 or 85.
Buyers who die before this age receive nothing,
but those who live long enough receive much,
much more per month than from an immediate
annuity. A longevity annuity is a viable option
if you fear that you will outlive your money but
■ your financial situation seems secure for the first
15 or 20 years of retirement.
Example: A 65-year-old woman currently
would receive a monthly income of around $140
from a $25,000 investment in an immediate annuity—but she could receive $1,169 starting at age 85
from a longevity annuity.
EQUITY-INDEXED ANNUITIES
What they are: Equity-indexed annuities (EIAs)
are deferred annuities, so their distributions do
not begin immediately but rather at some predetermined future date. The size of distributions
is determined in part by the performance of an
underlying stock market index—often the Standard & Poor’s 500 stock index or the Russell 2000
Index. But unlike index funds, EIAs come with
safeguards against losses—there’s usually a guarantee that the principal won’t decline much or
at all in value, plus a guaranteed minimum annual return of 2% to 3%, so your investment could
make money even in years when the underlying
­index falls. There’s often a death benefit, too—a
designated heir receives a check if the annuity
owner dies before receiving some predetermined
amount.
Problem: Complexity. Insurance companies
that offer EIAs use extremely complicated formulas to calculate these annuities’ returns. That
makes it very difficult for investors to compare
EIAs or to predict how much they can expect
to earn from one. Investors should not expect
to receive the full returns of the underlying index—EIA returns generally are capped at about
6% per year. On top of this, steep EIA annual
fees, surrender fees and commissions eat into
profits.
Appropriate for: Conservative investors
who seek stock gains but who do not want to
risk losses.
Buying strategy: Ask the financial pros you
speak with for data on the past 10 years of annual returns on the EIAs that they recommend.
Compare those past returns to get some idea as
to which EIAs truly offer the best returns and/
or lowest risks. Also, compare commissions and
annual fees.
CHECK RATINGS
Don’t buy annuities issued by an insurer rated
lower than A by A.M. Best (www.ambest.com) or
Investment Smarts ■
Moody’s (www.moodys.com). A low-rated ­insurer
is more likely to fail.
How to Check Out the
Creditworthiness of Your
Brokerage Firm
T
o defend yourself against today’s financial industry turmoil, ask your brokerage firm for a
written statement affirming that it is creditworthy
and in no danger of failing. This helps your case
if your assets go missing and you sue to recover uninsured amounts. Up to $500,000 of your
brokerage assets are protected by the Securities
Investor Protection Corporation (SIPC), including
up to $250,000 in cash, per brokerage account.
Dan Brecher, Esq., is a securities attorney in New York
City. He specializes in claims against brokerage firms.
Billion-Dollar Mistakes:
What We All Can Learn
From Hotshots
Who Lost Big
Stephen L. Weiss, recently retired senior managing
director and partner at Leerink Swann, LLC, a Bostonbased investment bank. He spent 24 years on Wall Street
in ­senior management positions with ­companies such as
Salomon Brothers, SAC Capital and Lehman Brothers. He
is author of The Billion Dollar Mistake: Learning the Art
of Investing Through the Missteps of Legendary Investors
(Wiley).
I
t can take a lot of smart moves to make $1
billion…but just one big mistake to lose it.
Wall Street veteran Stephen L. Weiss took a
look at some of the billion-dollar investment errors made by money masters in recent years to
find out what went wrong—and what lessons
we can learn from these expensive blunders…
1. Don’t cut corners. Just because you think
you know a company and/or its management
well doesn’t mean that you can cut corners on
your ­homework.
David Bonderman, a founding partner of the
very successful private equity firm TPG Capital,
■ Turn the Worst of Times Into the Best of Times for You ■
plunged $2 billion of his fund’s money into troubled ­savings-and-loan giant Washington Mutual
(WaMu) in 2008 after little more than a week
of studying the company. The fund’s investment
was wiped out when WaMu failed later that
year.
There are two likely reasons why the usually
cautious Bonderman felt he could move quickly
on this huge investment. First, he probably believed that he already knew WaMu inside and
out because he had been on its board of directors six years earlier. Second, he likely trusted the
optimistic opinion of his friend—Kerry Killinger,
the CEO of WaMu. Unfortunately, his reasoning
was flawed.
WaMu had issued huge numbers of highrisk mortgages to subprime borrowers during
Bonderman’s six-year absence, and he seemed
not to realize the extent to which the WaMu he
was investing in differed from the one he knew.
Bonderman isn’t the first ­investor to fall victim
to the familiarity trap. Investors who have made
money in a stock tend to think that they can
buy that stock again at a later date without doing much additional research. In reality, companies and markets can change substantially in just
months.
Trusting the opinion of WaMu’s CEO was a
mistake as well. Killinger certainly knew his
own company, and he probably would not intentionally mislead his friend—but Killinger was
struggling to rescue WaMu, his job and his stock
options. His opinion could hardly be considered
­objective.
No matter what you’re told or think you know,
do thorough research.
2. Don’t break your own rules. If you occasionally violate your investment disciplines,
you really have no disciplines. Self-set rules can
help investors remove emotion from their decisions and act objectively—but only if the rules
are followed every time.
William Ackman, CEO of hedge fund operator Pershing Square Capital Management, had
a policy of never making highly leveraged investments or putting his money in companies
that were highly leveraged ­ themselves due to
the added risk imposed by the borrowed funds.
Ackman consciously bent this rule to make a
major investment in the somewhat leveraged
bookstore chain Borders…then he broke his rule
completely when he used leveraged options to
make a major investment in retailer Target. Both
investments failed, costing his investors nearly
$2 billion in early 2009. In the case of Target, relatively small losses by the stock were magnified
by Ackman’s use of highly leveraged options.
3. Passion is not an investment strategy.
Kirk Kerkorian, president of the Beverly Hills–
based holding company Tracinda Corporation, is
one of the richest people in the world—but he’s
not the sort of billionaire who drives a Bentley.
Kerkorian loves American cars. He has owned
vehicles produced by each of the major American
automakers and has made or attempted to make
major investments in the companies as well.
Kerkorian made money by investing in Chrysler (now managed and partly owned by Italy’s
Fiat) in the mid-1990s, and he came out about
even when he invested in General Motors a
decade later. He lost $800 million investing in
Ford in 2008, however, and would have lost billions more had his 2007 bid for Chrysler been
accepted. It should have been obvious to an
experienced investor like Kerkorian that everincreasing foreign competition and unfavorable
union contracts meant that US ­automakers were
increasingly dangerous investments, but he was
too in love with them to fully take their problems into account.
Similarly, Peter Lynch, former manager of the
famed Fidelity Magellan Fund, encouraged investors in his book One Up on Wall Street to buy the
stocks of companies that make the products the
investors love. But Lynch wrote that book more
than 20 years ago, and the world has changed.
Thanks to the Internet and cable news networks, investment information now disseminates almost instantly. By the time you have
developed a passion for a product, other investors have as well and this has been built into the
company’s share price. Your emotional connection to a company or its products could easily
cloud your analysis of it as an investment.
4. Don’t ignore warning signs. If a company’s returns are significantly and consistently
better than others in its sector, it might be doing
something riskier than others in its sector.
It seemed perfectly natural that Chris Davis,
chairman of Davis ­ Selected Advisers, would
■ invest heavily in insurance giant AIG between
2005 and 2008. Davis’s family investment company had been pouring money into AIG and
other leading insurers for generations, with great
success. AIG’s stock had easily outpaced the
markets from 1990 through 2005. Trouble was,
by 2005, AIG wasn’t really an insurance company anymore. It had been moving quietly but
deeply into other, riskier businesses since the
late 1980s.
Most notably, AIG’s Financial Products group,
founded in 1987, was, by 2004, contributing
billions to the company’s annual revenues by
trading complex financial instruments. AIG’s operations were so confusing that no outsider could
really hope to figure out exactly how it made its
money. But the fact that AIG consistently made
more money than other insurers should have
been a tip-off that there were hidden risks.
Smart management might be the reason for
one company’s financial model outperforming
its competitors, but when the return on capital
is much larger for long periods than that of its
peers, investors should take it as a cause for investigation, not c­elebration. The “Revenue and
Expenses” section of a company’s annual report
might give you some idea of how that company
actually makes its money. But in the case of AIG,
how it achieved its performance was a mystery.
When a company is an indecipherable black
box—such as AIG or Enron before it—it’s usually best to stay away.
The World’s Smartest
Investor on Seven Ways to
Protect Yourself in Today’s
Dangerous Market
Alice Schroeder, former Wall Street analyst and former
managing director at Morgan ­Stanley, New York City. She
is author of The Snowball: Warren Buffett and the Business
of Life (Bantam).
O
ver the past few years, I spent thousands of hours with legendary Nebraskan investor Warren Buffett, chairman
and CEO of the conglomerate Berkshire Hathaway. While I was writing his ­biography, he
Investment Smarts ■
gave me unprecedented access to his work,
opinions, struggles, triumphs, follies and wisdom. Buffett’s success on Wall Street has made
him one of the richest men in the world. But
in many ways, he’s closer to Main Street than
Wall Street, a careful investor like you and me
who still lives in the house he bought in 1958
for $31,500.
Many Americans watch Buffett very carefully
when the stock market plunges and the economy teeters on the edge of disaster. In these kinds
of grim markets, he has been at his most brilliant and visionary. No one has a better record
of protecting assets, making shrewd purchases­—
and inspiring the confidence we need to survive financial turmoil.
Advice Buffett is giving to secretaries in his
own offices in Omaha…
•Invest in what you understand. In the
years 1998 to 2000, Buffett ­ famously avoided
buying Internet stocks because he didn’t see how
the companies could make enough money to
justify their valuations. In 2002, he started warning against complicated “derivatives,” including
the subprime mortgage deals that have devastated such giants as the investment firm Lehman
Brothers and insurer AIG—deals that are at the
core of the current financial crisis.
If you want an understandable business, Buffett points to Coca-Cola, of which he owns about
9%. After 122 years, the Coca-Cola Company still
sells more than a billion beverage servings a day.
He also is partial to Gillette, a division of Procter
& Gamble. Berkshire Hathaway owns about 2%
of Procter & Gamble. Gillette dominates US razor blade sales and will never run out of customers as it expands worldwide.
•Decide on your investing values and
criteria—then maintain them no matter how
good or bad the market is. When investors get
in trouble, it’s usually because fear or greed
has made them ignore commonsense rules.
Buffett has strategies that he follows in bull
and bear markets. He looks for quality companies with ethical, highly committed management
teams in ­ essential but often unexciting industries. Most important, he waits for a time when
he can acquire these companies at a large discount, often 40% below what he considers their
“fair values.”
■ Turn the Worst of Times Into the Best of Times for You ■
In fact, Buffett’s relentless focus on bargains
extends to every aspect of his life. As an example, he related the ­following anecdote to me.
He had a friend who went to stay in a house
owned by Buffett’s business associate Katharine
Graham, the late chairman of The Washington
Post. Afterward, the shocked friend called Buffett to tell him that Graham kept an authentic
Picasso painting in the guest bathroom. Buffett
said that he had used that bathroom many times
over the years but never noticed the painting.
What he did appreciate was that the bathroom
was well-stocked with shampoos and toiletries.
Buffett loves freebies.
•Have cash on hand. Many investors feel
that they need to be fully invested and that
holding cash in a portfolio is a drag on returns.
Cash, however, has its advantages when markets
plunge. For several years, Buffett sat on more
than $44 billion of cash in Berkshire Hathaway
accounts. This allowed him in September of
2008 to brilliantly and carefully pick up shares
of preferred stocks from General Electric and
Goldman Sachs in specially negotiated deals
with hefty dividends.
•Don’t try to catch a falling knife until
you have a handle on the risk. Many investors get into trouble because they see opportunity but don’t think about risk fully enough.
Asking yourself, “And then what?” over and over
can help you see all the possible consequences.
Let me give you an example from Buffett’s life.
In spring 2008, Buffett was approached about
investing in, or perhaps even buying, Bear Stearns. Until it was badly damaged by the subprime
mortgage debacle, Bear Sterns was one of the
world’s largest global investment banks and
brokerage firms. Buffett could have practically
named his terms, but he passed on the deal. He
worried that the company had at least 750,000
derivative investments. He said that even if he
cloned Albert Einstein and worked 12-hour days
with him, they could never properly analyze the
risk of that many investments. Rebuffed by Buffett, Bear Stearns raised billions in capital from
sovereign wealth funds in China and the Middle
East. Those funds lost most of their money as
Bear Stearns unraveled and was eventually taken over by JPMorgan Chase.
•Don’t bet the ranch. As an investor, leave
yourself a margin of safety in case something
goes very wrong. Buffet says that in the past 50
years, he never permanently lost more than 2%
of his own personal worth on any investment
position. He has suffered heavy losses at times,
but only on paper, which is why he warns
against using leverage (borrowing money to increase your bet on a stock pick).
•You can’t be just a little bit smart. Buffett
feels that if you try to be just a little bit smart,
you’re liable to be really dumb, especially in a
treacherous market. Few people have the time
or inclination to study enough to beat the market. Diversification is probably your best route.
Choose a low-cost index fund, and put your
money into it slowly and steadily over time. That
way you don’t buy everything at the wrong price
or the wrong time.
•Never sell into a panic. Buffett isn’t very
worried about the big picture for America. He
believes that the stock market does some very
crazy things in the short run, but in the long run,
it behaves quite rationally. Buffett’s underlying
belief now is that the American economy will do
very well and so will people who own a piece of
it. He knows that the economy might get worse
for a while and even endure a long, hard recession. There are a lot of factors gumming up its
potential now. But 10 years from now, he says,
we’ll look back and see that, as investors, we
could have made some extraordinary buys.
Safe Money-Market Funds
T
he safest money market funds in these dangerous times are those that invest in government ­securities, such as Treasury bills. But these
funds tend to have relatively low yields. If you
want better yields than these funds offer but don’t
want to get caught up in the turmoil, do the following…
1. Pick a money-market fund whose sponsor
has deep pockets, such as Fidelity or Vanguard.
2. Avoid any fund that achieves unusually
high yields by relying on risky investments, such
as securities with ratings lower than AA.
■ 3. Favor funds with at least $10 billion in
assets.
4. Distribute your money-market investments among several funds.
Peter G. Crane is president and CEO of Crane Data LLC,
Westboro, Massachusetts, which tracks ­ money-­market
funds. “Closed-End” Funds Can
Be a Good Value
L
ook for “closed-end” funds selling at deep
discounts to their underlying value. This
type of fund, which trades like a stock, can be
priced at a discount or a premium to the value
of its portfolio. Some closed-end funds investing
in municipal bonds or global real estate are especially good values now because their deeply
depressed underlying investments are likely to
have strong rebounds.
Cecilia Gondor, executive vice president of Thomas
J. Herzfeld Advisors, Inc., an investment advisory firm in
Miami, Florida, specializing in closed-end funds. www.
herzfeld.com.
How to Get the Help You
Need NOW…to Steer
You Through Today’s
Financial Turmoil
Sheryl Garrett, CFP, founder of Garrett Planning Network,
an international network of fee-only planners based in
Shawnee Mission, Kansas. She is author of Just Give Me
the Answer$: Expert Advisors Address Your Most Pressing
Financial Questions (Kaplan Business) and Investing in
an Uncertain Economy for Dummies (Wiley). She was
recognized by Investment Advisor as one of the top 25
most influential people in financial planning. www.garrett
planningnetwork.com.
M
illions of investors, savers and retirees
are turning to financial advisers—in
many cases, for the first time—to help
guide them through today’s financial turmoil
and put their retirement plans back on course.
Investment Smarts ■
This is wise, but to make sure that you get truly
helpful advice—and don’t pay too much for it—
it’s crucial that you ask your current or prospective financial adviser the ­following questions…
Are you a fiduciary?
Using this term legally obligates the adviser to
work in the “best interest” of the client. If an adviser doesn’t know what you’re talking about or
won’t put the word “fiduciary” in his/her written
agreement with you, walk away.
What do all those letters after your name
mean?
Anyone can call himself a financial adviser regardless of education or experience. The many
trade groups now offering professional designations these days increase the confusion. Keep it
simple—if you want broad-based help in steering your investments and other finances safely
through today’s economic turbulence, find a
Certified ­Financial Planner (CFP). That designation comes from the nonprofit Certified Financial
Planner Board of Standards, Inc., which is not
connected with any business that sells financial
products and does require extensive training
and testing (800-487-1497, www.cfp.net).
If you need someone to specifically pick
stocks for your portfolio, look for a Chartered
Financial Analyst (CFA). It’s the designation
that most mutual fund managers have and is
given by the CFA Institute, a nonprofit association of investment professionals (800-247-8132,
www.cfainstitute.org).
How exactly do you make money off me?
An adviser should explain his basic fees clearly.
There are four types of compensation…
•Flat fee, which is a onetime payment for
particular services.
Typical fees: $1,000 to sort through your
401(k) options and devise a plan of contributions and investments for you to carry out. Or
$1,500 to $2,500 to assess your current financial
picture—including investments, savings, portfolio allocations, risk management strategies,
debt-management strategies and college funding
—and to recommend a plan.
•Commissions. These fees are based on a
percentage of the money that you use to buy
investments under the guidance of the adviser.
■ Turn the Worst of Times Into the Best of Times for You ■
Typical commission: 4.5% on “A” shares of
a front-load mutual fund, which is deducted up
front from your investment and shared by the
mutual fund company with the adviser.
Caution: Some of these advisers may steer
you to the highest-commission products and frequent commission-based purchases. Unless you
have total trust that this won’t happen with a particular adviser, avoid this type of fee structure.
•Hourly fees, based on the amount of time
the adviser spends mapping out, discussing and
implementing a plan for you.
Typical fee: $200 per hour, for a minimum
of two hours.
•Annual percentage of your assets under
management.
Typical annual percentage fee: 1% of the
total amount of assets the adviser is managing
for you.
Best: If you just want a review of your current portfolio and suggestions to put it back on
course, a flat or hourly fee is most economical.
But if you want ongoing professional advice to
help you through the current crisis and beyond
—and plenty of hands-on attention—paying an
annual percentage fee is best.
How would you help me accomplish my goals?
Test an adviser by presenting a specific financial goal, such as saving for your child’s college
education or figuring out how much you can
withdraw from your portfolio in retirement. You
want to hear a thoughtful response tailored to
your circumstances, not a boilerplate plan that
the adviser uses for all clients.
Can I see a copy of your ADV Part II?
This is a disclosure form that financial planners
who advise you about investing are required by
law to file with the US Securities and Exchange
Commission (SEC) and/or their state’s securities
commissioner. It provides a wealth of information,
including any regulatory action or lawsuits against
the adviser. For even more valuable details, check
the adviser’s ADV Part 1 at www.adviserinfo.sec.
gov and/or www.finra.org/brokercheck.
Can you give me the names of professionals
you interact with regularly?
Professionals such as lawyers and accountants are more critical as references than handpicked clients because they work with many
different financial advisers. For instance, you
want to ask the estate attorney how skilled your
adviser is in estate planning…and ask the CPA
how well the adviser under­stands and integrates
tax law into his client plans. Also ask whether
the professional has any concerns about the adviser’s ability to respond to the needs of clients.
Can I have that in writing?
Any adviser worthy of your business should be
willing to provide a written agreement detailing
the total amount and source of compensation
(and the services that will be provided)…and
a thorough, written analysis of your financial
situation and his recommendations after you
have signed on.
Still Scared? Seven Ways
To Overcome Your Fears
And Get Back Into the
Market Now
Allan S. Roth, CPA, CFP, founder and president of Wealth
Logic, LLC, an investment and financial-planning firm
in Colorado Springs that serves clients with investments
from $10,000 to $50 million. He is author of How a Second Grader Beats Wall Street: Golden Rules Any Investor
Can Learn (Wiley). www.daretobedull.com.
S
nap out of it! That’s what Cher told a lovestruck Nicholas Cage in the film Moonstruck.
And that’s what many financial advisers are
telling gun-shy investors who are anything but
in love with the stock market right now.
Those investors are asking themselves if stocks
could suddenly plunge again because they’ve
recovered so much so quickly.
Top investment adviser Allan S. Roth has helpful answers for you, whether you pulled some
money out of stocks…held off on putting new
money in…and/or have money in other investments, such as money-market funds, CDs or
bonds, that you could consider shifting to stocks.
The seven rules that will help you ease back
into the market…
■ Don’t delay further
1. Start buying stocks right now—even though
the market could tank again. Will you be getting
in at the wrong time? Possibly. But accept the
fact that you will never catch the exact bottom
of the market.
2. Buy slowly and systematically. I am advising all my clients to invest equal amounts every
month, spread out over the next year, in a 401(k),
IRA and/or a taxable account.
Reason: This market has been so viciously
unpredictable that you will outsmart yourself if
you try to time your investments to take advantage of market pullbacks.
3. Invest only money you can keep in the
stock market for at least 10 years. In recent times,
I’ve seen many investors who have three-to-fiveyear time horizons stuck with big stock losses.
That’s not enough time to bounce back even if
the market suffers just one really poor year.
LET GOALS
DETERMINE RISK LEVELS
Whether you have new money to invest or just
existing holdings, you’re faced with the daunting
task of reevaluating how aggressive or conservative you want to be and determining how to
­allocate your investments. My suggestions…
4. Stop trying to figure out your “risk tolerance.” For many years, I quizzed clients on how
much volatility they could stomach in up and
down markets. I pointed out that how we think
we will react to pain is often different from how
we really react.
Better strategy: Let your financial goals determine the amount of risk you need to take.
That way, you let hard numbers—rather than
your own ever-shifting comfort levels—shape
your plan. Figure out how much money you
need to live on in retirement, then what kind of
return you must get to reach that amount.
Example: Say you have a $1 million retirement portfolio and you want it to generate $30,000
in annual income in today’s dollars for as long as 30
years. You don’t have to take much risk—you can
achieve that with conservative bonds. However, if
you want the same portfolio to generate $50,000 a
year, plus adjustments for inflation, you should consider including stocks as well.
Resource: Go to www.bankrate.com and click
on “Calculators,” then on “Investment Calculators”
Investment Smarts ■
and then “Retirement Income ­Calculator” for a
calculator that will help you determine your
appropriate asset allocation.
5. Stick like glue, in up and down markets, to
the asset allocation you choose. Consistency is
the most difficult part of investing because it requires the most emotional discipline. The average investor underperforms a total stock market
index by 1.5 percentage points annually because
of poor market timing—bailing out after downturns and jumping back in after upswings. (That’s
in addition to the effects of trading costs and
other expenses.)
If you weren’t able to maintain your allocation
through the past two bear markets, stop fooling
yourself. Ratchet down your risk to a level that
you can stick with.
Example: I’m in my early 50s with 15 years
to go until retirement. But my own portfolio allocates
33% to US stocks, 17% to foreign stocks and 50% to
bonds. That may seem too conservative, but it means
I lost only 16% in 2008, the worst year I’m likely to
see in my investing life.
6. Consider using basic stock index funds.
The knock against funds that track the Standard
& Poor’s 500 stock index or other indexes was
that even though they are sure to perform well
in bull markets, they are exposed to the full fury
of bear markets.
Under this common wisdom, “actively managed” funds can protect you in a bear market by
going to cash or buying defensive investments—
but that’s not what happened in this bear market. Many of the best managers made terrible
stock choices at the worst time.
7. Use the floor-and-ceiling approach to rebalance. Systematic rebalancing—in effect buying
low and selling high—is imperative to long-term
investment success. However, many investors
were too paralyzed to rebalance at the end of
2008 because it would have meant selling bonds
and buying large amounts of stocks. A “floorand-ceiling” approach can help you overcome
that paralysis.
How it works: Once you decide your target
allocation for different asset classes of stocks and
bonds, choose a “floor” (the most that you will
let your allocation in any asset class decrease
before you rebalance) and a “ceiling” (the largest
■ Turn the Worst of Times Into the Best of Times for You ■
amount you will allow an asset class to rise).
Typically, I use five percentage points.
Example: You have a $100,000 portfolio
consisting of 50% in a total stock market index fund
and 50% in a total bond market index fund. Say your
stock fund loses $10,000 while your bond fund stays
even. You now have 44.4% of your money in the
stock fund and 55.6% in the bond fund. To get back
to your original 50%/50% allocation, you need to sell
$5,000 worth of shares in your bond fund and use it
to buy $5,000 of stock fund shares. Alternatively, you
could use $10,000 in new investment money to buy
stock fund shares and keep your bond fund intact.
Shorting the Market
Steve Cohen, managing director at mutual fund and
exchange-traded fund manager ProShares, Bethesda,
Maryland. www.proshares.com.
S
ince hitting bottom on March 9, 2009, stocks
have staged a strong rally. But if they reverse course and begin falling again, there’s
a way to profit from that too. Buy a “short”
­exchange-­traded fund (ETF). These ETFs, also
called inverse ETFs, track a given stock market
index, such as the Standard & Poor’s 500 stock
index or the NASDAQ 100. Unlike most index
funds, they are designed to go up when the
index goes down. If the S&P 500 loses 5% on
a given day, for example, a short ETF tracking that index should gain 5%, less fees and
expenses.
In addition, there are short leveraged ETFs.
With these, you get about twice as much movement as the underlying index generates on a
given day. If the S&P 500 drops 5% in a day, a
short leveraged S&P 500 ETF would gain 10%,
again before fees and expenses.
Caution: Taking the inverse of an index
cuts both ways. If the S&P 500 gains 5% in a
day, a short leveraged S&P 500 ETF would lose
about 10%.
You can buy and sell an inverse ETF as you
would any stock, through a full-service or discount broker. There is no need to set up a margin account, as there is for short sales, and no
chance of getting a margin call for more cash
or securities. And you may be able to use these
10
ETFs in accounts where you can’t use margin,
such as retirement accounts.
There are dozens of short ETFs available.
They track broad as well as narrow stock market
indexes. Locate them by going to ETFConnect.
com and clicking on “Find a Fund.” Short ETFs
are those with the word “short” or “ultrashort” in
their names.
When It’s Your
Broker’s Fault
Dan Brecher, Esq., securities attorney in New York
City. He specializes in claims against brokerage firms.
I
t’s not your broker’s fault that the stock market plunged in 2008, but it might be his/her
fault that your portfolio lost as much value
as it did. Your broker could be legally responsible
for some of your losses if he…
•Invested your money more aggressively
than you told him to.
•Invested it more aggressively than was
appropriate for you.
•Lied to you about his credentials, education or track record.
•Charged excessive fees that cut heavily
into your profits.
•Violated his firm’s policies on such
matters as what promises he could make
and whether he could share in customer
profits.
If you believe that your broker might be guilty
of any of these missteps…
1. Track down the documents you signed
when you opened your account. If you can’t find
or never received your customer account agreement, request a copy from your broker.
2. Find the description of your investment objectives in these documents. If conservative objectives such as “income” or “wealth preservation”
are listed, yet your broker invested your money
mostly in risky securities (such as aggressivegrowth or microcap stocks) or on margin (borrowed money), there’s a good chance that you
can make a strong legal case against your broker.
■ If aggressive investment objectives—such
as “trading profits,” “growth” or “speculation”
—are listed, consider whether these goals are
consistent with what you told the broker you
wanted. Unscrupulous brokers sometimes overstate clients’ risk tolerance on these forms so
that they can invest more aggressively and earn
larger commissions. You could have a strong
case against your broker if these aggressive
investment objectives are clearly unsuitable for
you…you gave the broker discretionary authority over your account (or generally followed the
broker’s recommendations)…and you are a
relatively inexperienced investor.
3. Consider wheth­er the bro­ker’s supervisor
fulfilled his role. Brokerages have internal rules
detailing how super­visors should look out for
clients’ interests. If your broker invested your
money very aggressively, traded your account
on margin or made frequent trades, the brokerage company’s rules might say that a supervisor
should have contacted you to make sure you understood the implications.
4. Consider how your investments were described to you. Did your broker misrepresent the
risks? If so, he might be guilty of fraud. Your
case will be much stronger if this misrepresentation is in writing or was communicated to other
customers, too.
Example: You were told that securitized
mortgage derivatives were “the same as cash.”
5. If you believe that you have a case, contact
your city, county or state bar association and request a referral to an attorney specializing in securities law. (Go to www.findlegalhelp.org, then
select your state.) It should take this attorney
less than an hour to review your documentation, discuss the issues with you and determine
whether it’s worth proceeding. Such consultations typically cost about $250, but your regional
bar association referral program may offer initial
consultations for free or for a nominal fee.
Your account agreement states that conflicts
with your broker will be handled through arbitration, so the case is unlikely to go to court.
Most clear-cut cases, when properly presented
by an experienced attorney, end in settlement.
The rest go through arbitration.
Investment Smarts ■
How to Build a Business
Warren Buffett Would Buy
Jeff Benedict, attorney and award-winning investigative
journalist, Buena Vista, Virginia. He is the best-selling author
of nine books, including How to Build a Business Warren
Buffett Would Buy: The R.C. Willey Story (Shadow Mountain).
www.jeffbenedict.com.
T
he furniture and appliance company R.C.
Willey grew from a single cinder block
store on the edge of a Utah cornfield into a
company so successful that famed investor Warren
Buffett paid $175 million to acquire it in 1995.
Journalist Jeff Benedict concluded that the secret to Willey’s success lay in the management
principles of its longtime CEO, Bill Child, the sonin-law of the original founder. Among the most
important…
•Build a reputation for excellence—even
at the expense of profits. In the mid-1950s,
R.C. Willey repaired hundreds of poorly designed Hotpoint washing machines that it had
sold—after the manufacturer refused to do so.
This cost Willey nearly a full year’s profits.
In the early 1970s, Willey stood behind extended warranties that it had sold after the company legally responsible for the coverage went
bankrupt. This cost Willey $1.5 million.
Child considered these decisions to be investments in corporate reputation.
•Strive to offer the best values, not the
lowest prices. Offering the lowest price might
win you a customer once, but customers remember poor product quality long after they’ve forgotten the money they saved. R.C. Willey’s goal
is to offer well-made furniture and appliances at
the best possible prices.
•Treat potential customers as equals and
friends, not as targets (and make sure that your
employees do the same). Consumers remember
how they felt when they made a purchase nearly
as much as they remember the product or service
they bought. If the buying process is unpleasant, they will take their business elsewhere next
time—if it is enjoyable, they will happily return.
Also, become a part of the community your
business serves.
•Shun debt. When Buffett bought R.C. Willey,
it had more than a quarter billion dollars in annual
11
■ Turn the Worst of Times Into the Best of Times for You ■
revenue and essentially no debt. Buffett and Child
believe the risks of debt are not worth taking.
Borrowing seems like a great way to grow a
business when times are good—but debt can
turn into an inescapable trap in a recession when
sales slow and profits no longer cover operating
costs and loan payments.
Being in the black also meant Willey could
expand when the economy was struggling. Recessions might seem like the wrong time to expand, but Child saw that weak economies could
create opportunities.
•Don’t force employees to do things that
they don’t want to do. Instead, try to convince
them that they want to do these things. In the
1950s and 1960s, most retailers closed on holidays,
such as Memorial Day. Child suspected that holidays had the potential to deliver huge sales and
because other furniture stores were closed, Willey
could have all of this business for itself. Trouble
was, Willey’s sales staff wanted holidays off.
Child could have simply ordered his employees to work on holidays, but instead, he sat
down with them and explained that he expected
business to be very brisk, meaning big commissions for the sales staff. He asked his employees
to give it a try. They agreed and discovered that
Child was right about the big commissions.
•Learn the little details that shape your
customers’ experience. Child understood that
what he wanted in a furniture store was less
important than what his customers wanted. He
spoke with shoppers to find out what they liked
and what they didn’t when they visited his stores
and others. Their priorities became his own.
•Make your advertising stand out. If a company’s ads are the same as its competitors’ ads, the
advertising budget is wasted. Regional furniture
retailers tend to advertise in newspapers and on
the radio—few can afford television commercials.
Child told local stations that he was willing
to buy any unsold ad slots, regardless of what
shows were playing or the time of day. In exchange for this flexibility, Child demanded much
lower prices than other advertisers paid—5% to
20% of the usual rate.
•Embrace change. Businesses must change
to keep up with the changing world…keep
ahead of the competition…and keep themselves
from seeming stale.
12
When to Sell a Stock
Patrick Dorsey, CFA, director of equity research for
Morningstar, Inc., in Chicago, which tracks more than
290,000 investment offerings. He is author of The Little
Book That Builds Wealth: The Knockout Formula for Finding Great Investments (Wiley). www.morningstar.com.
V
olatile prices and the possibility of another staggering loss may make you want to
jettison your entire stock portfolio.
Wiser move: Distinguish between stocks with
a bleak long-term outlook and those that are likely to rebound. How to decide when it’s time to pull
the plug on or pare back a stock you own…
•When the changing business landscape
undermines the company’s com­petitive
advantage. This could be because of a shift
in technology, consumer tastes or government
­regulation.
Example: Garmin (GRMN) used to thrive as
the leader in mobile global positioning system (GPS)
devices, but now other devices, such as cell phones,
provide GPS capability in a more convenient and
cheaper form, and Garmin is not a leader in that highly competitive arena.
•When your stock’s dividend yield rises
to unsustainable levels. Companies whose
dividend is yielding more than 9% or 10% of the
share price rarely sustain the dividend. Either the
stock goes back up, which means that the yield
for new purchasers drops, or more commonly,
the dividend is reduced. If a major reason for
owning the stock was the dividend it threw off,
replace it with a stock that has a more stable
dividend.
•You want to upgrade the quality of your
portfolio. Say you own shares in a small technology company whose stock price has been
crushed over the past year. Consider selling the
stock and buying shares in a high-quality tech
company. High-quality tech companies don’t
sell at bargain-basement prices very often, so it’s
worth taking advantage of the opportunity.
•When a stock holding grows beyond
a certain percentage of your portfolio. For
safety and diversification, it’s wise to limit your
stake in any stock to 5% of the value of your
stock holdings.
■ The Stairway to
Higher Returns
Sheryl Garrett, CFP, founder of Garrett Planning Network,
an international network of fee-only planners based in
Shawnee Mission, Kansas. She is author of Just Give Me
the Answer$: Expert Advisors Address Your Most Pressing
Financial Questions (Kaplan Business) and Investing in
an Uncertain Economy for Dummies (Wiley). She was
recognized by Investment Advisor as one of the top 25
most influential people in financial planning. www.garrett
planningnetwork.com.
S
ometimes investors expect financial advisers to recommend complicated strategies
that reflect the complex world we live in today. But often the best solutions are simple, oldfashioned ones. That’s especially true at a time
when supposedly sophisticated approaches frequently fall flat and when low interest rates and
high market volatility threaten our nest eggs.
Example of a simple but effective solution: A corporate manager in his early 60s came
to me on the verge of retirement. He planned to
rely on $3,000 a month from Social Security payments and a pension plus another $1,000 from investment income generated by his $300,000 IRA.
To achieve that goal, his IRA would have to earn a
4% annual yield. But he didn’t want to bet on risky
investments.
I recommended a strategy called a “bond
­ladder.”
How it works: In his $300,000 IRA, my client purchased a variety of high-quality corporate
bonds that would mature at staggered intervals.
They included three-year bonds rated AAA with
yields of nearly 4% and four-, five-, six-, sevenand eight-year bonds with yields ranging as high
as 6%.
When each bond matures, my client can roll
over the proceeds into a new bond with an
eight-year maturity, thereby continuing the ladder. That way, if interest rates spike up, he can
reinvest money from the newly maturing bonds
at higher rates, pushing up his overall returns.
If interest rates decline, his overall returns won’t
plunge, because he’ll still receive higher yields
for at least several years.
Shrewd steps to keep in mind…
•Bonds bought for ladders should typically mature in no more than 10 years because
Investment Smarts ■
the additional yields from longer maturities
usually don’t justify tying up your money for
that many more years.
•Avoid using US Treasury securities now.
Yields are at historic lows. Alternative: Consider
a bank certificate of deposit or the highest-rated
corporate bonds.
•Don’t try to build a bond ladder with
bond mutual funds. You have no control over
when the bonds in those funds mature and
when they are bought and sold, all of which
­affect your returns.
Instead, call the fixed-income desk at a
discount brokerage firm, such as Fidelity Investments (800-544-9797, www.fidelity.com)
or Vanguard (800-992-8327, www.vanguard.
com). Tell a fixed-income expert that you want
to build a bond ladder.
•Make sure that you are paying a fair
price for your bonds. Shopping for bonds is a
bit tricky because you aren’t told how much commission or markup the bond broker is ­taking—
it’s included in the price of the bond. You can
check what others are paying for the same
bond at a large, online bond supermarket, such
as www.bondsonline.com or www.bonds.com.
Don’t Wreck Your
Retirement! How to
Overcome Your Financial
Fears and Disagreements
Bill Losey, CFP, certified retirement coach based in
Wilton, New York, and author of Retire in a Weekend
(Love Your Life). www.myretirementsuccess.com.
T
rying to shape a secure and enjoyable
retirement is an emotion-laden process,
especially in the middle of today’s economic upheaval and stock market volatility.
Foremost among these emotions: Fear.
That includes the fear of outliving your savings
and of soaring health costs.
So having a partner to help tackle the fears
and share the decision-making can be vital—in
both the planning and execution. But first you
have to overcome the many disagreements that
13
■ Turn the Worst of Times Into the Best of Times for You ■
typically arise when two people have different
views of what retirement should look like.
Common sore points: A recent Fidelity Investments study found that 60% of couples differ on the age at which they should retire…and
42% have very different ideas about retirement
lifestyle—ranging from what they’ll do during
retirement to how much they’ll spend on luxuries each year. How to turn retirement planning
into a team effort…
IDENTIFY YOUR FEARS
If you can identify the fears, you might be able
to defuse them. Among the most common…
•Fear of outliving your savings.
Symptoms: Insisting that it’s not yet time to
retire, despite advancing age and/or seemingly
sufficient savings…refusing to spend money on
anything but necessities.
Solutions: Show the fearful spouse that your
Social Security benefits, life insurance and conservative retire­ment withdrawal strategy ensure
a steady income for many decades. If your investment portfolio is heavily in stocks or cash,
invest a portion of your savings in high-quality
bonds to guarantee that you will have enough
guaranteed income.
Important: You can easily reduce spend­ing in
certain areas—such as travel­ing and eating out—
later in retirement if the money does run low.
•Fear of health problems.
Symptoms: A desire to retire as soon as possible, then live it up early in retirement “while you
still can”…also, pushing hard to buy a long-termcare insurance policy despite the huge expense.
Solutions: Take that dream vacation before
you retire…cut back on work hours instead of
retiring entirely…agree to buy long-term-care
insurance.
•Fear of stock market volatility during
retirement.
Symptoms: Wanting to pull most or all savings out of stocks…obsessing over the possibility
that your savings could evaporate at any time.
Solutions: Realize that a significant portion
of the household’s savings already are protected
14
from stock market fluctuations, including your
Social Security benefits, life insurance proceeds
and bond investments. Don’t ignore the fact that
every investment carries risks—ultraconservative investments carry the risk of not keeping
pace with inflation…and “guaranteed” annuities
are not guaranteed against the risk that the insurance company selling the annuity could fail.
One partner might suggest separate-but-coordinated accounts. Tell your financial adviser that
you and your partner each will have complete
authority over some portion of your retirement
savings, with the adviser providing guidance and
coordinating the portfolios to make sure that the
overall allocations and withdrawal strategies remain sound.
DREAMS, NOT NIGHTMARES
For many couples, money is the topic most
likely to lead to arguments about retirement.
For that reason, it’s often better to initially focus
planning conversations on nonfinancial matters
to get both partners thinking and interacting
positively. Potential conversation starters…
•What would you attempt in retirement
if you knew that you could succeed at it?
•Assuming that health, time and money
were not issues, how would you spend the
rest of your life?
After discussing these topics, imagine and discuss what your day-to-day retirement life would
be like. How much time do you expect you and
your partner to spend together in the typical retirement week?
If this conversation goes smoothly, segue into
the financial aspects of retirement that many
couples find more challenging to discuss.
If you find that your plans go no further than
“travel” or “golf,” you need to do some more
thinking. If you and your partner can’t come up
with a way to fill the rest of your time that satisfies both of you, you might not be ready to retire. Consider pulling back to three or four work
days per week at first. This kind of “phased retirement” is a less jarring life transition than traditional retirement.
2
Credit Smarts
Borrow Better—How to
Get the Best Deal Now
On Every Type of Loan
T
he ongoing credit crisis has made
it more difficult to obtain loans,
including mortgages, home-equity
loans and even credit card and student loans.
But that doesn’t mean it’s a bad time to borrow if you qualify.
The Federal Reserve cut its benchmark interest rate from 5.25% in 2007 to a range of zero to
0.25% currently. This has helped lower rates on
many types of loans.
To find the best deals today…
MORTGAGES
To get a rate anywhere near 4.5% on a 30-year
mortgage with reasonable points and fees, you
will need a credit score of at least 680 (preferably
720) out of 850…verifiable, stable income…and
enough cash to make a down payment of at
least 20%. Your interest rates will climb quickly
as your credit score drifts below that level, and
many lenders will not be interested in lending
to you at all. Less-qualified borrowers should
postpone their mortgage applications until requirements loosen up so that they can qualify
for better rates.
Best values today: “Conforming” ­fixed-­rate
mortgages—those that are within current limits for Fannie and Freddie backing, which range
up to $625,500, depending on location. Rates on
conforming mortgages remain very reasonable
by historical standards, averaging about 4.5%.
Rates on jumbo mortgages, those that exceed
Fannie and Freddie limits, have been about 1 percentage point higher than conforming mortgage
rates recently. If you require a jumbo mortgage to
purchase a property, consider choosing cheaper
property instead or make a much larger down
payment.
Greg McBride, CFA and senior financial analyst for
Bankrate.com, an online provider of interest rate information and financial advice based in North Palm Beach,
Florida.
15
■ Turn the Worst of Times Into the Best of Times for You ■
Where to shop: Shopping around among
banks, credit unions and mortgage brokers has
become even more crucial because rates vary
greatly. Look at Web sites that compare mortgage rates, including my site, Bankrate.com.
Compare all loan costs, not just interest rates,
before settling on an offer. Some lenders attempt
to make loans appear attractive by charging low
interest rates, but then tack on excessive fees and
points.
Recent* average rates for conforming
loans: 4.48% for a 30-year fixed-rate mortgage
and 3.5% for a 15-year fixed-rate mortgage. A
30% down payment can shave one-quarter to
one-half percentage point off the rate.
Best values today: If you can afford the
36-month loan’s higher monthly payments, lean
toward a 36-month loan rather than a longer period. That way, you’ll end up paying much less
in total interest payments.
Where to shop: Local credit unions. Interest rates on new car loans often are more than
half a percentage point lower at credit unions
than at other types of lenders. Also, dealerships have more incentive to offer their best
rates when they know that they must compete
with another offer.
HOME-EQUITY LOANS
CREDIT CARD LOANS
Lenders have been cutting back credit limits
and canceling some credit lines. But if you have
at least a 20% equity stake in your home even after the value of your home has plunged in today’s
market, it is possible to obtain a second mortgage with an appealing rate. That means that the
total amount of all loans secured by your home,
including the home-equity loan or home-equity
line of credit (HELOC), may not exceed 80% of
the value of the property. If you have a HELOC
and may need the money before long, consider
drawing on the credit line now and letting the
money sit in a bank account until you need it.
Best values today: HELOC* interest rates,
which are variable, were recently 4.92% (for
$30,000 of credit) on average, well below the
6.28% average fixed rate for home-equity loans.
Where to shop: Same as for mortgages.
AUTO LOAN
Vehicle loans recently have been at the lowest
rates in several years, helped by special financing offers from struggling auto manufacturers.
Only car buyers with credit scores above 650
will be able to obtain the best rates, however. If
you have poor credit, this is not a good time to
finance a car.
If the dealer is offering a 0% rate, you will
need a credit score of at least 680, and possibly
700, plus a 10% down payment in many cases.
Determine your credit score in advance on www.
myfico.com, and if it is too low, consider trying
to improve it before you get a car loan.
* Subject to change.
16
Examples of recent rates: 2.83% for a
four-year new car loan…2.75% for a three-year new
car loan…and 2.75% for a three-year used car loan.
Credit card interest rates are rising. If your
credit score is above 620 and you have a card
currently charging more than 15%, you should
be able to obtain a lower rate for both balance
transfers and new purchases.
Best values today: If you carry a significant
balance and pay a high rate, switch to a card
with low rates on balance transfers. This could
include cards with ultra-low six- or 12-month introductory “teaser” rates, particularly if you expect to pay down your credit card debt in the
near future. If you do not currently carry a balance on your cards but sometimes do, select a
card with a low interest rate on new purchases.
If you never carry a balance on your credit cards,
select a rewards card or cash-back card.
Where to shop: Use Web sites that compare
credit card features.
STUDENT LOANS
It has become much more difficult to obtain
student loans from private lenders in the past year,
particularly if your credit score is below 650.
On the bright side, many government student
loan programs recently have become more flexible and more appealing, with lower interest rates
and higher borrowing limits in some cases. Take
full advantage of these programs before searching for private student loans…
•Stafford loans provide undergraduates with
up to $12,500 per year depending on degree
status and years in school. Rates are currently
3.86%.
■ •Perkins loans have rates capped at 5%. They
are available only to students in extreme financial
need and cannot exceed $5,500 per year.
•PLUS loans allow the parents of undergraduates to borrow up to the full cost of tuition with fixed interest rates capped at 6.41%
for Direct PLUS Loans. A credit check is required, but this credit check is more forgiving
than those used by private lenders. See the US
Department of Education Web site for more details (www.studentaid.ed.gov).
Where to shop: Fill out a Free Application
for Federal Student Aid (FAFSA) form (www.
fafsa.ed.gov). Discuss grant programs and federal student loan programs with the college’s
financial aid office.
How to Get Rid of
Debt Collectors
Paul Stephens, director of policy and ­advocacy, Privacy
Rights Clearinghouse, a nonprofit consumer information
and advocacy group based in San Diego. www.privacy
rights.org.
D
ebt collection agencies often harass
consumers to pay their bills. Unfortunately, the collectors do not always get
their facts right. Sometimes they pursue the
wrong people or seek payments on bills settled
years before. On other occasions, they pursue
bills that are legitimately owed but intentionally
deceive debtors about their rights. Ways to stop
collection agency harassment…
GET THE FACTS
If you receive a call from a debt collection
agency, get the caller’s name…the name of the
collection agency…the address, phone and fax
numbers…the amount that you allegedly owe…
and the name of the creditor—the company or
individual that claims you didn’t pay a bill. The
collection agency is legally required to provide
this information upon request. Then check with
the Association of Credit and Collection Professionals (www.acainternational.org) to see if the
agency that called you is a member. If it is not,
Credit Smarts ■
call the original lender and ask if the collection agency is representing it.
Also note any verbal abuse, lies, threats or
profanity made by the collection agent—The Fair
Debt Collection Practices Act of 1977, a federal
law that governs debt collection practices, bars
such behavior. It also says that agencies cannot
call between 9 pm and 8 am.
Ask to have all evidence of the debt, such as a
copy of the original receipt or contract, mailed to
you. Collection agencies sometimes decide that
it is not worth their trouble to compile evidence,
particularly for debts smaller than $100.
Important: Refuse to make any comment
about the accuracy of the debt whether or not
you believe it is legitimate. Acknowledging responsibility for a debt can extend the period
of time during which the collection agency or
the original creditor can legally sue you for
repayment.
STOPPING THE PHONE CALLS
It is your legal right to demand that the collection agency stop phoning you. Say that future
contact with you must be made only in writing to your home address. Don’t give them your
name and address if they ask for it—they should
already have it. Add that this is your right under The Fair Debt Collection Practices Act. That
way, you’ll have written evidence of any claims
or promises.
Write a letter to the collection agency reiterating what you have said, including your request
for evidence of the debt and your ­insistence that
the phone calls end. Send this letter—and all future correspondence to the collection agency—
by certified mail with return receipt requested.
Note: The Fair Debt Collection Practices Act
applies only to debt collection agencies. Businesses attempting to collect money owed directly to them, government agencies and property
managers are not required to follow these rules,
though some states have rules that cover them
as well.
PRESENT YOUR CASE
When you receive a written ­account of the debt
from the collection agency, send your ­response
ideally within 30 days (according to The Fair
Debt Collection Practices Act, if you do not dispute the debt within 30 days, the debt collector
17
■ Turn the Worst of Times Into the Best of Times for You ■
will consider the debt valid). How to handle the
following scenarios…
•If you believe that this is not your debt,
or that you already have paid this bill, write a
letter disputing the debt. A sample debt dispute
letter is available on the Privacy Rights Web site,
www.privacyrights.org.
Include any relevant evidence, such as a copy
of a canceled check showing that you already
paid. Ask the collection agency to send you written confirmation that it no longer holds you accountable for the debt.
Once you file this written dispute, the collection agency is legally required to conduct an investigation into the legitimacy of the bill before
pursuing payment any further.
•If the agency believes that the debtor
is at your address or phone number but is
mistaken, write a letter explaining that the person doesn’t live there. A sample “notice to cease
contact regarding debt” for the debtor in question is available on the Privacy Rights Web site.
•If you know that you are the victim of
identity theft ­ because you previously have
found illegitimate charges on your credit card
accounts or discovered credit accounts opened
in your name, send the collection agency a letter
stating this. A sample letter is available on the
Privacy Rights Web site.
Be sure to include a copy of a police report
confirming identity theft if you have one. This
report should list all of the fraudulent accounts
opened in your name or the fraudulent charges
made using your accounts.
Otherwise, submit a complaint to the Federal Trade Commission by calling 877-438-4338
or by using their on-line “Complaint Assistant”
(www.ftccomplaintassistant.gov). Include any
additional evidence of identity theft as well,
such as copies of credit card receipts with signatures that are not yours.
•If a debt is yours but is many years old,
the collection agency or original creditor might
no longer have a legal right to sue you for this
money or to report the debt to the credit bureaus.
The statute of limitations varies depending on
your home state and the type of debt involved,
but often it is between three and six years. Contact your state’s attorney general’s office.
18
Inform the debt collection agency that the
statute of limitations on the debt has expired,
and insist that it stop contacting you.
Warning: Do not acknowledge that the debt
was yours. Debt collection agencies sometimes
attempt to “re-age” debts that have passed statute
of limitations deadlines. They might convince
the debtor to acknowledge responsibility for the
debt or to send a small partial payment, either of
which can reset the statute of limitations clock.
(It is the date of most recent account activity, not
the date the debt was incurred, that matters in
many cases.)
•If you cannot afford to pay a legitimate
and recent debt, try to work out a payment
plan with the collection agency (unless they direct you to negotiate with the original lender), or
have any late-payment fees and interest penalties
reduced or voided.
Do not make any payment until you have
received a written, signed copy of the terms
of your payment agreement. This agreement
should include a promise that the debt will be
considered paid in full for whatever amount you
have agreed to send…that no mention of late
payment or nonpayment will be placed on your
credit report…and that any mention of this late
payment that already appears will be updated to
state that the debt now has been paid in full.
If the late payment later appears on your credit report in a manner more negative than you
negotiated in this agreement, send a copy of the
agreement directly to the credit reporting agencies and request that it be corrected.
WHEN A COLLECTION AGENCY
WON’T GO AWAY
Disreputable collection agencies sometimes
continue their aggressive tactics even after
consumers invoke their legal rights. If this occurs, report the collection agency to the Federal Trade Commission (877-382-4357, www.
ftc.gov) and your state’s attorney general (visit
the National Association of Attorneys General
Web site at www.naag.org).
Warn the collection agency in writing that it
has violated your legal rights under The Fair Debt
Collection Practices Act. Threaten to take legal
action if the abuses continue. If the ­harassment
■ does not end, consider hiring an attorney. The
Web site of the National Association of Consumer Advocates (www.naca.net) or the Web site of
lawyer database ­ Martindale-­Hubbell, www.mar
tindale.com, can help you locate an appropriate
attorney in your region.
You Need Higher Credit
Scores Than Ever—Our
Insider Secrets
John Ulzheimer, president of consumer education for
Credit.com, Inc., a credit information Web site based in San
Francisco. He formerly worked with the credit score developer Fair Isaac (FICO) and the credit bureau Equifax. He
is author of You’re Nothing But a Number: Why Achieving
Great Credit Scores Should Be on Your List of Wealth Building Strategies (Credit.com Educational Services).
F
our years ago, a credit score of 580 was
good enough for you to earn approval for a
wide range of attractive mortgages and other loans. Today, borrowers need scores well into
the 700s (out of 850) to obtain similar terms.
Achieving these top-tier credit scores is
tough enough when the system is fair. Often it
isn’t. Harmful practices by retailers and ­ credit­reporting agencies can keep you from earning
your rightful credit score. How to protect your
score…
•Decline all offers from stores that say,
“No payments until…”
Reason: Retailers typically team up with ­third­party finance companies to make these offers.
They are the same finance companies that make
high-interest-rate loans to high-risk borrowers.
If one of these lenders is listed on your credit
report, the scoring models that calculate your
credit score might lower your score—even if all
you did was accept an offer to delay payments
on a flat-screen television or a coffee table.
•Do not apply for more than two or three
credit cards, including store cards, within
any 12-month span.
Reason: Each credit card you apply for, including store cards, posts a credit “inquiry” on
your credit report. Make more than a few inqui-
Credit Smarts ■
ries within a few months—which often happens
around the holidays when consumers take advantage of special card offers—and your credit
score might fall. These inquiries will continue to
affect your credit score for 12 months.
•Before you agree to become a customer,
ask small lenders, cellular service providers
and utilities whether they report on-time
payment of bills to credit bureaus. If you
have a choice of which company or lender to
use, lean toward those that do report, so your responsible use of this credit counts in your favor.
Reason: With many credit card issuers, even
when you act responsibly, you are not rewarded
—yet when you make even a small mistake, you
are punished. Because many utility companies,
cell-phone service providers and small lenders,
such as credit unions, don’t bother to report ontime payments to any of the credit bureaus, they
deprive their customers of an opportunity to improve their credit scores. But, if these customers
default or their bills are turned over to a collection
agency, that is reported, generally through the
collection agency assigned to recover the debt.
•Check your credit report for mistakes
six months before applying for an important loan.
Reason: If you find an error on your credit
report that is lowering your score, you can contact the credit bureau and correct the problem in
time. If you don’t check, when you apply for the
loan, you may discover that your credit score is
unfairly low.
No matter the mistake, it takes up to 30 days
for credit bureaus to update credit reports.
Best: Check your credit report with all three
­credit-­reporting bureaus—free—once every 12
months at www.annualcreditreport.com. You
can also purchase your credit score for $7.95
when you get your free report.
•When a customer service rep agrees
that a late or missed payment notice was
in error, ask to be sent confirmation to this
effect on company letterhead. This statement should note your name, account number
and the date of the bill in question. If the erroneous late or missed payment later appears on
your credit report, you can send copies of this
statement directly to the credit bureaus.
19
■ Turn the Worst of Times Into the Best of Times for You ■
Reason: Even when a lender agrees that it
was wrong to accuse you of a late or missed
payment, the lender may still report the problem
to a credit-reporting agency. The customer service reps who correct the billing mistakes might
lack access to the automated system that reports
late and missed payments to credit bureaus.
Don’t Forget These
Basic Ways to
Protect Your Score
C
redit scores are so important from the interest rates you receive on credit cards, to
landing that great job. Here are three ways to help
boost your score…
•Use only a small amount of your available credit. Your credit score will suffer if you
use more than 10% of your available credit on a
particular account or among all your accounts.
•Vary your credit. It’s important to your
score that you have many different types of
credit, including several of the following: Credit
card, retail store card, gas card, auto loan, home
loan, student loan and personal loan.
•Do not close old accounts. The older your
credit card accounts, the better for your credit
score.
John Ulzheimer, president of consumer education for
Credit.com, Inc., a credit information Web site based in San
Francisco. He formerly worked with the credit score developer Fair Isaac (FICO) and the credit bureau Equifax. He
is author of You’re Nothing But a Number: Why Achieving
Great Credit Scores Should Be on Your List of Wealth Building Strategies (Credit.com Educational Services).
FDIC Information
T
he Federal Deposit Insurance Corporation
(FDIC) says that it never reveals its “Bank
Watch List” to the public.
Among the companies that rate financial institutions are AM Best Company Inc., Bankrate,
20
Inc., BauerFinancial, Inc., and Veribanc Inc. Most
charge for their information.
One reliable company, fortunately, offers its
ratings and comments for free—Bankrate.com.
Its “Safe & Sound” service (www.bankrate.com/
rates/safe-sound/sspromo.aspx) evaluates the
financial strength of 17,000 banks, thrifts and
credit unions, rating each from one to five, five
being the top rating. You can search by name
of the institution, state, zip code, asset size and
rating. I recommend starting there to find out
more about your bank. While a high rating is not
a guarantee of financial strength, it (along with
other available information, such as annual and
quarterly reports) at least gives you facts to use
when forming your own opinion.
Nancy Dunnan, New York City–based financial and
travel adviser and author or coauthor of 25 books, including How to Invest $50–$5,000 (HarperCollins).
Negotiate Better Terms
On Your Credit Cards
Curtis Arnold, founder and CEO of US Citizens for Fair
Credit Card Terms, Inc., which educates consumers about
credit cards, based in Little Rock, Arkansas. Its Web site,
CardRatings.com, features consumer reviews of credit
cards. Arnold is author of How You Can Profit from Credit
Cards (FT Press).
C
redit card issuers are eager to hold on
to good customers, especially as defaults
on card payments by financially strapped
customers soar. That means consumers have
the power to bargain for favorable terms.
Many terms are negotiable, from interest rates
to rewards. The better your credit score and payment history, the more clout you have.
Start by talking with a customer service representative. If he/she can’t help, ask to speak
with a manager. Arm yourself with knowledge
about offers from rival card issuers. CardRatings.com compares rates, fees and rewards for
dozens of cards. Be polite but persistent and
you can negotiate…
•Interest rates. If your credit score is 730 or
above, you shouldn’t be paying more than 9%
in annual interest. Card issuers will frequently
lower your rate by two to five percentage points
■ immediately. If an issuer suddenly notifies you
of a rate increase on an existing balance and
you have no luck negotiating, you should “opt
out” in writing, declining the new terms. You
will lose charging privileges, effectively closing
the account, but you will be allowed to pay off
your balance at the original rate.
•Annual fees. Most issuers will waive the
first year’s fee, but always ask for another waiver
in year two—it is often granted.
Note: Super-low-rate cards are least likely to
forgo the annual fee.
•Late fees. If you ask, issuers will usually forgive one or two late payments a year, especially
if you make a payment immediately by phone
or online. Also, if a fee is imposed for exceeding
your credit limit, ask to have it waived and ask
the issuer to automatically decline new charges
that exceed your credit limit.
•Credit line. If an issuer lowers your credit
limit, call and say, “This doesn’t work for me.” In
this tight credit environment, only the most creditworthy customers will succeed, but it’s worth
trying.
•Rewards. If your issuer gives you cash rebates of only 1% on what you spend, ask for
more. Cite competing offers.
Say: “I’ve been getting 1% for the past 10
years, and there are other cards that would give
me 2% rebates once I spend enough.” Various issuers, including Capital One, have been known
to raise rebate levels, at least temporarily.
•Balance due. If you are carrying a substantial balance and having trouble paying it off, ask
whether the issuer is willing to stretch out payments. Some card issuers may even accept less
than full repayment if you agree to settle within
a certain time.
Credit Smarts ■
Checking That
Pays More
Jim Bruene, author and publisher of NetBanker, a blog
devoted to finance and banking issues (www.netbanker.
com), and Online Banking Report, 4739 University Way,
Seattle 98105. He previously led the development of US
Bancorp’s online banking program.
M
ore than 450 regional banks and credit
unions now offer “reward checking”
accounts, which pay interest rates
comparable to or even greater than those paid
by many money-market funds or certificates of
deposit (CDs). Rates above 3% exist, though 1%
to 3% is more common.
The catch: Your account earns little or no
interest in a given month if you violate a rigid set
of rules. Details vary, but requirements might include making at least 10 debit card transactions
each month…accessing your account online at
least once each month…and setting up direct
deposits into the account.
Most reward checking programs charge no
monthly fee, impose no minimum balance, reimburse ATM fees charged by other banks and are
insured by the Federal Deposit Insurance Corporation (FDIC) or National Credit Union Administration (NCUA). Banks can lower the rates they
pay on these accounts with little warning, however, and the high interest rates might be limited
to the first $10,000 or $20,000 in the account.
Example: Kinderhook Bank in New York
offers a 2.5% yield on balances up to $20,000 (www.
nubk.com).
Bank Deals, an independent blog, maintains a list of these accounts at www.deposit
accounts.com. BancVue, which helps small
banks run reward checking programs, has a
searchable Web site of some programs at www.
checkingfinder.com.
21
3
Consumer Savvy
Pay Less for College T
he average tuition for one year of
private college in the US has reached
$29,056…the average state school
tuition, $8,655. And ­tuitions at some
schools greatly exceed these figures.
But these are sticker prices. Many colleges are
dis­counting tuition. The average private tui­
tion discount is 45%, and the average public
school dis­count is around 15%. Here’s how to
increase the odds that you’ll get a discount…
•Look for no-loan schools. If your family
qualifies for need-based aid, check out schools
that give out more need-based grants—which
don’t have to be repaid—than loans. A growing
number of the nation’s most selective schools
no longer include loans in their ­ financial-­aid
packages. Instead, they award grants to families
who need them.
Examples of no-loan schools: Amherst,
Bowdoin, Colby, Davidson, Harvard, Haverford, Po­
mona, Princeton, Swarthmore, Williams and Yale.
22
Find a list of schools with favorable financialaid policies at the Web site of the Project on Stu­
dent Debt (www.projectonstudentdebt.org, type
­“Financial Aid Pledges to Reduce Student Debt”
into its search engine).
To determine if you qualify for financial aid, use
the on-line calculator at www.fafsa4caster.ed.gov.
You’ll find more college-funding calculators at
www.finaid.org, including an “Expected Family
Contribution and Financial Aid Calculator.”
•Look for merit dispensers. If your fam­
ily is too affluent to qualify for need-based
cash, look for schools that hand out lots of
merit aid, which is given to promising students
without regard to whether they need the money.
A sampling of the schools in this category, along
with their average annual renewable merit
awards, includes ­ Tulane University ($14,000$24,000), Rice University ($15,800-20,800),
Lynn O’Shaughnessy, financial journalist and author of
four books, including her latest, The College Solution: A
Guide for Every­one Looking for the Right School at the
Right Price (Financial Times). Based in La Mesa, California,
she has two children, one attending a liberal arts college
in Pennsylvania. http://thecollegesolutionblog.com.
■ Pepperdine University ($19,673), Boston Col­
lege ($17,224) and Case Western Reserve Uni­
versity ($19,000).
Lots of public institutions also are offering
­merit-­based discounts. These include the Univer­
sity of Virginia, University of Florida, University
of South Carolina and Miami University in Ohio.
•Check on-line to find generous schools.
To discover how much money an institution
gives out, check the school’s profile on www.
collegeboard.com by entering the name of the
school in the search box. That will take you to
the “College Quick Finder.” Under the college
information, click on “Cost and Financial Aid.”
There you’ll find statistics on financial aid and
merit aid (non-need–based aid).
Another resource: Each school’s “Common
Data Set” is a gold mine of statistics that includes
information on need-based financial aid, merit
aid, student retention, majors, freshman class
profiles, gender breakdown and much more.
Most schools post their Common Data Sets on
their Web sites. To find the information, try a
Google search for the name of the school and
the phrase “Common Data Set.”
•Skip the very selective schools. Students
are more apt to receive ­financial help if they are
among the top 25% to 30% of applicants to a
particular school. You can compare SAT and
grade-point averages by looking at college snap­
shots at www.collegeboard.com.
•Play the gender card. At schools where fe­
males are in abundance, male applicants don’t al­
ways have to be as qualified to be accepted and/or
may receive more financial aid—and vice versa.
Example: Technical and engineering schools
may be more inclined to offer aid to women. Go Green and Save
$8,000 a Year
Jeff Yeager is author of The Ultimate Cheapskate’s Road
Map to True Riches (Broadway). www.ultimatecheapskate.
com.
A
friend of mine once questioned my cre­
dentials as both a cheapskate and an en­
vironmentalist (I’m proudly both) when
he discovered that I use disposable ­razors.
Consumer Savvy ■
“What do you expect?” I said indignantly. “I
hardly ever find the other kind in my neighbor’s
trash.”
Okay, that’s a joke. But what’s not a joke is how
much money you’ll save by incorporating a few
simple “green” practices into your life. Contrary
to what many people think, living green—doing
what’s environmentally friendly—usually doesn’t
cost more. It’s often the least expensive way to
go. After all, the bottom line when it comes to
conservation is consuming wisely—and that
usually means spending less.
Here’s how you can save more than $8,000 a
year by going green…
•Limit portions. According to the US De­
partment of Agriculture, roughly 25% of all edible
food bought by Americans goes to waste. That
is shameful in a world where billions of people
are literally starving. Also, the raising, process­
ing, packing, distribution, sale and waste dispos­
al associated with the food we eat—and don’t
eat—creates a huge carbon footprint (a measure
of the impact of our ­ activities on the environ­
ment). The average US household spends more
than $6,000 a year on food (groceries and meals
out). If you eliminate waste by preparing smaller
portions, eating leftovers and storing foods ef­
ficiently, you could save $1,500 a year.
•Plant trees. Trees improve air and water
quality and increase the value of your home. Ac­
cording to the US Department of Energy, as few
as three strategically planted trees in your yard
can lower your heating and cooling costs. Trees
can provide shade in the summer and block cold
winds in the winter. Even if you spend $100 for
each of those trees (that’s only a few dollars a
year when amortized over the life span of most
trees), you will save as much as $250 a year when
the trees mature.
•Reduce your lawn. A beautiful lawn typi­
cally requires water, as well as fertilizers, weed
killers and pesticides. That can be costly for you
and the environment. And if you hire a lawn
­service­—the US lawn-care business is approxi­
mately a $12-­billion-a-year industry—you’re pay­
ing even more. Reduce your lawn space by half
by planting a no-maintenance ground cover, such
as pachysandra or creeping thyme, and trim half
your lawn-care costs, say $500 if you are spend­
ing $1,000 a year now.
23
■ Turn the Worst of Times Into the Best of Times for You ■
•Be thrifty with clothes. Only a small frac­
tion of all clothing thrown away in the US is
truly worn out, representing a tremendous
waste of ­ resources. Some clothing, including
high-quality designer brands, finds its way into
thrift shops and yard sales before it reaches the
landfill. If you buy this gently used clothing,
expect to save about 80% or more compared
with the same items purchased new. With each
US household spending an average of $2,000
annually on clothing, buying just half of your
family’s clothing at thrift stores allows you to
save a fashionable $800.
•Use fewer paper products. The typical US
household spends about $400 on paper prod­
ucts each year, with most of those products
ultimately destined for recycling or a waste­
basket. Make a pact to cut your paper use in
half by using cloth napkins and ­towels instead
of paper…and real plates and cups rather than
disposable. Even after factoring in the cost of
washing linens and dishes, you could save
about $200 a year.
•Become an energy-saving star. As your
household appliances need replacing, look
for the Energy Star ­label when you are shop­
ping for new ones. Energy Star is a US gov­
ernment program designed to help protect the
­environment­—and save people ­ money—by
promoting ­energy-­efficient products and prac­
tices (see www.energystar.gov). Energy Star–
rated appliances are competitively priced and,
when paired with other Energy Star recom­
mendations (such as beefing up insulation and
installing low-flow water fixtures), could save
the typical household $400 a year.
•Eat lower on the food chain. In general,
it takes more resources, generates more pollu­
tion and costs more money to eat foods high
on the food chain, such as beef and poultry. It
takes seven pounds of grain to add one pound
of weight to cattle. The typical American diet–
which includes more than 200 pounds of meat
per year (an increase of 50 pounds since the
24
1960s)–is a far cry from the healthy diet recom­
mended by the US Department of Agriculture’s
food pyramid (www.mypyramid.gov). If you eat
more whole grains, fruits and vegetables, you
and Mother Earth will be healthier and you’ll
likely save 20%, or about $1,200, on your annual
household food budget.
•Drink tap water. It takes 1.5 million bar­
rels of oil every year to manufacture disposable
plastic water bottles for the US market—that’s
enough to fuel 100,000 cars for a year. Also, if
you drink only bottled water, you’ll spend about
$1,400 annually to get your recommended daily
amount of H2O, as opposed to 49 cents for one
year’s supply of just-as-healthy tap water. Use
the calculator at www.newdream.org to calculate
your savings based on your actual consumption,
but it’s likely to be more than $1,000.
•Stay close to home. Each US household
now generates an average of 10 vehicle trips per
day. With the price of gas at about $3 a gallon, if
you consolidate or skip just two or three of those
daily trips, you’ll save money—and reduce pol­
lution. According to AAA, it costs $9,369 a year
(excluding loan payments) to keep the average
car on the road. So after excluding fixed costs,
such as insurance, finance charges, license and
registration, a 25% reduction in use could mean
a savings of $890.
•Use your library. You already own almost
every book worth reading—your tax dollars
were used to stock your public library. So in­
stead of buying books, borrow them. You’ll save
trees and help reduce the publishing industry’s
War and Peace–size carbon footprint. Also bor­
row music CDs and movie DVDs. If you borrow
one book a month instead of buying a hardcover
for $25 and borrow two movies a month instead
of spending $5 per movie at a video store, that’s
a total savings of $420 a year.
Helpful resource: To see how much more
you can save by living green, use the Personal
Greenhouse Gas Emissions Calculator at www.
epa.gov. In the search box, please insert Per­
sonal Greenhouse Gas Emissions Calculator.
■ The 10 Most Affordable
—And Desirable—Places
To Live in the US
Bert Sperling, coauthor of Cities Ranked & Rated (Wiley)
and Best Places to Raise Your Family (Wiley). He is the de­
signer of the city-analysis software program Places, USA
and created Money magazine’s original “Best Places to
Live” list. www.bestplaces.net.
Y
ou might be able to trim annual costs
by thousands of dollars by relocating to
a different area. We asked Bert Sperling,
coauthor of Cities Ranked & Rated, to identify
the 10 most affordable yet desirable places to
live in the US.
Sperling limited his search to ­metropolitan
areas of 500,000 people or more, favoring re­
gions with low crime and unemployment rates,
short average commutes, long life expectan­
cies, quality medical care and good schools.
Sperling looked for areas where the cost of
living, including median home prices, was well
below the national average. Here, the 10 best,
ordered by cost of living, lowest to highest…
Wichita, Kansas
Wichita is not just one of the most afford­
able cities of its size in the country, it also
offers one of the lowest unemployment rates
and highest job-growth rates and an appeal­
ing sense of community. Downtown Wichita
has under­gone urban renewal. Attractive new
parks have sprung up near the city’s center.
There also is a new convention center along
the Arkansas River and new restaurants and
shopping areas throughout the city. Wichita
has more arts and entertainment facilities than
you might expect from a city of this size, and
homes are very affordable.
San Antonio, texas
San Antonio is a modern city but one with
lots of history. It features such a wide vari­
ety of neighborhoods that virtually everyone
can find a part of town that is appealing. The
economy is strong, and commute times are
very reasonable considering the city’s size (av­
erage commute time is about 27 minutes one
way). There’s a lively downtown with plenty of
Consumer Savvy ■
entertainment, including the River Walk, one
of the nation’s most beautiful urban shopping
and dining areas. Texas Hill Country to the
north and east offers wonderful scenery and
recreational opportunities.
Tulsa, Oklahoma
It has been said that Tulsa combines the best
of the American South with the best of the
West. The city’s downtown is attractive and
modern, with numerous parks, gardens and
historic districts. Appealing suburbs lie to the
east, northeast and south. Summers are hot,
but Tulsa is far enough north that it usually
avoids extended periods of sweltering heat.
It’s far enough south that extreme winter cold
is rare as well. Tulsa’s strong economy and af­
fordable housing combine to make it a true
value.
Indianapolis
Indianapolis’s downtown has undergone
major renovations in recent years and now
boasts attractive buildings, ­ pedestrian zones
and a state-of-the-art sports arena. The city
has a well-rounded arts and cultural scene, a
strong and diversified economy and the intel­
lectual opportunities of Butler University and
the nearby ­Indiana-Purdue joint campus. The
most desirable suburbs tend to be north of
downtown.
Omaha, Nebraska/
Council Bluffs, Iowa
Omaha’s historic district and the beautiful
shaded streets and older suburbs north and
west of the city are charming, but it is this
city’s growth and vibrancy that mark it as a
truly appealing place to live. Omaha has a new
convention and performing arts center and a
booming music scene. Prices are low in this
city on the Missouri River, and the job market
is strong. The whole city exudes a quiet con­
fidence.
Pittsburgh, Pennsylvania
Once a decaying steel town, Pittsburgh has
remade itself into an attractive and desirable
location for both young families and retir­
ees. It’s a city of neighborhoods, each with a
unique identity and personality. Some of the
neighborhoods located in the hills on the edge
25
■ Turn the Worst of Times Into the Best of Times for You ■
of town can be reached via a 19th-century in­
cline tram from the central city. Pittsburgh is
rooted in traditional values, but it also offers
exciting nightlife along the riverfront and an
active shopping district downtown.
Des Moines, Iowa
Des Moines is the cultural and economic
heart of Iowa. The city offers numerous diver­
sions, including parks, museums, zoos, a wellregarded symphony and ballet and a large
concert venue—but it is still small enough that
you can get virtually anywhere in town in less
than 15 minutes. Jobs are available, particu­
larly in the insurance industry.
Dallas/Fort Worth/
Arlington, Texas
Dallas’s size guarantees an extremely wide
range of work, leisure and cultural opportuni­
ties. Housing is very affordable by the stan­
dards of large American cities, and the local
job market is strong despite the tough econo­
my. The downside is that commute times can
be lengthy (more than 30 minutes) due to long
distances and heavy traffic.
Harrisburg/Carlisle,
Pennsylvania
Harrisburg, the capital of Pennsylvania, is a
quiet city located on the Susquehanna River a
little more than 100 miles northwest of Phila­
delphia. The city offers an assortment of his­
toric ­museums, minor-league sports teams and
a lovely riverfront area. Real estate is very af­
fordable compared with the standards of the
Northeast, and the economy is relatively stable
due in part to the inherent stability of state gov­
ernment jobs.
Madison, Wisconsin
Madison is home to the University of Wiscon­
sin and cultural, entertainment and intellectual
opportunities abound. Two large lakes virtually
surround the city, providing natural beauty and
­recreational options. It has a ­pedestrian-friend­
ly downtown featuring a number of buildings
designed by Frank Lloyd Wright, a former resi­
dent. The downside is that the winter is long
and cold. Choose a fuel-efficient home, or high
energy prices will undercut your savings.
26
Painless Ways to Save
$2,000 a Year on Your
Energy Bills
John Krigger, founder of Saturn Resource Management,
an environmental consulting, training and publishing com­
pany based in Helena, Montana. He has served as a con­
sultant to the US Department of Energy and is coauthor of
The Homeowner’s Handbook to Energy Efficiency (Saturn
Resource Management). www.homeowner​shandbook.biz.
M
ost families could trim their energy
bills significantly without sacrificing
any quality of life. Using the following
easy ­energy savers could cut as much as 40%
from home energy expenses.
HEATING
•Use an electric space heater when everyone in the home is gathered in one room.
Turn the home’s thermostat down to 55°F or 60°F
so that the vacant sections of the house are not
heated unnecessarily.
Savings: This could trim your heating bills
by 10% to 30% if done regularly. Some families
in cold climates, who pay as much as $5,000 per
year for heating, could save $500 to $1,500.
•Unblock heating registers. Move furni­
ture, rugs and drapes clear of your system’s
vents. Impeded airflow can undermine a ­system’s
­efficiency.
Savings: Depends on your overall ­ system
and how badly airflow was blocked. You might
save very little, or you might save hundreds of
dollars a year.
WATER HEATING
•Set your water heater to 120°F. Most
household water heaters are set between 130°F
and 145°F, but 120°F is hot enough for washing
dishes and showering.
Savings: It’s been estimated that ­every 10
degrees of temperature reduction can reduce
water-heating costs by 5%, so lowering the
water heater temperature by 20 degrees could
save the typical family $30 to $50 per year.
•Install a modern low-flow showerhead.
Most showerheads use about three gallons
of hot water per minute. The best low-flow
shower­heads offer equally enjoyable showers
■ using just 1.5 to two gallons per minute. Qual­
ity varies, so read product reviews on shop­
ping Web sites such as Amazon.com.
Helpful: A low-flow shower may initially
feel less satisfying than a three-gallon-per-min­
ute shower, but give it a week or two. After
an initial adjustment period, most people agree
that it’s fine.
Savings: Varies greatly depending on how
much time your family spends in the shower, but
it has been estimated at as much as $150 a year.
•Wrap your water heater in an insulated
blanket. Do-it-yourself wrap kits are available
at hardware stores for less than $25. The blan­
ket pays for itself in less than a year and offers
savings after that. It is worth wrapping any wa­
ter heater that does not carry a label specifically
warning against this.
Savings: Usually around 4% to 9% of total
water heating costs, according to the US Depart­
ment of Energy. That translates into an annual
savings of $12 to $45 for most households.
Refrigerator
•Replace your refrigerator if it is more
than 15 years old. Avoid models with throughthe-door ice and water dispensers. They detract
from energy efficiency.
Savings: A new refrigerator could save you
about $80 per year in ­ electricity compared to
a similarly sized refrigerator made in the early
1990s or earlier.
•Clean your refrigerator’s coils at least
once a year—every six months if there’s a dog
or cat that sheds heavily in the house. Dirt, dust
and pet hair on refrigerator coils can impede
airflow and make heat transfer less efficient,
forcing the appliance to work harder. Refrigera­
tor coil brushes are available at home centers
and hardware stores.
Savings: The Sacramento Municipal Utility
District estimates that coil cleaning can cut a
refrigerator’s energy use by 6%—a yearly saving
of about $15 on an old fridge and $5 on a
modern one.
•Set your refrigerator’s temperature to
between 30°F and 40°F. Set your freezer tem­
perature to between 0°F and 10°F. Colder tem­
peratures increase your electricity bills without
significantly improving food freshness.
Consumer Savvy ■
Savings: Setting your refrigerator 10 degrees
higher and freezer five degrees higher has been
estimated to cut the appliance’s electricity con­
sumption by at least 20%. This could save you
$50 a year with an old fridge and about $10 with
a modern one. If you don’t have a temperature
dial in your refrigerator, place an ordinary house­
hold thermometer inside for 10 to 15 minutes.
Read it the moment you open the door.
Dryers
•Replace your dryer’s flexible plastic
vent ducting material with a four-inch rigid
(not corrugated) metal duct. This creates less
airflow resistance, allowing your dryer to dry
more efficiently.
Helpful: It might be necessary to use a small
section of flexible ducting material to connect
the back of your dryer to this smooth metal duct
so that you can move the dryer away from the
wall for cleaning or service.
Savings: As much as 20% of drying costs, or
$10 to $40 per year for the average household.
•Clean lint from your dryer vent at least
once a year by disconnecting the vent from the
dryer and the wall and reaching in as far as you
can to pull out lint. Clean lint from the dryer’s
lint trap before every load of laundry. Lint build­
up can increase drying time and energy con­
sumption by more than 50%.
Even better: Hang clothes from a clothesline
outside, weather permitting.
Savings: Serious lint congestion could cost
you more than $50 per year if you do a lot of
laundry. Hanging laundry from a line could save
you as much as $200 per year.
Lightbulbs
•Use name-brand compact fluorescent
bulbs. Compact fluorescents consume ­ one­quarter to one-third as much electricity as
incandescents. Stick with brand-name bulbs—
store-brand or no-name-brand bulbs might be
cheaper but are likely to burn out sooner.
Savings: Your annual savings might be less
than $20 if you typically have just one or two
bulbs burning—but more than $150 if your
house tends to be lit up like a jack-o’-lantern.
27
4
Retirement Smarts
Rescue Your Retirement
—How to Get Back on
Course in This
Volatile Market
T
his is a nerve-racking time if you are
counting on your investments to carry you through retirement. To guide
you through the volatility, we spoke
with top money manager and retirement adviser Paul Merriman. His suggestions…
•Resist the urge to go to cash. I have
helped guide thousands of investors through
dozens of periods of financial upheaval and
market free fall in my 40-year career. During
each period, I have watched some investors
liquidate large portions of their portfolios. This
is a huge mistake! The market appears to have
bottomed. Unless you have impeccable timing,
you run the risk of selling at the wrong time,
then getting back in too late and buying at inflated prices.
28
Better way: Avoid selling as the market is
plunging. Try to keep adding systematically to
your investment holdings whether you are using
new investment money or reinvesting dividend
and gain distributions. Think in terms of shares,
not dollars. The lower the share price of a stock
or mutual fund, the more you can afford to buy.
•Cut back your annual spending temporarily. Take this prudent step even if you aren’t
having trouble making ends meet. If you’re already retired, reduce your annual withdrawal rate
by one percentage point, at least until the market
recovers. Even small cutbacks like this can have
a major impact on shoring up your nest egg.
•Decide the maximum amount you are
willing to lose in your portfolio in a given
year. The greater the loss you can live with, the
greater your asset allocation to stocks should be.
Over time, stocks tend to maximize your returns,
Paul Merriman, CFP, founder and director of Merriman
Berkman Next, Inc., a Seattle–based investment advisory
firm with more than $1 billion under management. He
is author of Live It Up Without Outliving Your Money!
Getting the Most from Your Investments in Retirement.
Wiley. www.merriman.com.
■ while bonds protect your capital. You must have
enough fixed income from bonds, certificates
of deposit and money-market funds to help you
weather bad times.
I find that most individual investors don’t want
to risk losing more than 10% to 20% of their
money in any given year even if the market falls
by a greater amount.
What to do: If you can’t tolerate losing more
than 10% to 15% in any year over a 30-year period, you would be wise to allocate 30% of your
investment money to stocks and 70% to bonds.
This is based on extensive research about the
likelihood of certain outcomes. Expect a compounded annual return of 7% to 9% over 30
years.
ate a…
Other examples: If you are able to toler-
•15% to 20% loss in a given year, maintain a
50% stock/50% bond portfolio. Then expect a longterm return of 8% to 10%.
•20% to 25% loss in a given year, maintain
a 60% stock/40% bond portfolio. Expect a long-term
return of 9% to 11%. This is the formula that most
pension plans employ for investors with time horizons of 10 years or more.
•25% to 30% loss in a given year, maintain
a 70% stock/30% bond portfolio. Expect a long-term
return of 10% to 12%.
•30% to 40% loss in a given year, maintain a
100% stock portfolio and expect a long-term return
of 11% to 13%.
If your stock allocation exceeds your risk tolerance, adjust it quickly.
HOW TO INVEST NOW
Split your stock investments evenly between
domestic and foreign, and between large company and small company. Also tilt toward a value approach rather than growth-oriented stocks.
This mix is much less risky than the traditional
model that most small investors end up with—
extra-heavy on large-company US stocks. Over
the past 30 years, this suggested mix has outperformed the S&P 500 by 2.5 percentage points a
year, on average.
My ideal allocation for the stock portion of your
portfolio focuses on 10 different asset classes. For
do-it-yourself investors, I recommend mostly Vanguard index funds to keep costs and taxes low.
However, investors who use another fund firm,
such as Fidelity, can use similar index funds.
Retirement Smarts ■
THE BOTTOM LINE
1. Avoid selling when the market is plunging.
2. Withdraw one percentage point less than
you normally would from your savings and
­investments.
3. Determine your stock/bond allocation
based on how much you are willing to lose in
a given year.
New Law Makes
Reverse Mortgages
More Attractive
Tyler Kraemer, Esq., Colorado Springs–based attorney
specializing in real estate, finance and estate planning. He
is coauthor of The Complete Guide to Reverse Mortgages.
Adams Media.
S
ince the financial crisis, home-equity loans
have been difficult to obtain. But reverse
mortgages are an alternative way for older
home owners in need of cash to access the equity tied up in their homes. (Reverse mortgages
typically are available to home owners age 62
and older.)
When a home owner takes out a reverse mortgage, he/she essentially converts a portion of his
home equity into cash. The home owner can
receive cash in a lump sum, monthly payments,
a line of credit or some combination. When the
home is sold, the loan must be repaid. Any remaining equity goes to the borrower or his heirs.
During the home owner’s lifetime, no payments are due unless he moves out. Plus, no
income verification is necessary to qualify for a
reverse mortgage.
The catch: The biggest complaint with reverse mortgages has always been that they are
expensive. Historically, up-front fees could run
5% to 6% of the home’s value, and all major reverse mortgage programs have adjustable interest rates, so rates can go higher.
What’s changed: The federal Housing and
Economic Recovery Act of 2008, includes provisions that make Home Equity Conversion Mortgages (HECMs), by far the most common type of
reverse mortgage, a bit more attractive…
29
■ Turn the Worst of Times Into the Best of Times for You ■
•Loan origination fees on HECM reverse
mortgages are capped at 2% of the first
$200,000 of the home’s value, and 1% of the
remainder, with an overall cap of $6,000. This
cap could save borrowers perhaps $1,000 to
$2,000 compared with previous fee schedules.
•The potential size of HECM reverse
mortgages is increased. In the past, home
owners could borrow no more than $363,790,
and often the amounts were lower still, depending on home values in the region. The 2008 law
creates a national limit of $417,000, but this can
rise to as much as $625,000 in certain high-value
regions.
•Reverse mortgage lenders are barred
from engaging in certain questionable sales
practices.
Example: Reverse mortgage lenders are prohibited from requiring the purchase of annuities and
certain other financial products in connection with
reverse mortgages—a strategy that rarely works in
the home owner’s favor.
Caution: Even with the new laws, reverse
mortgages are a pricey way to obtain money. A
home owner should consider all other options
before getting a reverse mortgage.
Strapped for Cash?
How to Raid Your
Retirement Accounts
Rick Meigs, founder and president of 401kHelpCenter.
com, based in Portland, Oregon. He is coauthor of Your
401(k) Survival Guide (Authorhouse) and cohost of The
Retirement Hour on a Portland ­radio station.
T
he number of people raiding their retirement accounts has soared despite the
substantial drawbacks of doing so. If
you have already exhausted other ways to raise
money, such as home-equity loans or college
loans, here’s what you need to know about
drawing on 401(k)s and similar tax-advantaged
accounts…
401(k)s
Federal regulations require that 401(k) hardship withdrawals be used only for “immediate
30
and heavy ­ financial need,” such as staving off
a foreclosure or paying unreimbursed medical
bills, college ­ tuition or funeral expenses for a
family member. If you are under age 59½, you
typically pay a 10% early-withdrawal penalty for
hardship withdrawals, in addition to having to
pay income tax on them for that year. If you are
age 59½ or older, you still pay the taxes but not
the penalty. You also may qualify for a penaltyfree withdrawal under some circumstances (see
below).
Note: Not all employers choose to allow hardship ­withdrawals.
•Determine whether you qualify for a
penalty-free early withdrawal. If you’re under
59½, the IRS specifies very limited circumstances that allow you to avoid the penalty, although
you’re still liable for taxes.
Examples: You are in debt for medical
expenses that exceed 7.5% of your adjusted gross
income…you become totally disabled…you are required by court order to give the money to your divorced spouse, a child or a ­dependent.
More information: www.irs.gov/publications/
p575.
Important: If you are at least age 55 and
leave your job, the early withdrawal penalties do
not apply.
Drawbacks: Once you take a hardship withdrawal—with or without a penalty—you can’t
just put back those funds when you have the
money. However, you can continue to contribute
new money to your 401(k) account as long as
you remain employed by the 401(k) sponsor.
•Borrow from your 401(k). Most, but not
all, plans allow workers of any age to borrow up
to half of the vested balance in their accounts,
up to $50,000, without withdrawal penalties or
taxes. Unlike hardship withdrawals, there are
no IRS rules regarding what the money must be
used for. And unlike many kinds of loans, there
are no credit checks and minimal paperwork is
involved.
Annual interest rates usually are one percentage point above the prime rate, which is 3.25%
at the moment, and most employers deduct
monthly loan payments, with interest, from your
paycheck. (Of course, you are paying interest to
yourself, which reduces the sting.) You must re-
■ pay the loan back to your account within five
years.
Exception: If you borrow the money to buy
a primary residence, you have up to 15 years.
Drawbacks: If you lose a job or switch jobs,
the remaining balance of the loan typically becomes due within 60 days. Should you not meet
this deadline, the balance is considered an early
withdrawal subject to taxes and a 10% penalty if
you are under 59½.
IRAs
•Take early distributions from your IRA.
You typically must pay a 10% ­early-distribution
penalty if you take money from a traditional IRA
before age 59½. This is in addition to the income
tax you pay on withdrawals from IRAs funded
with deductible contributions. Federal rules allow you to make early withdrawals (before age
59½) from an IRA without penalties if you withdraw equal amounts once a year for a minimum
of five years…or equal annual amounts until age
59½ if that would extend the withdrawals to a
later date.
You pay income tax on these equal annual
withdrawals, which are called 72(t) distributions.
This route is best if you are within a few years of
retirement so that you don’t have to spread the
withdrawals over a prolonged period. (Similar
rules apply to 401(k)s, but ­additional hurdles are
­involved, so this type of distribution is not often
used for those accounts.)
Drawbacks: You’ll be assessed a 10% earlywithdrawal penalty on all withdrawals if you
don’t strictly adhere to the required schedule of
­withdrawals.
Special circumstances: Under certain circumstances, you can withdraw IRA money early
without the five-year schedule and without the
penalty. These circumstances include…
•If you are buying a home for the first time
or at least two years after you last owned one, you
can take a distribution up to $10,000 to use toward
expenses, including closing costs.
•If you have lost a job, you can withdraw
enough to pay medical insurance premiums…and/
or unreimbursed medical expenses that exceed
7.5% of your adjusted gross income.
•If you need to pay qualified higher-education expenses, including tuition, fees and books for
Retirement Smarts ■
college, university or vocational school for yourself
or an immediate family member.
•If you are disabled or become disabled as a
result of a mental or physical p­roblem.
•Dig into your Roth IRA. Because the money you contributed to Roth accounts was taxed
before you made those contributions, you are eligible to make early withdrawals of those contributions at any age, though not earnings on those
contributions, without paying penalties or taxes.
You also pay no taxes on the account’s earnings
after age 59½ as long as it is at least five years
since you made your first Roth ­contribution.
Divorced? You Could Be
Entitled to Much More
Social Security
Barbara Shapiro, CFP, a certified divorce financial analyst (CDFA) and vice president of HMS Financial Group,
a financial-planning, wealth-management and investment firm based in Dedham, Massachusetts. For 17 years,
­Shapiro has counseled clients on financial planning during
and following divorce. She is regional director of the Institute for Divorce ­Financial Analysts, a certification and education organization based in Southfield, Michigan. www.
BShapiro-cdfa.com
B
reaking up is hard to do—but on the
bright side, it may provide some extra
retirement benefits.
The Social Security system has special rules
and options for people who have divorced—
rules that allow some to claim significantly larger
benefits than they otherwise would receive.
But don’t expect the Social Security Administration (SSA) to inform you that you’re eligible
for those higher benefits. It’s up to a divorced
person to inform the SSA of a past marriage
and to request benefits based on his/her former
spouse’s earnings history (800-772-1213, www.
ssa.gov). Otherwise, you may be leaving thousands of dollars on the table, particularly if your
former spouse earned significantly more than
you did.
Here’s what you need to know about Social
Security benefits if you have ­divorced…currently
31
■ Turn the Worst of Times Into the Best of Times for You ■
are going through a divorce…or are considering
divorce now…
If you were THE LOWER EARNER
If your marriage lasted at least 10 years and
you have not remarried, you likely will be eligible to claim Social Security benefits based on
your former spouse’s earnings history—assuming that those benefits exceed the benefits that
you would receive based on your own earnings. Unlike a current spouse, who must wait
for the wage earner to file for benefits before
claiming spousal benefits, an ex need not wait
unless the marriage ended within the past two
years. Inform the SSA that you wish to file as an
“independently entitled divorced spouse.” There
is no downside to doing this—it will have no
effect on your ex’s benefits, and if it turns out
that your own benefits exceed those available to
you through your ex’s earnings, you simply will
receive your own benefits instead.
Your benefits as a divorced spouse likely will
be very similar to those that would have been
available to you had you remained married, and
like a married person, you must opt for either
benefits based on your own earnings or benefits
based on the earnings of the current or former
spouse. You can’t claim both at the same time.
What you will be eligible for…
•While your ex is alive, you will be ­eligible
for a monthly “spousal benefit” equal to 50%
of this former spouse’s full retirement benefit,
starting at your full retirement age. You could
begin these benefits as early as age 62, but doing
so would permanently reduce your monthly
checks by as much as one-third. For larger
monthly checks, wait until full retirement age.
The cochairs of a bipartisan deficit commission proposed capping spousal benefits at 50% of
the average wage earner’s benefit, which would
­reduce the monthly benefits of some ­ spouses
and ex-spouses of high earners. Even if such a
rule is ever adopted, however, it likely would
exempt those already in or near retirement.
•After your ex passes away, you will be
eligible for monthly “survivors benefits”
equal to 100% of the monthly amount that
your former partner was entitled to receive,
instead of the 50% spousal benefit. Survivors
benefits can be started as early as age 60—age
50 if you are disabled—but your checks will be
32
permanently reduced if you start receiving them
before your full retirement age. Divorced former
spouses are not eligible for the special lump-sum
death benefit paid to surviving spouses.
Even though you cannot simultaneously receive Social Security benefits based on your own
earnings history and benefits based on your ex’s
earnings, you can switch between these if future
Social Security reforms or life events affect the
amount that you would receive.
Example: A divorced woman claims benefits
based on her own earnings, which are greater than
the 50% spousal benefits she would receive based on
her ex-husband’s earnings. When her ex passes away,
she switches because the 100% survivors benefits she
would receive based on his earnings exceed her own
benefits.
If you REMARRY
You likely will lose your right to benefits based
on your ex’s earnings history if you remarry. Two
exceptions…
•If this new marriage also ends—whether
due to divorce, annulment or your new spouse’s
death—you once again will become eligible for
benefits under your first ex’s earnings history, regardless of how long the second marriage lasted.
If you also are eligible for benefits based on the
second partner’s earnings—you are likely to be
eligible if this marriage lasted at least 10 years, or
if it ended because of the death of this second
partner—you will be allowed to choose whichever partner’s earnings history is more beneficial
to you.
•Remarriage will not prevent you from
claiming survivors benefits based on your
ex’s earnings if the new marriage occurs after
your 60th birthday—after your 50th birthday if
you are legally disabled. This is true whether your
ex dies before or after you turn 60 and remarry. If
you are nearing 60 and considering remarriage, it
could be worth delaying the wedding.
If there are MINOR CHILDREN
If you are caring for your ex’s natural or legally adopted child…this child is younger than
16 and/or legally disabled …and your ex passes
away, you might be eligible for benefits of up to
75% of the ex’s full retirement benefit as a surviving divorced parent. These parental benefits
are different from the 100% survivors benefits
mentioned above that could be available to you
when you reach retirement age and are avail-
■ able even if you have not yet reached retirement
age and even if your marriage did not last 10
years. They end when the child turns 16 unless
the child is disabled. The child also is entitled to
benefits based on the deceased parent’s earnings, typically up to age 18, or 19 if he/she is
attending high school full-time.
Note: All of the minor children and caregiving parents combined cannot receive more than
150% to 180% of the deceased wage earner’s
benefit. If there are numerous claimants and this
cap is reached, each claimant will receive a reduced benefit.
If you are THE HIGHER EARNER
If you earned more than your former spouse
during your career, filing as an “independently
entitled divorced spouse” will not increase your
benefits. On the bright side, as discussed above,
your ex’s right to claim spousal and survivors
benefits based on your earnings will not reduce
your Social Security benefits or the benefits available to your current spouse except, perhaps, if
you pass away while your ex is caring for your
minor or disabled children, as described earlier.
Your ex’s Social Security benefits could become an issue for you if your ex requests a modification to your alimony agreement after age 62,
Retirement Smarts ■
however. You and your attorney or a financial
professional should take a close look at the ex’s
use of the Social Security system. An alimony
increase is less likely to be granted if you can establish that your ex could boost his/her income
by maximizing Social Security benefits instead.
If you are
CURRENTLY DIVORCING
The right of one former spouse to claim Social
Security benefits based on the other’s earnings
does not need to be negotiated during divorce
proceedings. These benefits are legal entitlements, not a negotiable component of the marital assets. Do consider the precise length of the
marriage before the divorce is finalized, however. If it ends even one day short of 10 years,
you will not be entitled to potentially valuable
Social Security benefits based on your former
partner’s earnings. Reaching the 10-year mark is
particularly important for spouses who have limited earnings histories of their own. If the marriage appears on course to end just shy of the
10-year mark, ask your divorce lawyer if the process could be dragged out ­slightly, or ask your
spouse to agree to a brief postponement. The
date the divorce is finalized is what matters, not
the date of legal separation.
33
5
Tricky Times
Why Tricky Times Are
Good Times to Start a
Business—You Can Do
It Yourself for Less
Than $5,000
T
he weak economy is making jobs
harder to find. One option for frustrated job seekers is to stop looking
for employment and start working
for themselves.
A recession is an excellent time to launch a
small business. Larger companies rein in their
advertising and expansion plans when the economy slows, making it easier for new companies
to get noticed and capture market share.
Newer, small companies also tend to have lower fixed expenses than older, larger ones—and
that allows them to underbid their competition.
That’s very important during a recession, when
customers are particularly price-sensitive.
The trouble is that starting a new business is
risky. Sinking all of your savings into a start-up or
34
taking out a small business loan could leave you
in a deep financial hole if the business fails.
There’s no way to eliminate all the risk from
entrepreneurship, but you can greatly reduce
your downside if you keep your business’s expenses to a minimum. Here’s how to launch a
business for less than $5,000…
THINK SERVICE
The service sector offers the best opportunities for low-cost business start-ups. Unlike retail or manufacturing businesses, service-sector
­companies…
•Rarely require major up-front outlays
of cash for inventory or ­materials.
•Often can be run out of the home,
eliminating the need to rent an office, factory
or storefront.
•Tend to be local, so there’s no need for
expensive nationwide marketing campaigns.
Rieva ­Lesonsky, former editor in chief of Entrepreneur
and author of Start Your Own Business (Entrepreneur).
She currently runs SMB Connects, a company that helps
major marketers connect with small business owners and
entrepreneurs, Irvine, California.
■ Four ways to come up with a low-cost service
business idea…
•Keep lists of the things that frustrate
you and the things that you wish you didn’t
have to do for yourself. Consider both your
personal life and your previous professional
career. Perhaps other people would pay you to
help them avoid these annoyances.
Example: Two brothers in Irvine, California,
were frustrated that it took them much of their lunch
hour to get from the local business district to area
restaurants for lunch. They started ­Restaurants on the
Run, a service that delivers restaurant food to office
workers at their desks. The company has expanded
into multiple cities and now does millions of dollars
in business each year.
•Find out which service-­oriented businesses (and other low-cost businesses) are
thriving in big cities. Trends tend to begin in big
coastal cities, such as New York and Los Angeles, and only later work their way to the rest of
the country. Read the business and lifestyle sections of magazines and newspapers from major
coastal cities to find out what new business ideas
are thriving there. Consider whether similar businesses would be successful in your region.
Examples: Frozen yogurt ­ franchises and
bakeries specializing in high-end cupcakes have
been hot new businesses in large, trendsetting cities.
Buying a franchise or opening a bakery would not
be cheap, but perhaps you could inexpensively open
a street-corner dessert cart selling comparable frozen
yogurt treats…or bake premium cupcakes at home
and sell them through area stores or ­restaurants.
•Target a growing demographic. Open a
business that serves a rapidly expanding demographic, and the odds of success are in your favor.
Currently the fastest-growing demographics are
seniors and children. (Make sure these national
trends apply to your local region before launching
your business.)
Examples: Potential service ­ businesses
that cater to seniors include transportation services
…shopping and grocery delivery services…adult
day-care services…and senior “transitional” services,
handling the details involved in moving to a nursing home or ­ assisted-living facility. Service businesses catering to the youth market include day
care…­transportation services…tutoring…college-prep
­classes…and ­college-application assistance.
Tricky Times ■
•Search for service opportunities related
to your professional experience. If your new
business is in a field that you already know well,
your learning curve will be shorter and your
Rolodex will already be full of potential customers and other useful contacts. Make sure that your
new business does not violate any noncompete
agreements that you might have signed with
former employers.
AVOID UNNECESSARY COSTS
Start-up expenses that your business can live
without…
•Renting an office. Work from your home
if at all possible. Meet with potential clients and
other business contacts in their offices…at the
local coffeehouse…or in the lobby of a hotel.
•Buying office furniture and business
equipment. Try to make do with the furniture,
phones and computers you already own. If you
must purchase business furniture or equipment,
search for used items. One advantage of starting
a business in a recession is that other companies
are going out of business and selling off their
business furniture and equipment at low prices.
•Expensive marketing efforts, such as
direct mail and television ads. Their high cost
makes them too risky for your start-up.
Helpful: Turn your customers into your marketing team. Tell them you’ll give them a good
discount on their next order if they refer another
customer to you and it leads to a sale.
FOUR EXPENSES WORTH PAYING
Not all start-up expenses should be avoided.
Do try to do the following…
•Incorporate your business. A lawyer might
charge about $2,000 to help you set up a Limited
Liability Company (LLC) or corporation, but it’s
money well spent. If your business is not an LLC
or a corporation, your personal assets could be at
risk in a lawsuit.
•Launch a Web site. A Web site does not
need to be elaborate, but it must look professional. This is particularly important if your company
doesn’t have an office or a long track record. To
learn more about how to start a Web site for your
business, go to www.allbusiness.com and type
“Web site” into the search window.
•Arrange for health insurance. Obtaining
health insurance at a reasonable price can be a
35
■ Turn the Worst of Times Into the Best of Times for You ■
major problem for those who are self-employed.
Find out if you are eligible for COBRA benefits
from your last job or if you can get coverage
through your spouse’s health insurance plan. If
you are past your 50th birthday, you should be
eligible for health insurance through AARP (888687-2277, www.aarp.org). Or find out if a health
insurance plan is offered by a trade association
that your business makes you eligible to join.
•Buy Business Plan Pro. If you don’t have
experience writing business plans, this software is
the cheapest, easiest way to do so. (Palo Alto Software, $99.95, 800-229-7526, www.bplans.com.)
Business plans are like road maps. They help
you lay out your route to get from where you
are to where you want to be. Good business-plan
­software prompts you to think about factors such
as competition, pricing, staffing and marketing.
Bulletproof Your Job
And Ride Out the Rough
Times at Work
Stephen Viscusi, who is founding principal of ­Bullet
proofyourresume.com, a résumé-writing service that creates both traditional and video-streaming résumés, New
York City. He started his career as a ­headhunter and is
author of Bulletproof Your Job: 4 Simple Strategies to Ride
Out the Rough Times and Come Out on Top at Work (Collins). www.bulle​tproofyourjob.com.
M
ore than two million US jobs have
been lost in the past year as the nation
slides deeper into a recession. Millions
more layoffs are likely.
In an economy this bad, even doing one’s job
well is no guarantee of job security. Many skilled,
hardworking employees will find themselves out
of work. How to decrease the odds that you will
be among them…
•Be “low maintenance.” You will be among
the first shown the door if your boss considers
you a complainer…thinks you require handholding or special attention…or fields complaints
about you from your coworkers. ­ Bosses don’t
lose sleep about laying off high-maintenance
employees such as these—they dream about it.
36
Cutting such people loose makes life easier for
them and everyone else in the office.
To avoid the “high maintenance” ­label, accept
without complaint all assignments that come
your way…do not ask for special treatment or
argue about your rights as an employee…learn
to endure your workplace’s minor annoyances
in silence…and get along well with all of your
colleagues.
•Stay upbeat. Black humor is common when
layoffs loom. Don’t join in—others might not
have any sense of humor about this economy or
the business’s current struggles.
Speak with optimism about the company’s
future—especially when the boss is around. It
sends the message that you want to be part of
that future.
•Make sure your boss knows you as a
human being. It is easier to fire an employee
whom you don’t know. Share details of your life
with your boss. Your goal is to humanize yourself to make it harder for your boss to fire you.
Also, be sure that your employer is aware of
your personal financial ­ responsibilities. Your
boss might be less likely to lay you off if he/
she knows that the layoff would mean financial
catastrophe for you because you have kids…a
spouse with a serious health problem…a parent
who is financially dependent on you…or some
other ­major financial commitment.
Sparing the job of someone who is especially
unable to afford unemployment allows the employer to think of himself as a big-hearted boss
who is doing his best to look after his employees
during difficult times.
Best: Do not sound desperate or needy when
you discuss your financial situation. Just mention it in a ­conversation with your boss should a
natural opportunity arise.
If you are single and debt-free, don’t advertise
this. Your employer won’t feel as guilty about
firing you.
•Make a friend in the human resources
(HR) department. HR employees often know
about layoffs months before they occur. If you
have an ally in HR, this colleague might be able
to warn you about which departments will be
hardest hit in time for you to transfer to a safer
position. In some layoffs, HR employees even
have a say in who stays and who goes.
■ •Volunteer to take on tasks that your boss
dislikes. This might mean managing a headache project…training employees who transfer
in from other departments…or representing your
company at conferences and charity outings. If
you don’t know which aspects of your boss’s job
cause him the most displeasure, ask.
If you’re in charge of these tasks, your boss
won’t be able to let you go without worrying that
he will have to take on these unloved responsibilities once again. That’s powerful motivation to
keep you around.
•Don’t let your boss catch you not working. Employees who are seen as slackers usually
are among the first to be let go. Don’t take long
lunches, and don’t get caught shopping on-line
…playing computer games…or making long
personal phone calls.
•Arrive at least five minutes before your
boss every morning, and stay five minutes
­after he leaves.
•Add value to the company. Employers lay
people off to save money. If it’s clear that you
earn or save your company more than you are
paid in salary and benefits, there’s nothing to be
gained by letting you go.
If you are not in a sales position and cannot easily bring more money into the company,
search for ways to help your employer contain
costs. Take on additional responsibilities to save
the company the cost of hiring an additional employee. Brainstorm creative ways to trim company expenses.
•Become your employer’s specialist on
a crucial chore. Your job is much safer if your
boss sees you as the one person in the office
who can keep the computer system running
…the most important client happy…or the files
­organized.
•Watch for warning signs that your specialized role might become obsolete. Have a
plan in place to transition to another vital role if
this occurs.
Example: You always have managed a
particular client’s account, but this client is struggling in the recession and could go out of business. Start cultivating a relationship with another
key ­client so that you will not be expendable if the
first one disappears.
Tricky Times ■
•Build allies. Layoffs are rarely distributed
evenly across large corporations. One department might lose 30% of its staff, while a more
profitable department might lose no one at all.
Give colleagues in your company’s most
promising departments reason to like you. If
your own department appears particularly vulnerable to layoffs, contact your allies in these
safer-­seeming divisions and ask them whether a
transfer might be ­possible.
•Try to negotiate a layoff into a pay cut
or a part-time job. If you are laid off, tell your
employer that you would consider a pay cut or
a part-time position if one were offered. In this
economy, an underpaid job is better than no
job at all.
Yes, You Can Find a Job
In Tough Times—But
The Usual Methods
Don’t Work…
Nella ­ Barkley, president and cofounder of Crystal­ arkley Corporation, a prominent career-coaching firm
B
with offices in several US cities. She is author of How to
Help Your Child Land the Right Job (Without Being a Pain
in the Neck) and coauthor of The Crystal-Barkley Guide
to Taking Charge of Your Career (both from Workman).
www.careerlife.com.
L
ose your job in an economy as bad as
this one, and it can be very difficult to
find a new one. Your odds will improve
greatly, however, if you know which job-search
techniques actually work when large numbers
of people are unemployed. The most common
approach—scanning want ads and mailing out
résumés—will almost certainly fail. With so
many people unemployed, each job opening
listed in the newspaper or on a career Web site
is likely to draw hundreds, even thousands, of
responses. Those are tough odds to beat.
Better job-search strategies…
•Network with an idea, not for a job. Networking can be a wonderful job-search strategy
—but don’t just call your contacts and tell them
you’re looking for work. In this economy, they
have probably been overrun with these calls.
37
■ Turn the Worst of Times Into the Best of Times for You ■
Instead, take some time to think up a compelling business idea related to your line of business or the line of business that you would like
to enter. When you call your contacts, say that
you are researching this idea and would like to
meet some of the industry’s insiders to discuss
its viability.
Calling with an idea means that your contacts
are unlikely to dismiss you as just another unemployed person desperate for help. They will see
you as someone with something to offer, which
means they can put you in contact with others
in the field without feeling that they are asking
those people for favors. If people like your idea,
these discussions could lead to job offers even
though you have not asked for a job.
Example: A former paper-industry executive
told his network of contacts that he was exploring
the idea of launching a business to fund private equity for starting sustainable resources companies, a
very hot field. He was soon offered a job by a private
equity firm.
•Apply your skills and knowledge to a
sector that is still hiring. Many companies in
the energy, health-care, life sciences, technology
and education sectors are still adding employees.
You might have the necessary experience to land
a job in these fields even if your background is
in a completely different sector.
Make a list of your strongest job skills. Think
about how each of these skills could be beneficial
to sectors and companies that are still hiring.
Certain job skills, including sales, customer relations and risk analysis, are transferable to virtually any industry.
Example: If you previously analyzed creditworthiness for a mortgage broker, you could just as
easily analyze credit-worthiness for an energy company or a real estate investment firm.
•Become more specific about the job
you want. Don’t just apply for jobs…apply
for your dream job. Many job hunters become
desperate during difficult economic times and
apply for any job that is available. Reasons why
that is a mistake…
•Passion and enthusiasm are a job seeker’s
best sales tools. An employer can see the fire in
your eyes when you apply for a dream job…or
the desperation in your eyes when you apply for a
job that you really don’t want. Considering the job
competition, no fire means no chance.
38
•There might never be a better opportunity
to enter the profession that you ­always wanted to
try. Some people spend their whole lives in jobs
they don’t love, because it is difficult to leave an
established career and accept a smaller paycheck.
Lose your job in this economy, and your career
and paycheck are likely to take a hit no matter
where you find work. You might as well take your
shot at a job you really want.
•Targeting a specific job makes it easier for
other people to help you. If you tell friends and
colleagues that you are willing to take almost any
job, they will have no idea whom to call or what
to do to help you move in the right direction—they
won’t even know what the right direction is. If you
are specific about the career path you wish to pursue, you’ll seem driven, not desperate. People will
not just want to help—they will know what they
can do to help.
Example: An executive laid off from the
struggling automotive sector might tell his contacts,
“I’m really fascinated about the possibility of applying
next-generation automotive fuel-efficiency technologies to the farm and lawn ­machinery sector.” Anyone
who knows someone in this sector is likely to see
this as a timely idea and be happy to help.
•Offer employers a low-risk hire. Businesses are not anxious to add employees when
the economy is lagging—new employees mean
additional fixed costs at a time when employers
are struggling for profitability and security.
Consider presenting potential employers with
a lower-risk alternative to hiring you outright.
Suggest that the employer take you on as an independent consultant…or that your compensation be based on your performance.
Downside: Independent consultants typically do not receive health insurance or other benefits. Performance-based compensation makes
sense only if you have a fighting chance to make
your project a success.
•Volunteer your way to a paid job. Donate your time to a nonprofit organization
when you are out of work. Show an excellent
work ethic…propose useful ideas…and attend
board meetings, fund-raisers and other events.
­Nonprofit organizations often have powerful
­executives on their boards. You might impress
these executives enough to earn a job offer
from their companies…or you might wind up
with a salaried job at the nonprofit itself.
■ Example: A financial industry ­executive out
of a job volunteered with a major homeless organization. When the organization learned of his availability and impressive résumé, they were thrilled to
offer him a job.
Do mention your unemployment to others at
the nonprofit. If they don’t know you need work,
they are far less likely to offer you work.
Volunteering also is a great way for those
who have lost their jobs to continue to feel useful and productive. Without this, unemployment
can lead to depression and reduced confidence,
a negative mindset that makes it more difficult
to impress potential employers.
•Reposition yourself—literally. Move
to an area with low unemployment, and you
won’t have to battle this tight job market. The
US Department of Labor provides regional unemployment rates each month on its Web site
(www.bls.gov/web/laummtrk.htm).
Examples: The national US unemployment
rate was 9.0% in January 2011, but the unemployment rate in Sioux Falls, South Dakota, was just
4.9%. Other areas where unemployment was less
than the national average include Bismarck, North
Dakota…Morgantown, West Virginia…Rapid City,
South Dakota…and Logan, Utah. New Orleans to
Oklahoma City and Washington, DC, regions had
the lowest unemployment rates among large metro
areas. El ­Centro, California, on the other hand, had
an unemployment rate of 28.3%.
Relocating is a drastic step that makes sense
only if you will enjoy living in this new region…
and you can sell or rent out your current home.
How to Handle a Tough
Conversation: Skip the
Sugarcoating and Try
These No-Fail Strategies
Holly Weeks, speech consultant to the ­ Urban
S­ uperintendents Doctoral Program at Harvard’s School
of Education, Boston. As principal of Holly Weeks Communications, she consults and coaches on communication issues. She is author of Failure to Communicate: How
Conversations Go Wrong and What You Can Do to Right
Them (Harvard Business). www.hollyweeks.com
I
t’s never easy to deliver bad news…own up
to a mistake…or interact with those who
become belligerent or defensive. But it’s
Tricky Times ■
important to have these difficult conversations
because when we do, problems get resolved
and we can move ahead confidently with our
lives…
DON’T FALL FOR DIVERSIONS
People often use diversionary tactics when they
feel threatened during conversations, sometimes
without ­realizing that they are doing so. These tactics could include threats, lies, ­counteraccusations,
anger and/or crying.
Example: When a neighbor asks a man to
clear a large amount of debris from his yard, the
man inexplicably flies into a rage. Assuming that the
neighbor’s request was polite and reasonable—and
there was no existing bad blood between the neighbors—it’s likely that this outburst is not true anger,
but just a diversion intended to make the neighbor
back down.
What to do: Suppress your natural inclination
to respond with shocked silence…a retreat…or
inappropriate emotions and language of your
own. Remind yourself that these responses are
what this person wants to provoke.
Instead, take a moment to collect yourself…
nod slowly in silent acknowledgment of what
has been said…and make an accusation-free
statement that refers to the diversionary ploy.
Then redirect the conversation back to its intended destination. Keep your tone as neutral
and emotion-free as possible.
Examples: “I know this is difficult, but the
current situation isn’t ­ working. What are we going
to do to fix it?”…“We’ve been getting along fine and
this is a necessary conversation, although it’s gone off
track here, but I need to stay on the yard issue.” If the
diversionary tactic pointed fingers at you or others,
or raised other unrelated problems, try, “We can talk
about the issues you raised next. Right now, we’re
talking about getting rid of the debris in the yard.”
SKIP THE SUGARCOATING
It’s normal to try to sugarcoat bad news, either by mixing good news in with the bad…or
by trying to downplay the severity of the situation. We imagine that this sugarcoating cushions
the blow. In fact, it mostly just makes it difficult
for the person we’re speaking with to figure out
what we are trying to say and how important it
is to us.
Example: A boss offers extended praise to
an employee before mentioning in passing a performance problem that he/she would like to see
39
■ Turn the Worst of Times Into the Best of Times for You ■
Examples: We might imagine that the only
possible response to aggression is to either become
aggressive or back off…that the only response to an
accusation is to apologize, deny or make counteraccusations…that the only response to a raised voice is
to become silent or to raise your own voice.
What to do: Before each statement during
a contentious conversation, pause to consider
whether what you are about to say is passive,
aggressive or moderate. Passive responses include backing down, playing along or saying
nothing even though you don’t agree. Aggressive responses include threats, accusations and
attempts to mete out punishment.
Offering passive and aggressive responses can
feel justified or even satisfying in the moment,
but often-overlooked moderate responses are
much more likely to steer difficult conversations
toward productive outcomes.
Best: Familiarize yourself with a few widely
applicable moderate responses before you engage in a potentially contentious conversation.
That way you increase the odds that those responses will come to mind during the conversation, when emotions are running high. Moderate
responses are best said in a neutral, emotion-free
tone. Five ­possibilities…
•“It might be that we have an honest disagreement,” or “It might be that we have a misunderstanding. Let’s sort this out before we get
angry with each other.”
•Wait a beat after the other person’s emotional outburst, then say, “Let’s go back to the
facts.”
•“I have a lot of respect for you, and in the
grand scheme of things, this is a small matter—
but it’s something we need to get past. What do
you think we should do?”
•“Your opinion is very different from
mine, but perhaps we can reconcile our points
of view.”
•If you wish to be more forceful, consider
responding to aggressive behavior with, “That
behavior isn’t going to work.”
We fall into this polarized response trap because difficult conversations often feel like warfare, and battles usually have outcomes in which
there is one winner and one loser or a stalemate.
But difficult conversations are not wars, and we
don’t need to follow someone onto the battlefield. There is a way to talk reasonably regardless
of how the other side is handling the conversation. Unfortunately, this solution is unlikely to be
reached when both parties see only the extreme
options open to them.
When you’re embroiled in a contentious conversation, admitting a mistake can feel like an
admission of weakness or even a concession of
defeat. We tend to dig our heels in even deeper
when we realize that we might be wrong. Unfortunately, this only makes difficult conversations
even harder to resolve.
Admitting a mistake and conceding a point
actually can make you seem ­ reasonable and
fair-minded—if it is handled properly. It also
addressed. The boss subsequently becomes angry
when the employee fails to immediately address
the problem, but the sugarcoating really is to blame.
The employee did not understand that this problem
was the true ­message and that the praise was sugarcoating.
What to do…
•Deliver bad news in a straightforward
manner, and the odds increase greatly that your
message will be grasped. In many instances, it’s
best to come right out and say what needs to be
said at the very beginning of the conversation.
Example: “Patrick, the promotion has gone
to someone else.”
•Use a neutral tone. Strive for the controlled
voice of NASA communications—“Houston, we
have a problem.” Attempts at sympathetic body
language or tone of voice might feel like kindness, but they can distract listeners from the content of your message.
•Select nonprovocative words. Straightforward doesn’t necessarily mean harsh or blunt. If
your news itself is tough, loaded language will
make it even harder for the person to take it in.
Example: “Employees have complained that
you act cocky and superior” is more likely to make
a manager defensive than “Your recommendations
would go down better if they were delivered in the
style of one colleague helping another.”
SEEK THE MIDDLE GROUND
We often see only the extreme options available to us when we’re embroiled in contentious
conversations.
40
ACKNOWLEDGE YOUR MISTAKES
■ can help keep the conversation moving forward,
which is to everyone’s benefit.
What to do: Remind yourself that ­admitting
an error is not what ­diminishes you in the eyes
of others. Making an error might diminish you—
but you’ve already done that. Responding immaturely or unproductively to an error also can
diminish you—and by denying an obvious error,
you are doing exactly that. If you can see that
you have made a mistake, others probably can,
too.
Make a simple statement that concedes the
point, then redirect the ­conversation back to the
larger topic. Do this both when you have made
a factual error and when you make the error of
being overly aggressive during a difficult conversation. If you act as though conceding the point
does not diminish you, then others are unlikely
to see you as diminished, either.
Examples: “I had my facts wrong—you’re
correct. Let’s see how that affects the plan.” “You
know what? I shouldn’t have said that. I’m sorry.”
How to Reduce Stress in
Tough Times
John Ryder, PhD, psychologist in private practice in New
York City. He has been an assistant professor at Mount
Sinai Medical Center and is a psychological consultant to
­executives, athletes and celebrities. He is author of Positive
Directions: Shifting Polarities to Escape Stress and Increase
Happiness (Morgan James). www.johnryderphd.com.
I
t is no surprise that a new study by the
American Psychological Association reports
that 80% of Americans are stressed by the
economy, with 60% feeling angry and irritable
and 52% having trouble sleeping at night.
In tough economic times, it’s understandable
that many people feel ­financially vulnerable and
emotionally stressed. But even in a national crisis,
we’re never as helpless as we think. Those who
develop mental fitness are in a much better position to weather this and other stressful times.
To achieve mental fitness, we need to open
our “locks,” behaviors or habits that prevent us
from finding solutions to problems and keep us
from reaching our full potential.
Tricky Times ■
Example: One of my clients coped with
his high-stress job by eating too much and drinking heavily after work. These negative strategies (his
locks) eased his stress momentarily but did nothing
to increase his overall resilience and, in fact, undermined his mental fitness.
People who handle stress well use a series of
skills, or “keys,” to overcome obstacles and unlock their full potential. The main ones…
DIRECT YOUR ATTENTION
Your brain can focus on one issue at a time
(the laser mode), or it can expand its attention to
everything around you (glow mode). Both skills
are useful. An air-traffic controller, for example,
has to keep track of fast-moving and constantly
changing situations. He/she needs to be comfortable with the glow mode. But when you’re
dealing with a specific problem, the laser mode
is more efficient.
Many of us have a hard time meeting deadlines not because we have too much to do, but
because too many things compete for our attention. We jump around from thought to thought
and task to task. We’re mentally scattered, which
means we excel at nothing—and stress builds.
What to do…
•Decide what has to be done first. The
process of prioritizing requires that we rank tasks
along two dimensions—what is most important
and what is most urgent. Maybe there’s a project
that you have to finish by the end of the day or
a meeting later in the week to prepare for. Establish these as your one or two priorities, nothing
more. Then selectively ignore everything else.
Keep communication flowing when others are
involved, and let them know where they are on
the waiting list.
•Create reminders. Jot down your immediate
goal on an index card. Keep the card somewhere
in your field of ­vision. If your attention begins to
wander, seeing the card will remind you to stay
on target. Some people also find it helpful to set
an alarm or cell phone to ring every 15 or 30
minutes as a reminder to focus on the goal.
STAY ALERT
We all get distracted when life is stressful. We
forget to pay attention to what’s going on around
us. That’s when we do stupid things, such as
forget where we put our car keys or bounce a
check because we forgot our account balance.
41
■ Turn the Worst of Times Into the Best of Times for You ■
People who handle stress well almost always
are observant. They watch what’s going on around
them in order to acquire information and choose
the best course of action.
What to do: Practice observing ­ every day.
When you put down your car keys at home, for
example, notice the whole environment, not just
the spot where you put them. Notice the table
you put them on, the lighting in the room and
so on. Not only will you find your keys more
quickly, you’ll sharpen your ability to acquire
new information.
improve it. These might include taking a personal finance class at a community college or getting a book
on that topic from the library.
KNOW THE OBJECTIVE YOU
We’re creatures of habit. Any behavior that’s
repeated a few times can become an automatic
pattern. These patterns can be positive (such as
arriving at work on time) or negative (thinking
you’re going to fail).
Negative patterns are particularly hard to
manage because they’re often internalized—we
don’t always know that we have them. People
often have an inner voice that says things such
as, I can’t succeed…I’m not smart enough…It’s
not worth my trouble.
Negative self-talk has real-world effects because it guides our behavior and prevents us
from coping effectively with difficult situations.
What to do: Pay attention to the thoughts
that go through your mind. Are they helpful and
affirming? Or do they inspire fear and anxiety?
When your thoughts are negative, create opposite mental patterns. When you think, I’ll
never get this project done, consciously come
up with a positive alternative and say it aloud if
you can or to yourself if the situation warrants.
Be specific. Rather than something general,
such as I can do it, say something such as, I’m
glad to be completing this project with pride, on
time. Say it three times.
This might sound like a gimmick, but our
brains like routines. Focusing your mind on
positive outcomes—even if it seems artificial
at first—causes the automatic part of the brain
to build more positive thought patterns that enable us to achieve more. The key is to constantly
monitor yourself. Are you aiming at the center of
the target? If not, refocus on the bull’s-eye.
We all have two visions of ourselves. There’s
our subjective self-image, which often is colored
by self-doubt and insecurity. Then there’s the
objective self, which usually is closer to reality.
Many experienced people with impressive résumés fall apart when they lose their jobs and
have to find new ones. They’re paralyzed with
self-doubt because all they see is their subjective
(inferior) self. It’s the equivalent of stage fright.
Even though they have done the same type of
work a thousand times, an inner voice tells them
that they’re not good enough.
What to do: Do a reality check. Suppose
that you have spent three months looking for
work without success. Before doubting yourself,
get objective verification. Show your résumé to
different people in the field in which you’re applying. Ask them what they think about your
qualifications.
Maybe you’re not qualified for the jobs you’re
applying for. More likely, you’ve just had a run
of very bad luck. Trust your objective history of
­accomplishment.
BOOST WILLPOWER
This is one of the most vital skills during difficult times. Someone with strong willpower, for
example, will find it relatively easy to cut back
on spending. Most people think that willpower
just means resisting temptations. It’s much more
than that. It’s a set of skills that you can use to
achieve specific goals.
Example: Suppose that you’re in debt and
know you need to create a budget and stick to it,
but you’ve never been very good at that. Willpower
means knowing your weakness…identifying ways
to correct it…and then taking the necessary steps to
42
What to do: Some people naturally have
more willpower than others, but everyone can
develop more. The trick is to start small. Maybe
your goal is to save 10% of your paycheck each
month, but the first step is to reduce your credit
card debt by paying off 10% more than the minimum payment each month.
REPLACE NEGATIVE PATTERNS
■ Tricks to Keep Burglars
Away from Your Home—
Former Jewel Thief
Reveals His Secrets
Walter T. Shaw, one of the most notorious jewel thieves
of the past half-century. Based in Fort Lauderdale, Florida,
he is author of A License to Steal (Omega), an account
of his career as a jewel thief and his father’s career as a
telecommunications inventor.
A
man’s home might be his castle, but few
homes have moats and battlements. If
a burglar wants to break in, he probably can—and in these tough economic times,
a burglar is more likely to do so.
Fortunately, most burglars are lazy and fearful.
They target the homes that look like they will be
the easiest to rob with the lowest risk of capture.
Your home does not need to be impregnable—it
simply needs to be less appealing to burglars
than others in your neighborhood.
How to reduce the odds that your home will
be targeted—or send the would-be burglar running if it is…
•Keep your garage door closed as much
as possible. Leaving the garage door open when
you go out tells all who pass that there’s no car
inside and it is likely that no one is at home.
Open garages also provide convenient cover
for burglars. They can simply walk or drive into
the garage, shut the door behind them, then
force open the door connecting the garage to
the home without worry that they will be seen.
Regularly leaving your garage door open
when you are home and there is a car parked in
the garage is a bad idea, too. A burglar might figure out that your garage door tends to be closed
only when no one is home.
Of course, if you have expensive bikes or yard
equipment in your open garage, you’re inviting
burglars to walk right in and take them.
•Stay out of the obits. The newspaper obituary page offers burglars a handy guide to which
homes are going to be vacant when. Burglars
simply wait until the time and date listed for a
funeral or memorial service, then break into the
homes of the local residents mentioned among
the relatives of the deceased.
Tricky Times ■
If you provide an obituary for a family member to a local paper, either do not list survivors
or do not mention when the memorial service
will be held. Instead, provide a contact phone
number for those who wish to attend.
•Post a “Beware of Dog” sign. Dogs bark
and bite, which makes them effective burglar deterrents. Even if you do not own a dog, a sign warning
that you do could encourage a burglar to target a
different home. You also could attach a dog’s chain
to a stake in your yard to add to the illusion.
If you buy a dog to scare off burglars, favor
a small, “yippy” dog over a big one. Most little
dogs bark incessantly when strangers approach
their homes. Big dogs might bark a few times,
but unless they are trained as guard dogs, they’re
less likely to keep it up.
•Leave a sandbox, tricycle or other outdoor toys in your yard even if you don’t have
young kids. Most burglars prefer to stay away
from homes that have young children. These
homes are less likely to be vacant than others—
a stay-at-home parent might be inside during
working hours, and families with young kids are
less likely to go out at night.
Find a cheap used tricycle or sandbox at a
garage sale so that you can leave it outside without worrying that it will be stolen. Leave toys on
your lawn even when you go on vacation. Most
families take children’s toys inside before heading out of town, so leaving them out creates the
impression that the home is not vacant.
•Post a “video surveillance” or “you are
being videotaped” sign on the front gate or
elsewhere around your home. Burglars fear being ­ photographed even more than they fear
alarm systems. They have time to flee if an alarm
sounds, but there might not be much they can
do once their image is caught on tape.
Putting up inexpensive, fake ­ video cameras
in conspicuous locations around your home improves the illusion. Fake cameras are available in
home stores or on Web sites, such as Amazon.
com, for $10 to $20 apiece, sometimes less.
•Remove thick hedges and privacy fences.
Burglars love to break into homes with doors or
windows that are not visible from the road and
from neighboring homes. They can take their
time breaking into these homes without fear that
they will be seen.
43
■ Turn the Worst of Times Into the Best of Times for You ■
If a high hedge or fence around your home
provides potential cover for burglars, replace the
hedge with plants no taller than knee-height…
and replace the fence with a lower fence, a ­chain­link fence or a wood fence that has spaces
between the slats.
•Don’t let mail or newspapers pile up
when you are on vacation. This makes it easy
for burglars to see that the home is vacant. Unfortunately, stopping delivery informs newspaper
deliverymen and other strangers that you will be
away. It is better to ask a trusted neighbor to collect your mail and newspapers for you.
Also, be sure to have someone mow your
lawn in the summer or shovel your walk if it
snows in the winter.
•Use lights and radios to make it seem
that someone is home. Homes that are completely dark before bedtime are obvious targets
for burglars. Timers, available for a few dollars at
home stores and hardware stores, are a reasonably effective solution.
Also, leave a radio on and tuned to a talk station when you’re away so that anyone who approaches the home will think someone is inside.
Install motion-activated floodlights on every
side of your home, not just over the driveway and
front door. Bright lights scare away most burglars.
Where to Hide Your
Valuables
Walter T. Shaw, one of the most notorious jewel thieves
of the past half-century. Based in Fort Lauderdale, Florida,
he is author of A License to Steal (Omega), an account
of his career as a jewel thief and his father’s career as a
telecommunications inventor.
T
he master bedroom is the first place
that all burglars search. Valuables stored
there are likely to be found even if they
are well-hidden. The main living area of the
home also is likely to be well-searched.
Least likely to be searched are young children’s
rooms…garages…unfinished basements…and the
space above hung ceiling panels.
44
I would not recommend installing a safe. Home
safes consolidate the family’s valuables in one
place, which makes them easier to steal. If the
burglar lacks the know-how to crack your safe,
he might take the whole safe with him…or wait
for you to return and force you to open the safe,
turning a bad situation into a dangerous one.
One potentially effective strategy is to set up
your home so that it convinces the burglar that he
has found your valuables before he actually has.
Hide your most precious possessions in a room
unlikely to be targeted, but leave a few less important “valuables” in a location a burglar is likely to
search, such as a drawer in the master bedroom.
These “valuables” might include a stack of small
bills with a $20 bill on top…a few credit cards that
are expired or cancelled…a broken but impressive-looking camera…or some costume jewelry
that looks more precious than it is.
For maximum security, rent a bank security
deposit box. Banks always are more secure than
any location in the home.
E-Mail Account Smarts
Y
our e-mail account may not have been compromised, even if friends tell you that they
have received spam from your address. Spammers can “spoof” your address, meaning that
your e-mail address appears as the return address, even though it was sent from someone
else’s (the spammer’s) account. However, if you
are concerned that someone may have accessed
your account, change your password and notify
your e-mail provider’s customer service. A representative may be able to investigate the matter
further to make sure that no one is accessing
your e-mail account.
Research editor David Boyer is Bottom Line/Personal’s
resident computer guru.
TURN THE
WORST
OF TIMES
INTO THE
BEST
OF TIMES
FOR YOU
For additional valuable Wealth secrets
at Bottom Line’s very useful site . . .
www.BottomLinePublications.com
902486