What a week. To cap it off Friday, Uncle Sam played the part of Santa Claus, finally stepping in to give the country a solution to this mess we’ve gotten into. But is it the right solution? Does it mean more money in your pocket? Will Congress get its act together for long enough to pass the legislation? And what took our government so long to get here?
The unprecedented steps – including having the feds purchase a substantial amount of our bad mortgages, temporarily ending short-selling in financial stocks and guaranteeing money-market funds – sent the market soaring to end a stomach-churning week. Suddenly your nest egg is worth a lot more than it was a couple days ago.
But while the government may have given Wall Street a break, don’t count on getting your own bailout. You’ve got to stay more vigilant than ever to live within your means, avoid taking on too much debt, protect the equity in your home and keep building wealth for the future.
Carmen’s here to help. Along with our team of experts, she answered more of your questions on Friday’s Special Report. Below is a sampling:
Q: This government bailout sounds great for corporations plagued by their investments in toxic mortgages. But what is this going to mean for the homeowner who currently has an ARM scheduled to reset in the upcoming year?
The way to get out of an ARM is to refinance. David Kittle, Chairman-Elect of the Mortgage Bankers’ Association, says the best thing to do, with rates around 6%, is refinance now into a fixed rate. But you will have to qualify for the new loan and that will probably require a new
Q: I have a HELOC with WaMu $250,000. My house is now upside-down. If WaMu goes under, is my loan safe?
Your loan terms will remain the same even if your bank fails, so you have nothing to worry about there. Carmen is a little worried, however, about the size of that HELOC.
Q: I’m an ex-AIG-employee; I have a pension through them and I never rolled over my 401(k). Should I roll my 401(k) into my current employer’s 401(k) or should I just ride it out and roll it over when things stabilize? Also, if AIG fails, what happens to my pension? Is it protected?
First, make sure your 401(k) rolls over to your new employer because you can’t keep contributing unless you proactively roll it over. The 401(k) and pension should both be safe, even if the institution holding them isn’t, thanks to protections from the state guarantors as well as the Employee Benefits Protection Act.
Q: I recently inherited $116K in cash, mutual funds and IRAs. What’s the best thing to do with the cash and funds that are losing their value?
Be careful investing in another home. Carmen would diversify, put in money markets, Treasury bills and high-yield savings accounts for the safest options. And don't forget about the pros of creating a living trust for your beneficiaries.
Q: How can I protect my Equity Line to remain liquid during this economic downturn? How can I find out and know if my bank is healthy and solvent?
Opening a HELOC is a great way to keep some cash at hand. David Kittle recommends calling your bank and asking them their policy on closing lines of credit. If it doesn’t seem like they're going to, there’s no reason to tap into your HELOC. Never borrow what you don’t need. But if your bank is having trouble, it’s possible it could freeze up your line of credit, in which case the best move would be tapping it now and putting it somewhere safe.
While there’s no way to know for sure if your bank is healthy, the FDIC has research tools on its web site to help. You can also check out Bankrate’s Safe & Secure tool, but understand that these are not guarantees of which banks are safe.
Q: I recently converted $500k in stocks to cash and money market at Schwab. I want to wait until the market bottoms and buy back in. Is my cash safe? This is my retirement.
Per individual per institution the FDIC limit is $100K. Joint accounts are insured up to $200K. There are other different types of designations for small businesses and others, which you can view on the FDIC’s web site.
Q: I have $8K-$10K to invest, but it's my first time. What is the best place or vehicle to put my money into so that it's safe for my fiancée and our future together?
First-time investors should always tread lightly, and this time is no exception. Carmen suggests taking advantage of tax-friendly IRAs, including Roths. You can invest in mutual funds through the IRAs which give you that added diversification. If you’re looking to buy a house in the next few years, a high-yield savings account is the best bet.
Q: I have $100K in a bank. With everything that has been happening is it smart move to move from a bank to a credit union? I’ve heard rumors that they are safer.
If you’re a member of a union, a credit union can be a great alternative to a bank. They’re solid, they offer good returns on everything from CDs to high-yield savings accounts to mortgage rates. Just note that the FDIC does not insure credit unions; that is done by the National Credit Union Administration (NCUA), and it doesn’t back every institution. Also, Marc Hedlund ofWesabe.com notes that many credit unions are barebones, meaning they have fewer ATMS, online services and other things you’ve come to expect from your bank.
Q. I have a retirement account with TIAA-CREF. I have a Retirement Annuity that is paying annually for 10 years into a Traditional IRA using a transfer payout annuity. I also have a separate Roth IRA. I was told that the TIAA-CREF is not backed by the FDIC or SIPC but rather by FINRA. Should I move my money into a SIPC backed company or is my money safe enough to keep at TIAA-CREF?
FINRA is a regulatory agency and it does not insure. SIPC is the insurer. Your annuities are backed by state guarantors so there is no need to worry about the holdings disappearing. The thing to worry about is what the IRAs are invested in.
Q: Our retirement savings has dropped 17% since start of the year. Do we just ride out the market or should we reallocate our resources?
As long as you’re not too close to retirement, you generally don’t have to worry about if your retirement accounts are losing money in the short term, according to Steve Leisman. If you believe the U.S. economy will eventually come back, stick with it. Don’t get impatient and buy selectively because when the market is down is often a great time to get in to stocks and other asset classes at bargain prices. Think of it like the sales rack at your department store, Carmen says.
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