Advice for the Newly Unemployed, Part 1

Losing your job and becoming one of the growing number of unemployed can be a shock to anyone.  Even if you weren’t all that happy with your position, at least you had one.  But once the shock of losing a job wears off, there are several things that you need to attend to.  Some are obvious, and some require a bit of analysis.

File for unemployment benefits

First, you will want to file for unemployment benefits.  Each state sets its own benefit amounts, eligibility requirements, and benefit length.  Benefit amounts are based on a percentage of what you made during your last year of employment, up to the maximum in your state.  Remember that unemployment benefits, like regular income, are taxable.

To determine your benefits, inquire at your state unemployment agency or, if the option is available to you, file for benefits online.  Still, understand that it can take up to a full month before you will receive your first unemployment check.

Verify your termination benefits

The second thing you need to do is to verify what termination benefits your employer will provide.  You may be entitled to severance pay, continuation of medical benefits, and possibly support in finding your next job.  Take advantage of anything and everything your former employer offers in the way of help.

Obtain health coverage

Speaking of health insurance, you need to maintain your existing coverage or find a replacement insurance policy.  If you worked for a company that had 20 or more employees, you’re eligible for COBRA.  This federal law ensures that you can continue coverage for an additional 18 months, but you must pay the premiums for it yourself.  With no employer contribution you may be quite surprised at how much money your continued coverage will cost you. 

It’s important, especially if you have a pre-existing health condition, that you not let your health insurance lapse or you may find that pre-existing condition will not be covered under a new plan.

The recent federal stimulus program may cover 65% of the COBRA premiums for up to nine months, and that is certainly worth looking into.

Decide if you need life insurance

Your employer might allow you to continue to participate in the company’s group life insurance provided that you pay your own premiums.  But life insurance might not be worth the expense if you have no dependents or your children are grown up and self-sufficient.

If you do want to keep your coverage through your former employer, you may be able to find less-expensive term plans on your own, though it will take a little homework.

Review your budget

After taking care of the necessities of health and life insurance coverage you may want to evaluate your budget to see where you can cut expenses. Depending on your field, your flexibility, how well you network and a host of other things – including a little bit of luck – your job search could take a year, or even more.  That should be motivation enough to look for ways to save money.

Analyze your retirement plan options

What you should do with your retirement savings accounts is one item that requires extra care and analysis.  If you withdraw funds from your 401(k) or 403(b) employer-sponsored savings plan, you will pay ordinary income taxes on that amount, and if you’re less than 59½ years of age, incur an additional 10% penalty.

If you transfer your employer’s retirement plan to an individual IRA by “rolling it over,” you will not have to pay any income taxes.  Moreover, you can likely build a better portfolio, since you will have more investment choices in your IRA.  Do this with care, by doing a trustee-to-trustee transfer.  And by all means, consult a fee-only advisor to avoid high up-front commissions.

Once your money is safely ensconced in an IRA, you may be able to tap it without penalty, if you need it to cover large medical expenses or pay medical-insurance costs.  For additional details, read this article.

How best to approach your job search and other tips on how to survive your unexpected unemployment will be continued in Part 2.

Roth IRA Basics

Roth, Roth, Roth.  Everyone, it seems is talking about Roth, and if you haven’t, rest assured – you will.  Over the next few months, you will probably hear a lot about Roth IRAs because of a change in the rules that will take effect in 2010 regarding converting a traditional IRA into a Roth IRA.  That subject is just a little too complicated for most people, so let’s take a quick look at some of the fundamentals.

Roth Basics

If saving for your retirement is one of your financial goals (and it should be), you might want to consider investing in a Roth IRA.  You should know that some people earn too much to qualify; here are the limitations:

In general, if you file as a single, you can make the full contribution provided that you earn no more than $105,000; if you’re married and file a joint return, that maximum is $166,000.  It’s actually a bit more complicated than that, but if you’re interested in learning the nitty gritty, here is a link explaining how to calculate the amount you can earn and still contribute to a Roth IRA.

Investment Choices

As with a traditional IRA, you can invest in a number of things: Certificates of Deposit, stocks, bonds, mutual funds, etc.

Advantages

With a Roth, all earnings on your investments escape taxation completely. This is unique.  All other investment vehicles are either taxed currently or tax-deferred.  By tax-deferred, I mean that you don’t pay any taxes until you take the money out.  Examples of tax-deferred investments are 401(k)s and 403(b)s, as well as traditional IRAs.

Other benefits of a Roth IRA include avoiding the early distribution penalty on certain withdrawals and eliminating the requirement to take minimum distributions after age 70½.

Disadvantages

So what’s the catch?  The primary disadvantage of a Roth IRA is that you don’t get a tax deduction when you contribute to it, as you do with other retirement options.  Your personal situation will drive what is more important, tax-free growth or a current tax deduction.  But that decision to go with a Roth will also depend on the assumptions you make about what your tax bracket may be when you retire.

Another disadvantage of a Roth, albeit a minor one, is that you have to go out of your way to use it.  What I mean by that is you have to actually open an account with a bank, brokerage firm or mutual fund.  With a 401(k) or 403(b), you just pen your John Hancock to some forms at work and you’re good to go.

Aside from the (in)convenience aspect, psychologically it is easier to save though an employer sponsored plan, simply because you never see the money; it comes right out of your paycheck.  And, of course, many employers match your contribution either in full or in part, which you ordinarily wouldn’t want to miss out on.  That is, after all, found money.

Limits

What’s the maximum you can contribute to a Roth IRA?  The same amount as the traditional IRA.  For 2009, it’s $5,000 if you’re younger than 50 years old; otherwise, it’s $6,000, and both spouses can make contributions to a Roth.  You should be aware that contributions are a “use it or lose it” proposition; in other words, if you fail to take advantage of this year’s contribution, you can’t do it retroactively.

Summary

For a quick summary of your choices, Understanding the Roth IRA has a useful table comparing the various options.

Conclusion

In general, a Roth IRA is a very smart choice in saving for retirement for many people.  To make the right decision for you, discuss the question with your financial planner or accountant.

Financial Planners’ Reflections on 2008

I recently attended a meeting of financial planners in Northern New Jersey. Ordinarily, we meet once a month to listen to presentations given by experts on a variety of topics such as insurance, portfolio management and estate planning. This time, though, our group met specifically to discuss the recent upheaval of the stock markets and how that has affected, not just our clients, but us. (It’s been a very stressful year for planners.)

The members of our group are very experienced, individually and collectively, and they take financial planning and investment management very seriously. The consensus was that almost everyone has been adversely affected in some way or another by this year’s stock market decline. “It’s been a humbling experience,” said one planner.

Some members of the group expressed dissatisfaction with various mutual fund managers. Others revealed that they have revised their asset allocation recommendations, according to their changed outlook for various asset classes.

Here are some observations of general interest:

A great many people are genuinely frightened about the current economic situation, perhaps because the media continuously emphasizes the bad news. Some clients believe, rightly or wrongly, that the bad news will likely continue and things will probably get worse.

As various Wall Street industry icons went out of business, some clients became concerned about the financial stability of their custodians and Money Market accounts. Fortunately, planners were able to reassure their respective clients about these issues.

Planners are referring to 2008 as a “black swan” event, a comparison drawn from the book, The Black Swan: The Impact of the Highly Improbable  by Nassim Taleb.

While diversification is a valuable strategy in a typical year, 2008 has been anything but typical. As one participant said, “Diversification works over time, but not every time.”

While 2008 was a very difficult year, it was not totally unprecedented. Planners with long memories looked back to 1973 – 1974 and 1987 for some solace. Those were also difficult times, but we got through them.

All planners agreed that it was time to revisit their clients’ Investment Policy Statements and their personal financial plans.

One planner admitted to being right about one issue (investing in commodities), but not necessarily for the right reasons. (It was that kind of year.)

Naturally, the Benard Madoff mess came up. Providentially, the clients of only one manager were affected, and then, only by a very small amount. In this particular case, diversification definitely paid off.

Special concern was expressed for those individuals who have recently retired or are just about to retire. The markets may not recover in time enough for these people to fully and thoroughly enjoy what is supposed to be their golden years. As these retirees draw down funds, they will have less and less available to keep invested for the eventual rebound which most people expect. Various strategies were discussed for retirees.

Some technical issues were discussed such as Roth conversions, tax loss harvesting and the best strategies for rebalancing, when markets are volatile and people are worried.

One planner expressed concern about municipal bonds, since many states are under heavy fiscal and financial pressure.

The group consensus was this: We will all be very relieved to say goodbye to 2008.

Choosing a Financial Advisor, Part 4

When shopping for a financial advisor, just how do you ensure that he or she has the “right” experience and training?

A recent article in Money Magazine, Don’t Judge an Adviser by His Title, by Walter Updegrave, warns that “you should be on guard” against “unscrupulous salespeople posing as trustworthy advisers” who are using “dubious retirement credentials.”

Earlier this year, state insurance and securities regulators approved model regulations that will prevent advisers from implying they have expertise about retirement planning that they don’t actually have.

The new regs will make it illegal for advisers to tout made-up or self-conferred designations, or credentials that are real but granted by organizations that don’t set rigorous standards.

That said, it may take well into 2009 before most states adopt them. And no regulations can totally eliminate abuses. You still have to exercise caution when you seek retirement advice. Here’s how.

Don’t be awed by a string of initials.

Given the dozens of official-sounding titles floating around, it’s virtually impossible to know which are marketing gimmicks, which are legitimate and which fall in between. I’d view any credential that contains words like senior or retirement with skepticism.

Earlier this year, a reader e-mailed me to say he’d met with an adviser with a Wharton Certificate in Retirement Planning. How much credence should he give it?

What I found is that the certificate is available only to advisers affiliated with the insurer AXA who attend a five-day program at the Wharton School. There’s no final exam, no grade. I don’t want to suggest that the program is a sham. It is taught by Wharton professors, and AXA sends only experienced advisers. Then again, it’s not exactly a Wharton M.B.A.

When a designation does connote a special skill, consider how relevant that expertise is. The Certified Senior Advisor designation, while legit, is largely meaningless as a gauge of retirement planning proficiency.

Why? Its purpose is to increase awareness of the aging process. It requires no special financial training.

Do a background check.

Even if an adviser’s credentials are beyond reproach, his or her integrity may not be. Before signing on with an adviser, check with your state securities commission (nasaa.org) and state insurance department (naic.org) to see if he or she has a history of disciplinary problems or consumer complaints.

Plus, don’t attend free-lunch seminars that target retirees – they are often nothing more than a way for sales-people to peddle high-fee investments. Instead, screen for a planner who concentrates on retirement at the Financial Planning Association’s site (fpanet.org).

Be wary of safety claims.

Older investors are understandably worried about retirement today. Unfortunately, advisers who misrepresent themselves with misleading credentials may also see this as a perfect opportunity to prey on those fears.

Insurance commissioners in several states have recently warned that some advisers are using concerns about the health of insurer AIG to persuade annuity owners to switch into a new annuity.

Such a move can be a great deal for the adviser, who earns a fat commission. But it may not be a wise decision for the investor, since a transfer may trigger early-withdrawal penalties, not to mention start the clock on a new set of surrender charges.

It’s during uncertain times like these that you’re most likely to seek financial advice. Just make sure you end up with a real adviser, not a salesman with a fancy title posing as one.

Conclusion

This article is useful regarding what to avoid in looking for a financial planner, but you need more information to be successful in finding the right person for you.

I have written before about the importance of having a financial advisor who puts your interests first, i.e. a fiduciary. Fee-only planners, who are members of NAPFA, all agree to act as fiduciaries and sign a fiduciary oath.

Aside from the very important issue of the manner in which your financial advisor is compensated, keep in mind that different planners have different areas of expertise. Knowing this may help you choose the individual who best suits your needs. To a large extent, the best financial advisor for you will largely depend on the kind of advice you are seeking. A brief rundown of the alphabet soup of designations, which follow the name of a financial advisor, will help you sort it out.

Designations

The following designations have rigorous standards and are widely recognized and respected. One could debate whether the course requirements are comprehensive enough and just how difficult the tests are.

Nevertheless, if you are working with someone who has one or more of these designations, you know that the planner is serious enough about the craft of financial planning to meet the requirements. It’s not an ironclad guarantee of competence, but it is a good indicator.  In all cases, there are continuing education requirements.

Certified Financial Planner (CFP®) – The CFP® designation requires a minimum of three years of experience and the passing of a rigorous two-day exam. Certified Financial Planners should be able to provide a broad range of financial advice.

Certified Public Accountant (CPA) – A CPA is an experienced accountant who has met strict education and licensing requirements. A CPA is a good choice for tax issues.

Personal Financial Specialist (PFS) – CPAs, who undergo additional financial planning education and pass an exam, can use the PFS designation.

Chartered Financial Consultant (ChFC) – Insurance professionals, who specialize in some aspects of financial planning by meeting additional education requirements in economics and investments, can use the ChFC designation.

To be continued …

Why You Need a Financial Planner

“An idiot with a plan is better than a genius with no plan.” - T. Boone Pickens.     

The stock market has been volatile, and the headlines have been scary. And that description has become common over the last year or more.

Given the state of the U.S. economy and the U.S. stock market, and indeed, all financial markets worldwide, how confident are you that your financial plan is on track?  While books and computer programs may help you plan your future, there are several reasons why you should seriously consider seeking the advice of a qualified financial planner.

Planners know that it’s about more than just money.

At its core, financial planning is about effectively managing financial resources so that you can lead a happier, more fulfilling life today and tomorrow. One of the very first steps in a financial planning relationship is to help clients define their life goals. Do you want to start your own company, buy a second home, retire early? How do you balance competing goals, such as saving for retirement, while simultaneously putting your children through college and helping out your elderly parents?

In our financial planning, I meet with clients periodically to reassess their goals and the strategies that will help them to achieve those goals, especially as life circumstances change. No financial planning or investment software program can effectively come up with those kinds of questions — let alone provide the right answers.

Planners see the whole, not just the parts.

Many financial specialists provide valuable services to people for a specific financial need, such as buying property and casualty insurance or drafting a will. However, a comprehensive financial planner provides the overview, in order to make sure that the various parts are working in harmony. That’s why I call myself a Personal Chief Financial Officer. A company has a CFO, so should a wealthy or moderately wealthy individual, or anyone with similar desires.

As a Financial Planner, I can often see something that is missing but is needed, something which the client had never previously considered. One example was a client who had a sizeable life insurance policy in place, but should have had it owned by a Life Insurance Trust. This would save what amounted to a lot of money on estate taxes.

Another client thought she was contributing to her employer’s 401(k) plan, but she wasn’t. She had returned from a maternity leave, and somehow the paperwork never got completed. While a computer program might provide generic investment advice (not necessarily well tailored to your individual needs), a financial planner can spot the missing ingredients.

Planners motivate.

You probably know that you need a will, more insurance, a budget, a better handle on your investments and true assessment of a host of other financial issues. Perhaps you could do some of it adequately on your own. But, there’s nothing like going to a financial planner to motivate you to finally take the actions that you’ve been procrastinating about, all along.

From my experience, procrastination is a huge problem. As part of the financial planning process, I typically use an Action Plan for clients and for me, to make sure that recommendations and specific tasks are accomplished in a timely manner.

Planners provide checks and balances.

Beyond the financial expertise and the motivation to take action, the planner can provide a much-needed objective perspective. Numerous studies have shown that investors who work with financial advisors trade less often and, on the average, get better returns than those who invest on their own. Planners can filter out the financial “noise” that so often clouds financial judgment.

Planners understand that “hot” stocks become lukewarm pretty quickly.

Financial publications frequently have lists of hot financial ideas and stocks to watch. But those recommendations change all the time. Whose list should you believe? No one’s. I encourage my clients NOT to watch CNBC news, because it will just rile them up to do something that is a mere reaction to the news. Good planning is about having a road map that anticipates various events and gives you peace of mind. Turn off the TV, and enjoy your life!

Planners allay fear.

Some clients are just too fearful to invest in the stock market at all, and they have kept their money in safe investments for years. In the long run, risk and return are related. You know the saying: Nothing ventured, nothing gained. But you need to understand that you can take on risk intelligently. We are talking about investing your money, not gambling with it. A good financial planner should be able to explain risk and return to you, and to craft a strategy that is right for you. Something you will stay with in good times and bad.

Planners save time.

It takes time to develop a personalized financial program, monitor your investments, reduce risk and keep track of it all. Perhaps more time than your busy schedule may allow. Your Financial Planner offers a professional approach to your customized financial program that will not demand a lot of work on your part, and a level of knowledge and expertise that may be difficult for you to achieve on your own.

Planners know about taxes.

Like the weather, everyone complains about taxes. Planners can help you structure your investments to take advantage of legitimate tax-saving moves.

Where to find a planner?

Does everyone need a financial planner? No, certainly not. But if you have resources — savings and investments — you have choices to make. You may not have the time, inclination or even desire to do the hard work to come up with the best answer.

You can find a professional fee-only financial planner at The Garrett Planning Network (GPN) or the National Association of Personal Financial Advisors (NAPFA). If you have determined that what you are truly a Do-It-Yourselfer, or you only need a financial checkup or a second opinion, your search should probably start with GPN. If you want to delegate the work, look for a planner at NAPFA’s web site. Most NAPFA members require that you have a minimum amount of investable assets for them to manage. GPN members have no such minimum.

Disclosure: I am a member of both organizations.