Mailbag for Friday, February 2, 2007

Marketplace Staff Feb 2, 2007

TESS VIGELAND:
I’m Tess Vigeland, and with our economic editor, Chris Farrell, we’re going to attempt to answer every single one of your pressing financial questions. Right, ?

CHRIS FARRELL:
Every single one. I’m going to try at least.

VIGELAND:
We have all day, right?

FARRELL:
That’s right.

VIGELAND:
All right. But before we attempt this great feat, please take down our web site address. It’s marketplace.org. Click on contact. Or you can call us at 877-275-6669, that’s 877-ASK-MONY and we spell that, M-O-N-Y. All right. Well, first up we’ve got Satia calling from Las Cruces, New Mexico. She’s a professor of public health at New Mexico State University there. Hi, Satia.

SATIA:
Hi.

VIGELAND:
Well Satia, why don’t you tell us a little bit about yourself?

SATIA:
Okay. I have been on the faculty here at the university for about 11 years. And I teach public health in the graduate and the under graduate program. And I think I’m one of those people who has a job that I love very much. I love to teach, so I’m in the right place I think.

VIGELAND:
That’s very lucky for you.

SATIA:
I hope so.

VIGELAND:
So what’s your question for today?

SATIA:
Okay. The question I have is in the last two years, my partner and I, we’ve been going to Curacao and have really – have been thinking about our summers in Curacao where I’m going to do a little bit of teaching. And our goal is to find a small home there and spend about three to six months, in a year, living there. And I’ve had a lot of trouble figuring out how to finance the mortgage on a home in Curacao, so I was really interested in hearing what has to say and what are some of the pitfalls of doing that kind of financing from the United States.

VIGELAND:
All right, Chris, well I can smell the coconuts already.

FARRELL:
Now I’ve been to…

VIGELAND:
I feel the breeze.

FARRELL:
Yeah, I mean I was just thinking about it, you know, boy. I’ve been to two of the islands in the Netherland Antilles.

SATIA
Yes.

FARRELL:
I haven’t been to Curacao, but I’ve been to Bonaire and to Aruba. I don’t know if I can really answer your question without doing some research. And so…

VIGELAND:
Oh there you go.

FARRELL:
How’s our budget Tess? Okay.

VIGELAND:
Only if you take, you know, your host with you.

SATIA
That would be wonderful.

FARRELL:
All right. On a more serious note. There’s a couple of things that you can do. In terms of finding a home in Curacao, or really anywhere in the Caribbean because more and more people are doing it. More and more people are attracted to what you’re doing. There’s a standard piece of advice and I think it really does make a lot of sense. You’re going to want to work – find and work with a local real estate agent . . .

SATIA:
Okay.

FARRELL:
. . . and a local lawyer. And you’re going to need both because each island has different rules and regulations. I mean, for example, in some of the British islands you have to get a non-belongers license, which usually takes 12 to 18 months before you can buy a property. There are a number of banks, international banks that do business in Curacao. ING, which is one of the largest banks in the world, you may be able to get a loan through there. But you’re not going to have difficulty getting a loan.

SATIA:
Okay.
FARRELL:
They are typically. Now I’m not sure about Curacao, in the Caribbean typically is about 70 percent: 30 percent down, 70 percent mortgage. Here’s the Chris Farrell standard approach for buying beautiful property in the Caribbean. First of all, I don’t think two trips is enough. You’re going to have to take a couple more trips.

SATIA:
Okay. We’re going to do that, yes.

FARRELL:
You’re going to do that just so you get to really get to know what it is you like. I mean one thing, for example, that I had learned fairly recently just sort of nothing to do with this conversation. Someone who did buy in Bonaire and you know, they said that when they went they thought well of course you’re going to want to buy on the beach.

SATIA:
Right.
FARRELL:
Well, it turns out, what you really want to do is buy inland a little bit more and what you really care about it the breeze. I don’t know whether that’s going to be the case in Curacao, but this is the kind of knowledge that you’re going to want to gain.

SATIA: Right, right.

FARRELL:
There are a number of real estate agencies on the island. And just like with any real estate agency, you sort of try and find someone that you like and that you trust. How’s it going to impact your finances? How’s it going to impact your ownership? You know, run those kinds of numbers.

SATIA: Oh always, always. And I think that the idea of going a few more times to the island is helpful. It’s been very wonderful to know the languages of the island.

VIGELAND:
I would love to speak the language of the island myself. Well thank you so much for your phone call and let us know how it goes once you get down to Curacao, if you end up moving there.

SATIA: Absolutely. I will and I’ll give you guys a call from Curacao itself.

VIGELAND:
Terrific. Thanks so much.

SATIA: Great. Uh-huh. Bye-bye.

VIGELAND:
All right. How about a dip into the mailbag, Chris?

FARRELL:
I’m ready. I’m always wondering what you’re going to toss my way.

VIGELAND:
Okay. We’ve got Anna from St. Paul, Minnesota, your neck of the woods. And she describes herself as one of those very rare college students who does not take any money from her parents. She pays her own rent and tuition and books and pretty much everything. And every year when she pays her taxes, the software program that she cheerfully uses informs her that she can’t deduct any of those educational or rent expenses. But her parents could take the deductions for her. This doesn’t seem terribly fair does it? Why is this the rule and how long does this go on for her? Is that through the entire time she’s in college?

FARRELL:
All right. Let’s bring about a change.

VIGELAND:
Oh, let’s do that.

FARRELL:
She’s under 24, a full-time student. Now living primarily on her own, which certainly seems to be the case and covering most of her living expenses. Her parents should not be declaring her as a dependent on their income tax return. And by the way, they should not be taking any of the education credits like the Hope or the Lifetime Learning credit. That’s all – Anna should just go ahead and do it.

VIGELAND:
But that’s based on the fact that her parents are taking her as still living with them, right?

FARRELL:
Now I’m assuming that they are and they shouldn’t be doing it. They should not be taking the deduction and that way, what Anna can do is take advantage of one of these credits for higher education, deduction for higher education. For example, if like I say, the Hope or the Lifetime Learning credit which would be a real benefit to her.

VIGELAND:
I hope that helps you out Anna and good luck with your taxes. Need to know how to organize your money or your taxes? Well give us a call. We’ll show you how to do it. Click on the contact button on our web site, marketplace.org, or give us a call at 877-275-6669. That’s 1-877-ASK-MONY. And let’s hit the phones again. We’ve got Murl calling from Argyle, New York. Hi, Murl.

MURL:
Hi. How are you doing?

VIGELAND:
We’re doing quite well, and you?

MURL:
Well I’m doing pretty good. I just retired, two years ago.

VIGELAND:
From?

MURL:
From just outside of Washington, DC.

VIGELAND:
And what were you doing?

MURL:
I was a letter carrier.

VIGELAND:
Oh, okay.

MURL:
What happened was we bought the house that my father was born in, in 1999 and we got a real good price on it. In 2004, we sold our house right at the peak of the housing market.

VIGELAND:
Well that’s always a good thing.

MURL:
Yeah and we had two people bidding on our house, so we sold it for $30,000 more than we were even asking for it.

VIGELAND:
Wow.

MURL:
So we made a big bundle on our house.

VIGELAND:
Okay. So what’s your question for Chris then?

MURL:
Okay. Well, what happened was we ended up with $100,000 that we didn’t know what to do with and we had been dealing with Met Life and they told us to get this $100,000 variable annuity and that after – we couldn’t touch it for the first year but then we could take out 10percent of the principle and all the interest. So after a year, we came up here and we finally got a hold of a financial advisor, but then as soon as she saw that variable annuity, she said, you can’t get any of that money. You’re too young. See I’m only 57 now.

VIGELAND:
All right. Well, Chris, it’s always nice to have $100,000 to play with but – let’s look at whether they got some bad advice here and whether there’s anything they can do because I, I’m guessing that we’re looking at some potential tax penalties here.

FARRELL:
Well there’s a couple of things that I would consider. One would be, there is a way to do a tax free exchange into another annuity. It’s called a 1035 exchange, just in general for other people to know. If you bought an annuity that you’re not really happy with, you’re not happy with the terms. The money then goes into another company, another company’s annuity. And this can be a very good move to make. My guess is what you have with the seven years also is there are surrender charges over seven years.

VIGELAND: Chris, what else could he do with that money?

FARRELL:
Well this is the other thing, you know, to be thinking about. Perhaps you don’t want a variable annuity. Perhaps you might want what we call an immediate annuity. That’s the kind of annuity that pays you a certain amount of money.

MURL:
Right.

FARRELL:
Right away on a regular basis. It gives you something to rely on. If it turns out that the variable annuity is what you want to stick with and you do the 1035 exchange you want to go into an annuity that has very, very low fees, that has no surrender charges. And I would ask this person to do a calculation for you, which is at what point, and there will come a point – does it make sense for you to eat the surrender charges and continue with your transfer out of this into a lower cost product because of the low fees. And I’ll make one final point. You may – you did it. It’s not the worst thing in the world. I wouldn’t beat up on yourself. And by the way, your timing on selling your house, we all wish we . . .

VIGELAND:
Yeah, bravo.

FARRELL:
We all wish we knew.

MURL:
That was perfect.

VIGELAND:
All right, Murl, does that help you out?

MURL:
It makes me not feel so bad about the mistakes we made.

VIGELAND:
Well good. Thanks for the call, and stay warm up there in upstate New York.

MURL:
Okay, thank you very much.

VIGELAND:
All right, nothing fancy, nothing exotic; just solid information that you can use. If you’ve got a problem, we’ll do our best to figure it out. Give us a call. It’s 877-275-6669. That’s 877-ASK-M-O-N-Y. Or visit our Web site. It’s marketplace.org, and click on contact. This is MARKETPLACE MONEY from American Public Media. All right, Chris, how about one more reach into the email bag?

FARRELL:
All right, yes.

VIGELAND:
Here we go. Monty and Kimberly wrote from Los Angeles, California, right here in my backyard. They want to know if we can solve something of a family feud. Uh-oh. They are married, but they have some pretty differing opinions about how to solve their credit debt. Kimberly has almost $30,000 in credit debt. She’s also got $15,000 that’s tied up in stock. Monty, her husband, has heard the argument about not using your retirement accounts to pay off credit, but he thinks that this situation might be different. Does it make sense to liquidate the $15,000 of stock to pay off this credit card debt? Kimberly, though, thinks that she should hold onto the stock just in case it starts to take off. So, let’s settle this marital dispute, okay?

FARRELL:
I want to settle this family feud by changing the terms of the debate, because one problem that a lot of people fall into, , is maybe they get a bonus, maybe they break into the retirement account, maybe their taxable account. They have some money. They call in their chips. They pay off that credit card debt, but they didn’t really address why they were in the credit card debt in the first place.

VIGELAND:
And then it gets run up right again, doesn’t it?

FARRELL:
Right again, and then you still don’t have those assets, by the way. So all you really did was buy yourself a little bit of time. Remember, it’s a marriage. So it’s not Kimberly has $30,000 in credit card debt, in my world.

VIGELAND:
Good point.

FARRELL:
So how are they going to address this issue together? And how are they going to have the conversation? And what is it that they’re going to be willing to give up or willing to cut back on, or work a couple extra hours, or whatever it is they decide to start attacking this credit card debt? It’s that conversation that Monty and Kimberly have, and as they install that discipline of getting rid of the debt that is really going to hold them in good stead over a long period of time. That’s all personal finance is; it’s just good habits.

VIGELAND:
You’re absolutely right. And we’re so glad that you’re here to remind us of that every single week because we all need reminding. That’s all the questions we can take on this week’s show. Please leave your questions for a future program on our voicemail. It’s 877-275-6669, 877-ASK-M-O-N-Y, or visit our contact page on our Web site. It’s marketplace.org. Thanks again, Chris. It was good to talk to you this week.

FARRELL:
Thank you.

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