Mailbag for Friday, March 23, 2007

Marketplace Staff Mar 23, 2007

TESS VIGELAND:
I’m Tess Vigeland. And it’s that time, once again, to hear from the financial wellspring that we call Mr. Chris Farrell. Hey, Chris.

CHRIS FARRELL: How are you doing? Financial wellspring. Hmm.

VIGELAND:
You are the source of all financial wellspringness.

FARRELL:
Oh, boy. Okay. Well, don’t put on the pressure. Don’t. You know, it’s OK. Whoa.

VIGELAND:
The pressure is all there. Anyway, he is our economics expert and knower of all things money-related. So we’re gonna go ahead and hit the phones here. But before we do, take down our number. It’s 1-877-275-6669. That’s 877-ASK-MONY. Or just hit our Web site. It’s Marketplace.org, and click on the contact button. Let’s go first to TERRY:, who’s in Cleveland, and he’s a self-described smarty-pants CPA. Hey, TERRY:.

TERRY:
How are you doing?

VIGELAND:
We’re pretty good. So what are you all smarty-pants about?

TERRY:
Well, you know, I look at it this way. I’m my own person over life, and if I had showed the rope like everybody else, I’d be a millionaire. I wouldn’t be asking this stupid question.

VIGELAND:
Yeah. You and me both. So who do you do CPA work for?

TERRY:
I’ve worked on my own. I’ve worked within industry, primarily.

VIGELAND:
But we reached you with the Boy Scouts?

TERRY:
Right. Correct. I’m the business manager here at our local council.

VIGELAND:
Well, terrific. Well, tell us a little bit about your situation and what we can help you with today.

TERRY:
Well, it’s an envious situation of kids who are all grown, no college payments and did not take out a second mortgage to pay for their schools.

VIGELAND:
So you did very well putting your kids through college.

TERRY:
Yes.

VIGELAND:
How are you doing on retirement?

TERRY:
That’s where we are right now.

VIGELAND:
Okay.

TERRY:
And that’s the question which I raised was how much is too much? With no house debt, no college tuition et cetera. My wife has maxed out on her . . . or 501C9, and I haven’t been that fortunate. The places I worked for, I could only sack a little bit away. But now, with the Boy Scouts here, I can sack away, I can max out in 2008. Can’t quite max out at 2007 because I’ve only been here less than a year.

VIGELAND:
All right. So a very, very common question, Chris, which is how do you know how much you’re supposed to be saving for retirement while still trying to enjoy your life?

FARRELL:
Exactly. Well, it used to be the rule of thumb theory was 10 percent of your pre-tax income.

TERRY:
Okay.

FARRELL:
Now, the discussion, the dialog is 20 percent of your pre-tax income because we live in a world where the traditional defined benefit pension plan, you know, the pension plan that would pay you that monthly salary.

VIGELAND:
Going bye-bye.

FARRELL:
Going bye-bye and…

TERRY:
Yes.

FARRELL:
…all the uncertainties in our economy. But you know, Terry is in good shape.

VIGELAND:
But 20 percent, that’s a good shock.

FARRELL:
And 20 percent is a good shock. And I also think that is an exaggerated chunk. But this doesn’t deal with your situation, Terry, but just sort of as a general statement.

TERRY:
Okay.

FARRELL:
Where that 20 percent starts to make sense, it’s less about saving for your retirement directly, and more thinking about the income volatility of your life. Let’s say you’re a tenured university professor, so you don’t have to worry about losing your job. Well then, you just go a long, 10, 11 percent, that’s probably fine. Now, let’s say you’re in a commission business. Some years you do well, some years you don’t do well. In that kind of environment, 20 percent might make a lot of sense. Or let’s say you’re in an industry and you love your job, you love your industry, journalism. And it turns out that, you know, there’s massive restructuring, there’s massive layoffs, there’s jobs being created, but there’s jobs being destroyed. All of a sudden, 15, 20 percent might make sense. It’s less about a retirement, as opposed to building yourself a cushion.

TERRY:
Gotcha.

FARRELL:
For Terry, I think, you know, your wife is doing the maximum and you’re gonna be doing the maximum, you don’t have any debt. So I would be doing two things. Go to the maximum as you’re going to do in 2008, and then, if you do have, do you have like an extra $500 a month.

TERRY:
OK.

FARRELL:
Put it into a taxable account with some equities. Let it compound over time. If it turns out you need the money, you can always cash it in. You’re not paying any penalty because if you’re under 59 and a half, so none of that, you’re not dealing with any of that.

VIGELAND:
And are you?

FARRELL:
And are you doing this?

VIGELAND:
Are you under 59 and a half?

TERRY:
No. No to both questions.

VIGELAND:
Okay.

FARRELL:
Ah. Well then, you don’t even have to worry about it.

VIGELAND:
But let me ask you, Terry, how have you done up to this point? Because if you’re saying that you’re older than 59 and a half, you’re getting pretty close to the point where you’d wanna retire. So have you been saving up to this point?

TERRY:
Oh, we have $280,000.

VIGELAND:
All right. Terrific. Well, it sounds like you’ve been quite the Boy Scout, financially. So congratulations to you.

TERRY:
Thank you very much. And I truly appreciated the call.

VIGELAND:
Thanks, Terry.

TERRY:
Bye now.

VIGELAND:
How about we reach in to the e-mail bag now?

FARRELL:
Okay.

VIGELAND:
We’ve got Madeline from Boston, Massachusetts. And she was laid pretty low for quite a while recently due to chronic fatigue syndrome. She says she’s recovered, but because she was away from work for a long time, she can really appreciate the benefits of disability insurance.

FARRELL:
Right.

VIGELAND:
She’s heard that because of this prior condition, it may be tough for her to get some coverage. So the question is very basic. Is that true and is there any way that she can prepare for some sort of unplanned absence from work due to these health issues?

FARRELL:
It is true. Now, there are two ways that you can get long-term disability coverage. One is by individual insurance from an insurance company. The other is through your employer if they offered as part of the benefit package. If her employer does offer long-term disability insurance, she’s covered because she’s part of a group.

VIGELAND:
Even though she has a preexisting condition?

FARRELL:
That’s right. There is a delay, and typically the delay adds up to about a year before it kicks in and you have to work a certain number of hours. I mean, there are certain conditions surrounding that statement that, yes, she’s going to be covered. But in essence, she will be covered after a period of time as an active worker. That’s the real key. Once you get into the individual market, it’s gonna be just very, very tough. Because what they want to see is that over the past 10 years, you have not had a medical condition that would lead them to suspect that you might have a disability. I think, really, what I would be investing my time in under the circumstances, I’d be investing my time finding a job at a company that does offer this benefit. I mean, you think about it. That is a form of an investment.

VIGELAND:
Absolutely.

FARRELL:
And if she is concerned that in the future that she may have the chronic fatigue syndrome, I’d put that on the top of my list to work for that this is part of the benefits package.

VIGELAND:
And again, they generally don’t take into account preexisting conditions or prior illnesses?

FARRELL:
No. As part of the group plan. There is a preexisting condition clause even in, when you join a workforce.

VIGELAND:
Through your employer, yeah.

FARRELL:
But I believe the preexisting condition typically last somewhere between 12 to 18 months. And as far as I am aware, I think a year or something after the 12 months. That’s typically about the period, and then you are fully covered.

VIGELAND:
All right. Well, we are here to help you sort through what’s fact and what’s fiction. Click on the contact button on our Web site, Marketplace.org. Or call us at 877-275-6669. That’s 877-ASK-MONY. Now, let’s take another call from a beautiful part of the country, Bozeman, Montana.

FARRELL:
Oh, I’ve been there several times. I loved it. I need to go back because it’s been, oh, it’s probably been 10 years since I’ve been there.

VIGELAND:
Oh, well, maybe you could visit Linda while you’re there.

FARRELL:
Absolutely.

VIGELAND:
She’s, is calling from Bozeman. Hi, Linda.

LINDA:
Hi.

VIGELAND:
Well, Linda, I understand that you are retired.

LINDA:
Yes.

VIGELAND:
What did you–what was your career?

LINDA:
As a secretary from the Los Alamos National Laboratory in Los Alamos, New Mexico.

VIGELAND:
Terrific. All right. Well, you’ve gone from one beautiful place to another.

FARRELL:
I was gonna say, you have good taste in special . . .

LINDA:
Yes. We’ve been quite lucky.

VIGELAND:
So tell us what your question is for Chris today.

LINDA:
The question is about Fannie Mae Bonds. I have $18,000 invested in Fannie Mae, and they matured 12/22/09. And I read in the Wall Street during all that, if you’re concerned about subprime lending and offsetting your investments, make sure that your bonds are triple A rated. So are Fannie Mae Bonds rated? And how large is the percentage of subprime loans that Fannie Mae has? How does anyone know? And is it enough to cost concern?

VIGELAND:
Wow. Great question. And…

FARRELL:
That’s a bunch of good questions.

VIGELAND:
And this is…

FARRELL:
Can I get to the bottom line, though?

VIGELAND:
Absolutely.

LINDA:
Yeah.

FARRELL:
You don’t have to worry.

LINDA:
Oh, good.

VIGELAND:
Great.

FARRELL:
OK.

VIGELAND:
Okay. Thank you, Linda.

FARRELL:
All right.

LINDA:
Thank you.

FARRELL:
Now, we can elaborate on that statement, but…

LINDA:
That was easy.

VIGELAND:
Well, no, but I was just gonna say, I mean, obviously, this is a huge tropical conversation these days with the primes and the subprime mortgage market.

FARRELL:
It’s a very big topic. And Fannie Mae is, you know, it’s the largest mortgage lender. I mean, one of every five loans, mortgage loans involved Fannie Mae.

VIGELAND:
Mm-hmm.

FARRELL:
So it’s a huge company. They recently gave a testimony before Congress, and they said that they were, their exposure to the subprime market was very small. I believe about two-tenths of a percent…

VIGELAND:
Wow.

FARRELL:
…to their overall portfolio.

VIGELAND:
Yep.

FARRELL:
So they have some exposure, but it’s very small. Fannie Mae is a triple A rated company. It is a private corporation. It has a stock that’s outstanding. Stock has been doing that well recently for just the reasons that Linda laid out. But the belief is that the federal government will stand behind Fannie Mae. It is not written in the charter that the federal government will provide the full faith in credit…

VIGELAND:
Right.

FARRELL:
…under federal government to Fannie Mae. But it’s what we call an implicit guarantee. And frankly, it’s a very safe bond. And frankly, Fannie Mae’s exposure to the subprime market is very small.

VIGELAND:
All right. Does that help you out, Linda?

LINDA:
It does. It does. That’s good news.

VIGELAND:
All right. Well, thanks for the call.

LINDA:
Thank you very much.

VIGELAND:
Take care.

LINDA:
Bye-bye.

VIGELAND:
All right. Stocks, bonds, housing, whatever you have a question about, we’ve got the answer. Give us a call, 877-275-6669, that’s 877-ASKMONY, or hop on over to out Web site. It’s Marketplace.org and click on the content button. This is Marketplace Money from American Public Media. All right. One more reach into the e-mail bag, Chris. We’ve got Mike writing in from Council Bluffs, Iowa. And he’s a professional truck driver, but his real dream involves food. He’s got a neck for cooking, so much so that he received his professional chef certification. And he’s got a dream of opening up a little bed and breakfast inn.

FARRELL:
OK.

VIGELAND:
But, as we know, that is quite the expensive dream. So lately, he’s been looking into this notion of government grants to start a small business, but he gets into all of these Web sites that claim to have info on his grants for a fee. Is this notion of small business grant from the government a myth? Does he have to pay this kind of fee?

FARRELL:
Okay. You can go to the Small Business Administration Web site, Sba.gov. It’s pretty some Web site, a lot of information there. And they do have a page that lists all the different grants, typically, by various federal agencies. That’s one way to do it. And by the way, I would just forget about it. I mean, having a grant.

VIGELAND:
So don’t bother with this, Chris?

FARRELL:
So I–basically, I wouldn’t bother with it, you know? Take a look at it, if you are thinking about starting your business, some of them maybe at an area, you know, transportation, infrastructure, there maybe some reason why there would be a grant available to you. But as you can imagine, it’s pretty tough to get. I’m not saying don’t take a look at it, but I wouldn’t have high hopes that your entrepreneurial dream and a government grant are going to match up. But I have a suggestion that may be more useful. Go to a Web site, Score.org, S-C-O-R-E, dot O-R-G. It’s a nonprofit. It works with the Small Business Administration and its retired executives. And they help small business people start their business.

VIGELAND:
Hmm.

FARRELL:
A lot of what I think in terms of starting a business is you wanna talk a lot. You wanna have a lot of conversations. Yes, you’re going to need money. I know you’re going to need money.

VIGELAND:
Absolutely.

FARRELL:
But you also need knowledge. If you’re on the road and there’s a bed and breakfast, may be walk over there. Say, hey, you know, I’m a professional truck driver, but I got my chef’s license and I got this dream and–here’s what I’m thinking. What do you think? You know, you can get a lot of information that way. I’d spend my time in that area rather than trying to hunt down a grant.

VIGELAND:
All right. Well, we hope that helps you out, Mike. That’s all the questions we can take on this week’s show. But please leave your question for our future program on our voicemail. It’s 877-275-6669, 877-ASKMONY, or visit the contact page on our Web site, Marketplace.org. Thanks so much, Chris.

FARRELL:
Thanks, Tess.

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