Mailbag for Friday, April 6, 2007

Marketplace Staff Apr 6, 2007

Mailbag for Friday, April 6, 2007

Marketplace Staff Apr 6, 2007

TESS VIGELAND: I’m Tess Vigeland. And here to join me, as always, is not just a man, but a super man. He’s Chris Farrell our economics expert. And he’ll set your financial house in order, in record time. Hi, Chris.

CHRIS FARRELL:
Hi. How are you doing, Tess? I hope I could live up to that billing.

VIGELAND:
Leap tall bank accounts in a single bound, something like that. All right. Before we get in to answer your questions, take down our Web site address. It’s Marketplace.org. Click on the contact button there, or you can give us a call. It’s 877-275-6669. That’s 877-ASK-MONY. And we’ve got Charles on the phone from Roselle, New Jersey. Hi, Charles.

CHARLES:
Hi. How are you?

VIGELAND:
We’re doing well. How are you doing?

CHARLES:
I’m doing okay. But I have a question.

VIGELAND:
Oh, well, that’s what we’re here for. Right, Chris?

FARRELL:
That’s right.

CHARLES:
And I’m a, I think my question is not the usual type that you get. I’ve been listening to your show since I discovered it and been helping by osmosis to sort of, accumulate some knowledge about how to deal with money. I find myself in the odd position of being 51 years old and about to retire in two months with a full pension.

VIGELAND:
Well, that sounds like you’ve taken a lot of advice very well.

CHARLES:
Well, neither of these things I ever expected in my life to see. It’s from the same job and that’s just one year, one out buy after another.

VIGELAND:
What industry have you been in?

CHARLES:
I work in the auto industry.

VIGELAND:
Wow. So you’ve actually done well in an industry that’s been struggling?

CHARLES:
That’s been struggling. In fact, my plant just closed. So I have, but I was one of the lucky ones. And this is a pension that has a cost of living, has a prescription program and a medical program. Those are the good things that stay with me once my pension checks start. But I have no reserves. I know there’s a lot of people like myself who are, you know, telling baby boomers who are all gonna reach my age around the same time. And a lot of us just never thought we’d be here and didn’t save.

VIGELAND:
So, Charles, is your question what to do with that money once you’ve kind of got it socked away?

CHARLES:
Settled and it’s starting to roll in on a regular basis. How can I make it more than what it is?

FARRELL:
I have a couple of thoughts. The first thought, and just listening to this conversation, and I think a lot of people in your circumstances, is really gonna think about what it is you’re going to be doing. You have an enormous savings cushion by working 30 years with this company. Plus, as you mentioned, you have what is really valuable, the health care, the medical side. If you didn’t have that, then I’d be giving a much more draconian discussion or advice because that’s where people can really get hurt as they do get older. In terms of where do you put the money, I would sort of think of two categories.

FARRELL:
I mean, one category is the, your classic cash. Just because you may wanna travel, you may have a health issue, you may have good coverage. And Tess knows that I like these funds. They come under different names. They’re called lifestyles funds, target funds, and you may set it up as a Roth IRA, you may set it up as a SEP IRA, which is an IRA for the self-employed. You may decide that you don’t want to do it in an IRA form, you’d rather do it just because your taxes may be low, that it may make more sense, not too tied into one of these retirement vehicles.

FARRELL:
The advantage of them is that you take a look at your risk tolerance. You know how willing you take risk. Put in what the length of time that we’re talking about. So maybe, you might be investing with a 20-year time horizon, and you’ll be a little more aggressive. And then as you get closer toward the end period, it gets more conservative, and it makes very intelligent decisions for you. So the only decisions you’re making are about timeframe, risk and how much money you can put into them. And then a lot of these funds have very high fees. You don’t want them. There are very good ones with very low fees. Over 20 years, fees compound just like returns do.

VIGELAND:
All right. So does that help you out?

CHARLES:
Yes, it does.

VIGELAND:
And enjoy your retirement at 51.

CHARLES: Thank you very much and have a good day.

VIGELAND:
Thanks so much, Charles. All right. How about a reach in to the e-mail bag? We’ve got John and Elizabeth writing in from Brooklyn, New York. They’re expecting their first child very soon, a boy, in the next few days, in fact. And they’ve been getting a whole bunch of offers for life insurance for the baby. Now, of course, my question is how did all these life insurance companies even find out that they had a baby? But aside from that, they’re not sure that this is necessary. So they’re trying to think of a more positive spin on what they’re calling an insurance policy, which would be starting an investment for the child, getting ready for the education, that sort of thing. So what is your advice here?

FARRELL:
Well, there’s no reason to buy an insurance policy in the child’s name. I know it gets sold. I’m not a big fan of it. I do wanna say, the parents should buy life insurance. But in the name of the child, forget it. Because we have much better options today, much better options. 529 plan is one option. Save for the child’s college education or whatever form of education that the child’s gonna have over time. You could set up an automatic savings program investing in, as you know, I like broad based equity index funds, S&P 500, Wilshire 5000 you know you start doing that on an automatic basis. Over 18, 20 years, you’re gonna have some real money for this child. You could do it in your name, by the way. Because if it turns out that your child truly is superman and he gets the full scholarship to college, well, if it’s in your name, you can go ahead and use it for what you want.

VIGELAND:
But what about, you always hear about trust funds. Is that really a vehicle that’s really for the wealthy?

FARRELL:
You know, my feeling on trust funds is that, you know, they are oversold. I think that the 529 plan is much better than setting up a trust. I mean, think about an UGMA, Uniformed Gifts to Minors Act. I mean, essentially, that’s really just a trust, but it’s the very simple trust. Well, 529, in most cases, is a better plan than a Uniformed Gifts to Minors Act account. Trust, unless you’re wealthy, let’s not go that route.

VIGELAND:
All right. Well, we’re here to give you real life solutions to difficult situations. And you know, we’re even available as baby sitters if you need us. That’s…

FARRELL:
Maybe, you are.

VIGELAND:
Maybe we should stick to financial care for right now. Just click on the contact button on our Web site. It’s Marketplace.org. Or call us at 877-275-6669. That’s 877-ASK-MONY. Well, you know, as a public radio show, we’re considered a not-for-profit business. But there are a lots of different kinds of non-profit companies all over the world, big, small. And our next caller is actually in the process of creating her very own non-profit. Jill is calling from Rochester, Minnesota. Hi, Jill.

JILL:
Hi there.

VIGELAND:
So what are you trying to do?

JILL:
With my nonprofit organization?

VIGELAND:
Yeah.

JILL: Or with my life?

VIGELAND:
Let’s start with the nonprofit.

JILL:
The nonprofit is called the International Breast Milk Project. And we shipped donor breast milk from the U.S. to children orphaned by HIV in Africa.

VIGELAND:
Wow.

JILL: Yeah.

VIGELAND:
How did you get interested in that?

JILL: Oh, I just had a freezer full of milk, and I just read that orphans in Africa had a six times greater chance of survival if they receive breast milk. So I became hell-bent on sending my milk there. And when I did that a year ago, I guess, other moms kind of caught on and it became kind of this thing that, I learned there are a lot of other moms worldwide that wanted to do the same thing. So I had to start a nonprofit and kind of decide if I wanted to make a lot of money or have more of a rewarding career, but no money.

VIGELAND:
How did you even get this launched? I mean, there are all kinds of factors here, including shipping and how you keep things cold and getting them to the right places. How did you get started on that?

JILL:
Well, logistic is definitely the biggest challenge. And just after a few months of researching, and I got FedEx to donate the last shipment. And I work with a company called Prolacta Bioscience in Monrovia, California. And they take care of all of the shipping, the cold storage so that there’s temperature monitors in each cooler. They blood test all the moms, process at all tests that makes sure it’s 100 percent safe, and basically take care of the online applications and everything.

VIGELAND:
Wow. Did you ever think you’d be running a nonprofit?

JILL:
No way. But it’s awesome, I have to say.

VIGELAND:
Well, congratulations.

JILL:
Thank you.

VIGELAND:
It sounds like a terrific project. So tell us what your question is for Chris, today?

JILL:
Well, basically, I quit my job in medical field to run my non-profit, and, of course, in the meantime, it’s been a little more difficult to make ends meet, especially with my husband being in medical school. Actually, he’s on medical school. He’s in residency now, I should take that back. My question is, is it better to continue to save all of our money for retirement or take some of the savings that we have built up to pay off our up credit card debt?

VIGELAND:
Well, Chris, this is a very common question of whether to pay off credit cards or whether to go ahead and keep things in savings.

FARRELL:
That’s right. And for every season, there is a priority. Now, do you really think, is it six months, is it a year before you’re gonna be able to start paying it off?

JILL: It, it would be September. Would be when he starts Moonlighting it. And I think that there’s probably a lot of other medical students or residents that, that have a unique situation and that we’re really poor now. But we know, in a few years, this is gonna be a lot different. So how do we manage our funds until then?

FARRELL:
My first big thought is that both you and your husband are making huge investments because we’re talking six months, nine months. You’re not gonna make that much of a difference in terms of, you know, the standard of living in retirement or how you’re doing. But you’re gonna relieve some financial pressure for you. And then those credit cards are really there more for emergencies. So I would just say, hey, relax. Hold back on the savings, and then, once he starts making the money, you see what the money is, then start saving again.

VIGELAND:
So Jill, are, are you not paying yourself at all through this business?

JILL: No, I’m not. I’m not. And that’s a common misconception, too, is that a non-profit is just like a hobby that people do for fun. But it really is being a social entrepreneur and investing your life in something to make a difference.

VIGELAND:
We’ll tell you what, let us help you out a little bit. I want you to tell us your Web site.

JILL: Oh, thank you. Breastmilkproject.org.

VIGELAND:
All right. Well, there you go. Best of luck with it.

JILL: Thank you so much. I appreciate it, guys.

VIGELAND:
Well, we’re not physicians, but we do have the prescription to heal your financial pains. Give us a call. It’s 877-275-6669. That’s 877-ASKMONY. Or visit our Web site, Marketplace.org, and click on the contact button. This is Marketplace Money from American Public Media. All right. Let’s hit the e-mail bag one more time. We’ve got Gail from Lennon, Michigan. And her parents are very involved in investing. And they created one of those UGMA accounts, that you just mentioned a little bit ago, for their six grandchildren, a trust fund.

VIGELAND:
And these are the bases of the grandkids’ portfolios. Now, Gail’s parents passed away recently, but the accounts still have the grandparents’ names on them. The grandkids’ are almost all over 18 now. So how does she go about changing the names on these accounts?

FARRELL:
In most states, for UGMA’s, they transfer to the kids at age 18.

VIGELAND:
So if they have an UGMA, does that mean that the names – that the grandkids’ names are already – have already been transferred?

FARRELL:
That would be my guess. That it’s already happening. But I would just simply contact the financial institution that they have the account with, and I would contact them because it’s a fairly routine procedure. But you’d wanna make sure that it’s going to happen, depending on how the accounts are set up, and the age and all the transfer, it still could be part of their taxable estate. Again, probably a fairly minor deal, but I would contact the financial institution, and it should be fairly straightforward and simple.

VIGELAND:
And for the kids who aren’t yet 18 that would just happen automatically when they have, when they hit that birthday?

FARRELL:
Yes. It is their money. And by the way, this is the big, the big criticism of UGMA, is that people have very divided opinions on this, which is it used to be a way to save for college. I mean, that was typically how they were set up for by, by middle-class folk, middle-class families. This would be for 529 plans and Coverdells and all that. Of course, the big risk is the money truly is theirs. And, you know, the, the exaggeration is if they wanna go to Europe and hitchhike, they can do that.

VIGELAND:
Right.

FARRELL:
So that’s why 529 plans, besides there are greater advantages to 529 plans. But one of the reasons why 529 plans, or Coverdells have become so popular is that if you are setting the money aside, it has to be spent on a qualified education purpose. You can’t use it and hitchhike around Europe.

VIGELAND:
Aw.

FARRELL:
You know, life’s a bummer sometimes.

VIGELAND:
Well, it’s a bummer that that’s all the questions we can take on this week’s show. Do leave your question for a future program on our voicemail. It’s 877-275-6669. That’s 877-ASK-MONY. Or visit the contact page on our Web site, Marketplace.org. Chris, thanks so much for all the great advice.

FARRELL:
Thanks a lot, Tess.

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