Mailbag for Friday, May 4, 2007

Marketplace Staff May 4, 2007
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Mailbag for Friday, May 4, 2007

Marketplace Staff May 4, 2007
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TESS VIGELAND:
I’m Tess Vigeland. And it’s my favorite part of the show, the time when we get to hear from you. But before we start, allow me to introduce all of you to Mr. Chris Farrell, our resident economics expert. He’s here to help us answer all of your questions. Hey, Chris.

CHRIS FARRELL:
Hey, Tess. How are you doing?

VIGELAND:
I’m well and good, and ready to lob questions in your direction.

FARRELL:
And I’m ready to take them.

VIGELAND:
Excellent. But before we start, please do take down our Web site address. It’s Marketplace.org. Click on the contact button. Or you can give us a call. We’re at 877-275-6669. That’s 877-ASK-MONY. And we go first to the phones, and we’ve got John on the line, from Minnesota. Hey, John.

JOHN:
Hey. How are you?

VIGELAND:
We’re doing well. And you?

JOHN:
I’m doing all right, thanks.

VIGELAND:
All right. Well, tell us what your question is for Chris today.

JOHN:
Yeah. I’ll try and keep it as simple as I can.

VIGELAND:
Uh-oh. Sounds like it might be complicated.

JOHN:
Yeah. You know, I’ve put some money into a retirement account, and so has my partner. He’s Chinese and has an H-1B visa here. And he now has kind of like the Green Card equivalent in Canada.

VIGELAND:
In Canada?

JOHN:
Yeah. So we’re giving real consideration to moving there in the next half-year or so. And we’re wondering, once we’re there, well, what do we do with our retirement account?

VIGELAND:
Interesting. Chris, I would assume that there’s some tax implications, maybe, all kinds of potential complications here. So what’s your advice for them?

FARRELL:
Okay. There is actually a vast literature about dealing with retirement plans between the US and Canada. In the new government, on their list of things that they would like to accomplish is that they’ve reached an agreement, in principle, to, in the tax treaty, to sort of deal with retirement plans between Canada and the U.S. more exorably, and make the rules a little bit cleaner. But I don’t believe it’s been done yet. So here’s my advice. Do nothing. Just leave them alone. The money will compound. You move to Canada. You look at the landscape.

FARRELL:
You see how it’s gonna work out for you. And then, there is a whole industry of, essentially, lawyers who do deal with this between Canadians who have decided to move to the US and dealing with bringing their tax savings from Canada to the US, or Americans who have moved to Canada. Hopefully, the rules will be simplified because there is a lot of Canadians working here, a lot of Americans working in Canada, going back and forth. And there’s really no reason for it to be as complicated as it is right now.

VIGELAND:
Okay. So, John, really, the advice is go ahead. Get on with your life. Do whatever you need to do, and then worry about the implications on down the line when you start to take money out of those accounts. And then get some good advice from a lawyer.

JOHN:
Okay. And that would be true both for my partner with an H-1B as well as for me, for, as a U.S. citizen?

FARRELL:
Yes. The only issue that will start complicating things is if you are continuing to contribute to the plans. Then, you know, then, that comes into the tax treaty and it’s, it’s considered part of your income while you’re in, in Canada, et cetera, et cetera. But that’s the type of thing a tax accountant would be able to deal with fairly easily and routinely. But if you’re just not adding to them, you’re just allowing them to compound while you explore what you’re gonna be doing in Canada, then there is really no issue whatsoever.

JOHN:
Okay. Thanks very much.

VIGELAND:
Thanks for the call.

JOHN:
Bye-bye.

VIGELAND:
All right. And how about I reach into the e-mail bag, Chris. That sound good?

FARRELL:
That sounds really good.

VIGELAND:
All right. So let me reach…

FARRELL:
So what you got for me?

VIGELAND:
…reach into the bottom here. Ah. Let me pull it out. Here we go. All right. Mary writes in from Redlands, Calif. Mary’s daughter owes about $100,000 in student loans. Ouch. So they want to try to negotiate a buyout of this student loan, and it seems like the loan holder would wanna negotiate a settlement since, currently, the daughter is default and isn’t likely to ever be able to pay back this amount. So what is the likelihood that they will be able to get out of this situation paying less than what is owed?

FARRELL:
You know, the student loan situation is really tough. Now we talk a lot about the benefits of it, you know, in terms of paying for your education. But once you’re in default, a lot of really bad things can happen to you. You’re referred to a collection agency. They can garnish your wages. If you get a tax refund…

VIGELAND:
They could take it.

FARRELL:
…they can take it. So if she is in default, she’d want to rehabilitate herself. And so, rehabilitation calls whoever owns the paper, the lender. You ask them about their program. You make a certain number of payments, and there’s usually a negotiated price or, or deal if you do.

VIGELAND:
But it, but it is negotiable, you’re saying?

FARRELL:
It is negotiable. So what I would do is go back and negotiate, but understand – let’s just say, you owe $100,000. They’re not gonna say, you’re not gonna owe us any money.

VIGELAND:
They’re not gonna wipe the slate clean.

FARRELL:
There is no easy way out of this, but default is not the right route to go. You want to talk to your lender again and again, ad nauseam. I think that’s what she needs.

VIGELAND:
All right, Mary. A tough situation but hopefully, that advice can help you get started on the way toward correcting it. And if you’re looking for a solution to a unique financial problem or if you have a solution, and you just wanna make sure it’s a good idea, 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. All right. Let’s head to the phones again. We’ve got Steve on the line from Danville, Pennsylvania. How are you doing Steve?

STEVE:
Good. Good. How are you, Tess?

VIGELAND:
We’re doing all right. Tell us a little bit about yourself.

STEVE:
Well, I’m in the market for a first-time home, and I am seeking some advice as to how best to go about financing this major purchase.

VIGELAND:
Excellent question. A lot of people looking at how to buy their first homes. Tell us a little bit about your financial situation. What do you do? What kind of money do you make?

STEVE:
Well, I work as a rehab technician in a major medical center in the rural town of Danville in Penn.

VIGELAND:
Mm-hmm.

STEVE:
I gross about $28,000 a year, so I’m a low-wage income earner, debt-free. My credit rating’s over 800.

VIGELAND:
Wow. What kind of savings do you have?

STEVE:
Well, I have a couple of IRA’s, personal savings accounts, some money markets and, you know, over $100,000 in retirement accounts.

VIGELAND:
OK.

STEVE:
And I’m looking to put 20 percent down. And I’ve met with some mortgage lenders locally, and I’ve been pre-qualified. But there are just so many options out there and I’ve done some homework, but it’s, it’s almost too much information.

VIGELAND:
All right. Well, Chris, what do you think? Given the financial situation, what’s his best bet for getting this first home?

FARRELL:
Well, I have a couple of thoughts now. Typically, and if you’ve been listening, Steve, you know financial advice always leans towards the conservative side, and I love 20 percent down. I mean, just love 20 percent down. However, you’re obviously really good with money and, you know, you’ve really amassed quite a bit of savings on not a very high income. So, you know, my advice loosens up for somebody like you. So here’s – I have couple of thoughts. One is I would check with state programs, where you can put a lot less down and still get a very favorable mortgage. And that can be one of the easiest ways to qualify as a first-time homebuyer. So at least say we check that out.

STEVE:
And I have.

FARRELL:
And do you qualify?

STEVE:
Yes, I do. I’m looking at a 30-year fixed rate at 5.95, and that’s without any points.

FARRELL:
That’s wonderful. Now, is that it with 20 percent down?

STEVE:
With 20 percent down, yes.

FARRELL:
Now, the question that I would raise is do you think you’re gonna have to withdraw from your retirement accounts for the down payment and meet that 20 percent or can you do it without doing that?

STEVE:
I have a Roth IRA. It’s the newest of my IRA’s. And according to regulations, if I take from a Roth, there’s no penalty and no taxes paid on it. So by default, I’m gonna have to choose the Roth IRA and, unfortunately, deplete that entire account.

VIGELAND:
And with the Roth, you can only pull out what you’ve actually put in. Right, Chris? Not the…

FARRELL:
That’s right.

VIGELAND:
…earnings on your money?

FARRELL:
You would still pay taxes on the earnings. The advantage of the Roth, by the way, this is one of the reasons why I’m such a big fan of the Roth and, if you don’t mind, Steve, I’ll use you as an example, and…

STEVE:
Not at all.

FARRELL:
And we’ll just make up an example, and say, hey, you’ve been paying $2,000 a year for the past five years since your Roth . . . $10,000. It’s a great way to save because it’s part of your retirement portfolio, but you can withdraw that $10,000 with no penalty.

VIGELAND:
But anything you’ve earned on it has to stay there?

FARRELL:
Exactly. Here’s what I would do, run some numbers putting 10 percent down, see how that changes your financial position and how much less would you have to take out of the Roth.

VIGELAND:
Well, Chris, let me ask two questions. One is, you know, we hear all the time that we should never touch our retirement funds. The retirement money is for retirement and it should stay there. And second, if he does do a 10 percent down, then he’s looking at what we call a piggyback loan, right?

FARRELL:
No, not necessarily. You could just do…

VIGELAND:
No?

FARRELL:
I mean, you put 10 percent down and you, and then all you’re really doing is borrowing 90 percent. You’re gonna pay private mortgage insurance.

VIGELAND:
Ninety percent mortgage.

FARRELL:
And private mortgage insurance, I don’t get that upset about frankly.

STEVE:
Really?

FARRELL:
And I know people hate it, and they get all worked up about it and how terrible it is, but, you know, if you do private mortgage insurance, it’s not the end of the world. And the fact of the matter is that the equity increases, you get the 20 percent. You cancel the private mortgage insurance, so you’re not doing a piggyback loan. The goal is not to tap your retirement money.

STEVE:
Right. In a perfect world.

FARRELL:
If you do take some retirement money out, you’re gonna take that little incremental bit out of your Roth IRA and leave the rest of your retirement money alone.

STEVE:
Right. Well, I – don’t go into tapping my retirement funds happily. Doing them out is the only I’m gonna be able to meet that 20 percent down.

VIGELAND:
And just make sure to try to, try to pay yourself back at some point.

STEVE:
Mm-hmm.

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

STEVE:
Very much so.

VIGELAND:
Terrific. Well, we’ll check in with you later on and see what you ended up doing, all right?

STEVE:
OK.

VIGELAND:
Thanks for the call. Well, you’ll never know what can happen when you follow some good common sense when it comes to money. If you need any suggestions how to get your financial plan started, do give us a call. We’re at 877-275-6669. That’s 877-ASK-MONY. Or just visit our Web site, we’re at Marketplace.org, click on the content button. This is Marketplace Money from American Public Media. All right. And one final reach into the e-mail bag. Chris, we’ve got Dahlia writing in from Rolla, Mo.

VIGELAND:
And she has a financial planner overseeing both her and her mother’s finances. Some years, he does very well for them. Sometimes, the things that he urges them to participate in, different financial vehicles, just don’t do well at all. So her question is, is there any way to compare his performance to other money managers? And how do you really know that your adviser is doing the very best job they can for you?

FARRELL:
There’s a couple of things. Let’s just assume for the moment that this adviser is giving good service, then you wanna – just as she’s asking how to compare his performance, how is he doing. And the way that I would like to do it that I think is realistic because she sort of go, all right, he’s been putting me into, you know, big company stocks, you know, brand name stocks, IBM, Microsoft or companies like that. So I’m gonna look at the S&P 500. And I’m gonna see how the S&P 500 did and I’m gonna look at in what the return is, and then I’m gonna look at how he did in comparison to the S&P 500.

FARRELL:
And in fact, I’m gonna be realistic about it because I’m gonna go to, I’m going to assume that I pay a fee for my S&P 500, which you will, and what did I pay over the year for what he’s done. That’s one way to compare it. Now, let’s say that he’s been giving, you know, small company, you know, Chris Farrell Inc, Tess Inc. We don’t have a whole, whole lot of money and we’re sort of small so you might look at the Russell 2000 because that captures the universe of small company stocks. So this is one way to compare the performance.

VIGELAND:
Just basically go in and look at index, indexes . . .

FARRELL:
Indexes, make it real simple, make it real quick and then basically, ask yourself, okay, how much am I paying this person and, you know, am I satisfied with the service, and take a look at the returns.

VIGELAND:
Any other ways?

FARRELL:
That’s the way that I would do it. Of course, there’s a slight bias to this advice, which you have probably picked up on. At the end of the day, I think that you should have the core of your money index.

VIGELAND:
In index funds?

FARRELL:
Right. Now, you may still wanna have this adviser. A lot of times, we wanna be dealing with a professional, but nevertheless, you wanna act like the IBM pension fund or any really good pension fund. What makes up the bulk of those pension assets are tied to an index fund or index funds and then, you have some alternative investments and this adviser might be an alternative investment.

VIGELAND:
All right. Well, unfortunately, that is all the questions we can take on this week’s show, but please do leave your question for a future program on our voicemail or at 877-275-6669. That’s 877-ASK-MONY, M-O-N-Y or just hop on over to the contact page on our Web site, it’s Marketplace.org. Thanks so much, Chris, as always.

FARRELL:
Thanks a lot, Tess.

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