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My Two Cents

Star Tribune Q & A

Chris Farrell Dec 2, 2007

My latest Star Tribune column.

Q: I am one of that pending horde who will be turning 62 in the next year and have a question that I believe may be common to many of our fortunate number. Last year, I was able to leave my management position at a Fortune 500 company after enough years to take a pension WITH health benefits. After giving myself a sabbatical, I began a lifelong dream of full time writing…BUT… From everything that I read, my [Social Security] benefits will be based on the last years of earnings before I begin drawing SSI. Every year that I wait, with zero income or below, doesn’t that impact my benefit level adversely? Where can I find someplace where I can calculate the impact of waiting while having minimal earnings? Between my writing and volunteering over 30 hours weekly with Red Cross and some faith- based groups, I really don’t want to take a job just to up the SSI, so any input you can provide would be greatly appreciated…Helen

A: Yes, you sure are part of a horde. The leading edge of the 76 million strong Woodstock generation hits 62 in 2008. But unlike some of your peers you’re in good financial shape. And I think it’s wonderful that you’re in a position to pursue your writing interests and volunteering in the community.

I don’t think you need to worry about your Social Security income and what you earn in the next few years. The underlying benefit formula is complicated, but it’s built on a foundation of your highest inflation-adjusted earnings for 35 years. To put it somewhat differently, Social Security is based on income during your working career, and not just the last three or five years of earnings. The AARP has a write-up of the benefit formula on its website at www.aarp.org/research/socialsecurity/benefits.

I’d encourage you to run some numbers. The Social Security Administration offers three benefit calculators ranging from the quick and dirty to the detailed and comprehensive at www.ssa.gov/planners/calculators.htm. Another place to go is the website www.analyzenow.com. It’s run by Henry “Bud” Hebeler, formerly a high ranking executive at Boeing. He has a number of Social Security calculators, including one that will help you decide whether to apply for Social Security at age 62, 66 or 70.

Q: Hi Chris,

I am thinking of transferring some money into a TIAA-CREF money market account because the account has a higher interest rate than the checking account with my bank. After the transfer, the TIAA-CREF account would have $125,000 in it. Given that the FDIC only insures money up to $100,000, would it be unwise of me to transfer this money and go over that limit? Should I consider opening a second money market account at TIAA-CREF or elsewhere? Thanks so much!!

A: The answer involves shades of risk. First, a basic point: The Federal Deposit Insurance Corporation has nothing to do with the TIAA-CREF money market mutual fund. It’s a billion dollar-plus mutual fund that invests in commercial paper, U.S. government agency securities, certificates of deposit, and other short-term debt. (All of the funds securities mature in 397 days or less.) Your security comes from diversification and the high quality of the short-term debt the fund invests in.

Now, the mutual fund industry periodically gets roiled by the risk that a money market mutual fund will “break a buck.” In other words, the promise of a money market mutual fund is that if you put a dollar into it you will at minimum get a dollar back at withdrawal. As far as I am aware, the value of no major money market mutual fund has fallen so much that withdrawals have been worth less than a buck. However, I am aware that in some cases the parent company has injected cash into the money market mutual fund to preserve its value.

Right now, there are concerns about money market mutual funds that invested in securitized mortgage securities that have gone south in value. That’s why I always recommend that investors put their money into a brandname financial institution with the financial resources to support a money market mutual fund if it becomes necessary. TIAA-CREF is a good, sound institution. If you’re comfortable with the minimal risk that goes along with a money market mutual fund, then you should be comfortable keeping $125,000 in the account.

If a money market mutual fund is too risky for you and you want the financial security of FDIC insurance, then keep the money at a bank in insured accounts, such as certificates of deposit, a savings account or a bank money market deposit account. All of these types of accounts generally are insured by the FDIC up to the legal limit of $100,000 per depositer per bank. (Retirement accounts where the investments are in bank deposits are insured up to $250,000.) Since accounts at different banks are insured separately, the simplest way to hike your coverage is to keep less than $100,000 at any one bank. The FDIC has a lot of good information at its website www.fdic.gov.

Q: I recently heard that Credit Scores are lowered each time a request for a score is made. This seems incredible to me so I wondered if Chris could clarify this for me… thanks, Ernie

A: This is an area with a lot of confusion. Here’s what you can do without impacting your credit score. You can check your own credit report as often as you want with no implications for your overall score. The industry understands that in an era of identity theft and rampant credit errors it makes sense for you to check your credit report at the three major reporting agencies at least once a year–and preferably more often than that. In addition, for two categories of purchases, the industry provides a safe harbor. When you buy a house or a car, the credit scoring business knows that consumers shop around for the best financing deal possible. However, if you drag out the process over several months and lenders keep making requests to view your credit report your credit score will take a hit.

Now, there is an impact when credit card companies and other lenders make a “hard inquiry” on your credit history. (There’s no impact from a “soft inquiry” when lenders ask for your credit report to make a preapproved offer.) So, if you already have a handful of credit cards (a subject for another column) I’d think twice before applying for another.

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