Coping With a Layoff

You go to work and get the word … you’re being laid off. Maybe it’s no surprise. Maybe it comes as a shock. The question becomes: what now?

Basically, you have three quick to-dos: leaving work with as much money as possible, securing health insurance for the interim, and arranging unemployment benefits. Beyond these items, stay calm and stay in the hunt – or alternatively, work for yourself.

Negotiate your exit. While no law requires your employer to give you a severance package, some employers do provide them. Severance package or not, you may very well receive two weeks pay and perhaps compensation for unused vacation or sick days.

Don’t be meek here. If you’ve been a key employee or simply a good employee, make the case for your company to extend your health coverage a little longer or give you a true severance package. They may see the merit if you have proven yours.

In tax terms, it may be better to receive your severance pay in the form of recurring checks rather than a lump sum. If you get a lump sum, it’s quite possible you could have too much withheld.

If you know you are getting laid off in the next few months, you can request to reduce the amount of withholding taxes on your last few paychecks to give yourself more take-home pay. And if it looks like you are going to receive a lump sum severance before December 31, think about deferring that payment until 2010 so you don’t have to include it on your 2009 tax return.

Keep yourself insured. If you can sign up as a spouse for the plan offered by your spouse’s employer, it makes sense to do it as soon as you can. If that doesn’t describe your situation, then the options are extending coverage through COBRA or keeping up the payments on private life or disability insurance that your company provided.

If you sign up for COBRA at the moment, the federal government will subsidize 65% of the cost for nine months as a result of the federal stimulus. In COBRA, you will have to pay the entire premium on your health insurance plus a 2% administrative fee.

Sign up for unemployment benefits. As few of us have bank accounts equal to six months or a year of salary, it is wise (not demeaning) to sign up for these benefits. You will want to do so ASAP, because it may take a few weeks for that first check to arrive. In some states, you can receive unemployment checks even if you have been given a severance package – although you may have to wait until the entirety of the severance is issued to you before jobless benefits can follow.

Remember that the federal government is pulling out all the stops right now. Take advantage of the federal economic stimulus effort, which is directing $500 million toward helping the jobless find jobs. New search assistance, education, and retraining programs are available. The government is also boosting unemployment payments a bit and elongating parameters of eligibility. Currently, the average weekly unemployment check in America is about $300. Jobseekers can receive unemployment benefits for up to 46 weeks – up to 59 weeks in states where the unemployment rate tops 6% for more than three months in a row, which would be just about everywhere right now. Under the stimulus, weekly unemployment checks will increase by $20 – and the first $2,400 of unemployment payments will be tax-exempt.

Press flesh, not just keys. Despite the buzz surrounding job boards like Monster.com, Dice.com and CareerBuilder.com, an article this winter in the San Francisco Chronicle noted that only about 2-3% of new hires find their jobs through such resources. About 15% of new hires find work directly by applying at a company’s web site, and about 65% find new jobs through that old standby – networking.

Older employees may actually cope with layoffs better. That’s what a collaborative study coming from the Federal Reserve Bank of Chicago and Columbia University has just concluded. It found that laid-off workers younger than 55 experience a much greater increase in “mortality hazards” than their older counterparts – stress and health risks, addictions, and negative personal behaviors. Perhaps this is because workers over 55 are somewhat less likely to deal with making ends meet and the pressures of raising a family; they may have already thought about (and planned for) a retirement transition and they have the options of Medicare and Social Security now or in the near future.

Have you been given a gift? That’s one way to look at it: one door closes, another opens. If you have an entrepreneurial ambition, or just suspect that like many Americans you will one day have to be your own boss, then maybe now is the time to talk over your options with a potential mentor – a friend who owns a business or makes a living as an independent professional in your industry. If you are mature and want or need to keep working, you might even think about a life or career coach – someone who can help you see the full range of possibilities, including those that you may not have considered five or ten years ago. As always, if I can help you in any way, please call me toll free at 1-866-786-2521.

Obama's Plan to Overhaul the Financial System

Since September 2008, the federal government has committed $10.5 trillion to fixing the economy – bailing out Citigroup, Bank of America, AIG, Freddie Mac, Fannie Mae, Chrysler and General Motors in the process. To try to prevent further economic nightmares, President Obama is proposing a “sweeping overhaul” of the U.S. financial system on a level unseen since the 1930s.

An answer to “an absence of oversight.” If enacted, Obama’s plan would hand more power to the Federal Reserve, the Treasury and the Federal Deposit Insurance Corporation, fuse two federal agencies into a single regulator of the nation’s largest banks, create a new agency to regulate consumer financial products, police hedge funds and private equity funds, and rein in the use of mortgage-backed securities.

The Fed’s role. Under the plan, the Federal Reserve would become the top watchdog of the U.S. financial system. It would regulate the banks, brokerages, insurers and hedge funds deemed too big to fail, see that they are keeping enough capital in reserve, and respond quickly in a crisis. The goal is to avoid another Bear Stearns or Lehman Bros. debacle, and the system-wide shock that could follow.

The Treasury could get veto power. Treasury Secretary Timothy Geithner would chair a regulatory council to work side-by-side with the Fed as it monitors the biggest financial firms. This council could potentially veto emergency loans made by the Fed to financial companies.

The FDIC could expand its reach. It would gain the ability to seize and unwind not only banks, but other kinds of financial firms.

The OTS dies. If Obama has his way, the much-criticized Office of Thrift Supervision would merge with the Office of the Comptroller of the Currency. This revamp would create a new entity, a National Bank Supervisor to monitor all deposit-taking thrifts. Under current rules, some banks may essentially select their regulator.

The CFPA would be born. That’s the Consumer Financial Protection Agency. This new office would regulate credit cards, mortgages and other consumer-marketed financial products. If would set guidelines for banks and bank holding companies, and if they got out of line, it would punish them with penalties and fines.

More scrutiny over hedge funds & private equity funds. Under the plan, all private equity and hedge funds would have to register with the Securities and Exchange Commission, and throw open their books when regulators demand.

A tighter rein on securities and derivatives. Banks that package and sell mortgage-linked securities (and other debt-linked securities) would have to keep at least 5% of those securities on their books. In fact, all financial firms that originate a security would have to retain 5% of the “securitized exposure” and maintain an investment interest in that security even if it is resold. The idea here is to discourage the promotion of exotic home loans and other complex financial products that were half-understood by investors and borrowers.

Will all this change really take place? It will likely take several months for any version of the Obama proposal to become law. The plan notes that the Fed has “the most experience to regulate systemically significant institutions.” But some Capitol Hill opinion leaders are especially concerned about expanding the Fed’s powers. As always, if you have any questions, I am here to help. Please call me toll free at 1-866-786-2521.

Asset Allocation in "Stormy Weather"

In any stock market climate, proper asset allocation matters. In a down market, you could argue that it matters more than anything else.

Did you have a well-diversified portfolio during the fall of 2008? That was a time when the importance of having a bond allocation and proper equity diversification really hit home. Nearly all investors were hit hard, but some were hit harder than others.

Wise asset allocation may help you as the market recovers. Yes, even diversified portfolios lost money at the end of 2008 and the start of 2009. Yet with rebalancing, these same portfolios may be poised to take advantage of a rebounding
market.

You might say there are two schools of thought when it comes to diversification and asset allocation – hands off, and hands on.

Modern Portfolio Theory. In 1952, a University of Chicago Ph.D. candidate named Harry Markowitz published a thesis - a brief, provocative paper that called for investors and money managers to see risk with new eyes. That was the start of Modern Portfolio Theory, which still has many advocates today.

Before MPT, money managers and investors tended to look at investments in isolation: if a stock had performed well in 1948, it was a good stock and it would probably perform well in 1949. They analyzed a stock almost like they would analyze a business.

In his paper, Markowitz basically said “You guys are going about this the wrong way.” He first assumed that all investors wanted to avoid risk (which he defined as standard deviation from expected portfolio returns). He then contended that you should measure the risk level of a whole portfolio instead of individual securities. (In other words, if you want to include a security in your portfolio, you should think about how that will alter the risk level of your entire portfolio, rather than simply consider the risk of the security.)

MPT asserts that for every portfolio, there exists an “efficient frontier” – an ideal asset allocation among diversified asset classes that should efficiently balance maximum return and minimum risk. Markowitz further developed the theory with economists Merton Miller and William Sharpe, and it eventually won a Nobel Prize in economics.

MPT has its fans – but also its critics. In the last 20 years or so, many investment advisors and money managers have practiced a buy-and-hold style of portfolio management using the diversification principles of MPT. But as the markets dropped in 2008-09, critics pointed out the danger of buying and holding - you can “hold” positions too long. In the crisis, some investment advisors took more of a hands-on approach to portfolio management – others had always done so.

How long is the long run? If history is any guide (and it may not be), the longer your investment horizon, the more sense buy-and-hold can make – at least when it comes to stocks. For example, $1 invested in stocks in 1929 would be worth $759 in 2009, whereas $1 invested in bonds in 1929 would only be worth $74 today. The critics counter that argument with the fact that the S&P 500 traded at the same level in mid-2009 as it did in summer 1997. Stretch or contract different windows of time and you can reach all kinds of conclusions.

The bottom line. The buy-and-hold adherents and critics certainly agree on one thing: diversification is hugely important. If your assets are allocated across 10 or 12 “baskets” instead of one or two, for example, you are theoretically less affected by the whims of the financial markets.

So what is “proper” asset allocation for you? Only you and your financial advisor can determine that. Your time horizon, preferred investment style, accumulated assets, life goals and financial objectives – these all have to be taken into consideration. It’s worth a conversation, today. As always, please call me toll free at 1-866-786-2521 if you have any questions.

To Roth or Not to Roth? That is the Question

In 2010, anyone may convert a traditional IRA to a Roth IRA. No income limits will stand in the way of the conversion. Should you do it? Here’s why it may (or may not) make sense for you to go Roth next year.

Why you might want to consider it. A Roth IRA permits tax-free growth and tax-free income distributions in retirement (assuming you are age 59½ or older and have held your Roth account for 5 years or longer). You can contribute to a Roth IRA after age 70½, without having to take mandatory withdrawals. While contributions to a Roth IRA aren’t tax-deductible, the younger you are, the more attractive a Roth IRA may seem.

However, older investors have reason to go Roth as well – especially if they don’t really need to withdraw IRA assets. Under present tax law, converting an untapped traditional IRA to a Roth will shrink the size of your taxable estate, and careful estate planning could foster decades of tax-free growth for those IRA assets.

Currently, if you name your spouse as the beneficiary of your Roth IRA, your spouse can treat the inherited IRA as his or her own after you die and forego withdrawals. So those Roth IRA assets can keep compounding untaxed across the rest of your spouse’s life.

If your spouse then names a son or daughter as a beneficiary, that heir has the choice to make minimum withdrawals according to his or her life expectancy, all while the assets continue to compound tax-free. Currently, withdrawals from an inherited Roth IRA are not subject to income tax.

Why you may want to think twice about it. The IRS regards a traditional IRA-to-Roth IRA conversion as a distribution from a traditional IRA – a taxable event. You’ll need to pay taxes on the entire amount of the conversion. Do you have the money to do that?

Keep in mind, however: with the market down, many IRA values are lower than they have been for years. That translates to paying less tax on gains. It is also worth remembering that tax rates could increase in the years ahead – another reason why now may be a good time to convert. (You could simply do a partial Roth IRA conversion if converting the full amount would send you into a higher tax bracket.)

You may be tempted to use the current IRA assets to pay the conversion tax, but should you? If you’re younger than 59½, you’re looking at a 10% penalty on the amount you withdraw, and you’ll lose the chance for tax-free compounding of those assets within the Roth IRA.

A potential tax break for those who convert in 2010. If you do a Roth conversion during 2010, you can choose to divide the taxes on the conversion between your 2011 and 2012 federal returns.

Be sure to consult your tax advisor before you convert. This is a very good idea before you arrange any rollover, trustee-to-trustee transfer, or same-trustee transfer of your IRA assets. In any year, you should fully understand the potential tax impact of a Roth conversion on your finances and your estate. Also, remember that while the income limit on Roth IRA conversions will go away in 2010, the income limits on Roth IRA contributions still apply next year and for the foreseeable future. If you have any questions about Roth IRA's, or anything else, please feel free to call me at 1-866-786-2521.

The Importance of Asset Allocation

Question: I’m reading more and more about asset allocation. How important is it?

Answer: What would you say if I told you that the return you earn on your money has little to do with your ability to pick good investments (security selection)? What would you say if I told you that the return you earn on your money has little to do with knowing when to buy or sell certain investments (market timing)? What would you say if I told you that the vast majority of the return you earn on your money can be attributed to how well you divide up your money among the major asset classes – stocks, bonds and cash (asset allocation)?

When you realize that whether or not you achieve your financial goals will depend, in large part, on how well you position your assets, I’d have to say it’s one of the most important decisions an investor can ever make.

According to Ibbotson & Associates, asset allocation accounts for nearly 92% of your overall portfolio performance, with investment selection accounting for only 4% and market timing accounting for less than 2%. All other factors account for less than 2%.

This clearly shows that how you allocate your money may actually be more important than the individual investments you choose.

Many people are led to believe that trying to “time” the market and picking the next “hot” investment are the keys to success in reaching their goals. They are sorely mistaken. The ultimate goal, of course, is a secure retirement. How soon you retire, how long the money will last, and in what style you retire can be greatly affected by your decision on asset allocation.

Bill’s Bottom-line: Normal market fluctuation will make your asset allocation change. Remember to rebalance your portfolio back to its target allocation at least annually. If you have any questions for me, please call my toll free number 1-866-786-2521.

Retirement Intelligence: GM Files For Bankruptcy

It finally happenened. What does it mean?

Today, June 1, 2009, was a sad day for General Motors: the venerable automaker, now financially vulnerable, filed for Chapter 11 bankruptcy (and was kicked out of the Dow Jones Industrial Average).

This shocked no one, and the stock market didn’t suffer. The Dow gained more than 2% today, pushing past the 8,700 mark. But GM’s bankruptcy will have a huge impact on lives and communities in Southeast Michigan and across the nation.

What’s the goal here? The goal is for GM to arrange financing so that it can leave Chapter 11 as a viable, albeit leaner, company. GM is still in business, although it is closing or idling two (eventually, perhaps four) assembly plants, three stamping plants, five powertrain manufacturing plants, and three service and parts warehouses. It is also aiming to cut 21,000 of 54,000 factory positions held by members of the United Auto Workers. It plans to reduce its dealerships by 1,100 or more within the next 18 months. It is projected that Oakland County, MI alone will lose 6,600 jobs.

The government-supervised reorganization will leave a new GM with new owners, at least for the time being: under the plan, the U.S. government will hold 60% of GM, the UAW 17.5%, the Canadian government 12% and GM bondholders 10%. If GM can’t viably reorganize, a Chapter 7 bankruptcy (liquidation) would be the next option – but GM is likely “too big to fail” in the eyes of the Obama administration.

What about employees and their pensions? The most depressing aspect of the bankruptcy is the many non-union GM employees who now have no job security. Pay cuts, job cuts, office closings – GM can request permission to do any of this from the presiding bankruptcy judge. (Whether it would make such a request is anyone’s guess.) While GM is supposed to honor new contracts forged with the UAW, it also legally has the option to ask a bankruptcy judge if it can void them and renegotiate terms with the union.

As for pensions and healthcare benefits, the White House said May 31 that pensions and health care benefits of GM workers would simply transfer to the new GM. While GM could legally request the bankruptcy judge to reduce or terminate pensions and health benefits for non-union workers, no one is saying it will. Terminating pensions would require a trial, and even if the judge ruled in GM’s favor, pension plan participants would still get about one-third of their benefits via arrangement with the Pension Benefit Guaranty Corporation. If GM’s non-union retirees were to lose healthcare benefits, they would be covered by Medicare.

Could the GM bankruptcy be as quick as Chrysler’s? So everyone hopes. It appears Chrysler might be out of bankruptcy this summer, if Fiat purchases the bulk of its assets as planned. Of course, Chrysler has a buyer. GM is trying to restructure without a buyer – and with a lot of help from Washington and Ottawa. The U.S. government has loaned GM $19.4 billion and could commit up to $30 billion more. The Canadian federal government and the Ontario provincial government are collectively directing $9.5 billion to GM.

What might the new GM look like? As widely discussed, GM will likely restructure itself around its strongest assets and liquidate or sell the rest. Pontiac is out of the picture, and Saturn may be out of the picture also if GM can’t get a buyer. Saab has a for-sale tag on it. Hummer looks to have a buyer, and most of Opel is supposed to be sold to a Canadian supplier (Magna) and a Russian car maker (GAZ). Any fuel-efficient vehicles aside, GM’s days of dominance appear long gone. In fact, the forecasting firm IHS Global Insight thinks that the new GM will be about a third smaller, and capture only about 15-16% North American market share in the next few years.

Credit Cards: The New Rules

With the stroke of a pen on May 22, President Obama authorized major changes to the way American credit card issuers do business. In the President’s view, these are “common-sense reforms designed to protect consumers.” Consumer advocates are rejoicing, but banks are already contending that the reforms might be bad for cardholders in the long term.

Here is a rundown of the notable changes within the Credit Card Accountability, Responsibility and Disclosure Act (CARD). Some of these changes will happen in 2010; others will occur within 90 days.

No surprise interest rate increases. If your credit card company wants to hike interest rates, it will now have to inform you at least 45 days beforehand and tell you why in writing.

New restrictions on retroactive rate increases. Under the new law, the interest rate on an existing balance cannot increase unless the customer is more than 60 days behind on a payment. Get this, though: even if that happens, the credit card company will have to restore the prior, lower interest rate if you pay the minimum balance on time for the six months that follow.

Statements mailed 21 days in advance. The new rules say that your monthly bill has to be mailed to you by the credit card company at least 21 days prior to the payment due date.

Pay before 5:00pm EST and you are on time. That’s right: all credit card payments made before 5:00pm Eastern Standard Time will be considered paid on that day. If your payment due date falls on a holiday, a weekend, or any day on which the credit card issuer is closed for business, your payment cannot be subject to late fees.

You can choose to attack the highest interest rates. Do you pay different rates for different kinds of credit card transactions? Under the new law, you will be able to apply any payment above the minimum to your highest-rate balance.

More protection for teens and young adults. The new legislation bars companies from issuing cards to most people under age 21. Those younger than 21 will only be able to use a credit card under one of the following conditions:

• They can prove they have the means to pay the debt (or their parent or guardian promises to pay it off if they default)

• They are emancipated minors

• They are designated secondary cardholders on a parent or legal guardian’s account.

No exploitation of college students. College-age Americans will still be able to get credit, but within reason. Account limits will be either 20% of their annual income or $500, whichever is greater. So this market will grow less attractive for credit card companies.

An end to universal default. If you make a late payment to one credit card issuer, other issuers will not be able to hike your rate as a consequence.

Cardholder permission for over-limit fees. Credit card companies now have to get your OK before they can process a transaction that would put your account over its limit.

Why are credit card companies crying? Cut out all the nickel-and-diming, and credit card issuers will be left with lower revenues. So where are they going to get the money back? Think reduced rewards for cardholders. Think new and inventive annual fees.

Edward Yingling, president and CEO of the American Bankers Association, fears that now “less credit will be available generally, which means some consumers and small businesses will not be able to obtain credit cards at all, particularly younger people and start-up small businesses.” But Sen. Chris Dodd (D-Conn.), the driver behind CARD in Congress, thinks such claims sound “a little like Chicken Little.” As usual, I am here to help. If you have any questions or concerns please call me toll free at 1-866-786-2521.