TedCo Software Financial Matters Blog

As the economy worsened, not only did retirement funds drop in value with the market, but also many people have been tempted to tap savings as a way to cut debt or otherwise shore up their finances after a job loss. Still more have found that employers have dropped matching contributions to shore up their own finances.

Worry about retirement seems to be widespread. A January survey by the National Institute on Retirement Security noted that 83 percent of Americans are concerned about their ability to retire.

Yet the worst thing you can do is tap or give up on your retirement funds. No one can know with any certainty when the investment markets will rebound, but even if you can contribute something, you stand to gain once markets start to rebound. Even more important, you risk penalties and the lost potential for earnings if you turn your back.

Before you make a move, seek out some advice. It’s a good idea to check in with an expert such as a Certified Financial Planner™ professional to see where your retirement funds stand in light of all your finances before you do anything.

In the meantime, here are things you can do to put your retirement funds in better shape.

Don’t stop funding your 401(k) under any circumstances: In March, the Spectrem Group, a Chicago-based consulting firm, reported that 34 percent of U.S. employers have reduced or eliminated matching contributions to their defined contribution retirement plans – which include 401(k)s and 403(b)s – since January 2008. The Pension Rights Center reports that besides the Big Three automakers, dozens of major companies have cut back their match, including Motorola, Starbucks, and JPMorgan Chase & Co. It’s a significant impact. US News & World Report recently reported that for a worker who earns $50,000 annually and receives a full employer match of 50 cents to the dollar on six percent of his or her pay, the match cut means $16,000 less for retirement. An employer dropping its contribution is bad news, but you should make every effort to keep up with your contribution because if you don’t, you’ll miss valuable tax deductions and the chance to build your funds more effectively for the long term.

Stay invested: Because no one precisely knows when the market is headed up or down it’s best to stay invested at a time when everyone is waiting for a rebound. Keep in mind that the market’s top performing days typically come at the start of a recovery, so leave your money in your 401(k) and IRAs.

Keep in mind that withdrawing or borrowing your funds can be costly: If you have an emergency situation, be careful. Workplace 401(k) plans do allow for hardship withdrawals, but you might have an option to take a loan, which would save you the taxes and the 10 percent penalty that accompany hardship withdrawals for account holders under the age of 59. The majority of 401(k) plans allow you to borrow up to 50 percent if your vested account balance or $50,000, whichever is less.

Adjust your spending so you can save more: If you have an existing Roth or traditional IRA or other means of saving for retirement, do whatever you can to get more money into these accounts. It may not come close to meeting the shortfall from losing an employer’s contribution or the chance to add to a 401(k) after you’ve lost your job, but it’s critical to keep some savings going.

Jim Heitman, CFP®, is a writer, speaker, Certified Financial Planning practitioner in Southern California, and the founder of Compass Financial Planning – a fee-only planning and money management firm.

European debt issues are dominating the headlines, and those problems are serious, but the Europeans are not the only ones swimming in the debt pool. Excessive debt is a global reality and most of the developed nations are playing the game hard. Really very few nations operate in the black, mostly oil producers. Many emerging economies have kept control of the debt load. It isn’t that it can’t be done by developed nations; Norway operates in the black, and Canada and Australia carry very reasonable debt loads. China carries little debt, and has huge reserves (however, they have significant infrastructure issues that will need to be addressed in the next decade).

So who’s overspending? Greece, obviously, and all the bailouts are likely to accomplish is to ease the sting of an eventual default. Spain, Portugal, Ireland, and Italy are in some trouble, and Germany, France, the UK, and Japan are spending way too much. Japan and the UK control their own currency so expect efforts to devalue. The Euro is already at a four year low and likely to continue to drop versus the dollar.

What about the US? We are in slightly better shape than our G7 partners (or is it G8 now?). Our debt load is somewhat lower than others (as a percent of GDP), but out deficit spending (as a percent of GDP) is near the top and presents a real danger.

Over the long run the problem must be resolved with a mix of higher taxes and less government spending. That will have a depressive effect on the economy. If the same effect happens to many economies world wide then you can expect slow going for the world economy. That means slower job growth and smaller fixed returns on investments. The sad truth about debt is that somebody always pays. When the debt is your country’s then that somebody is probably you.

One of the sad things here is that a politician who says that we have to radically reduce spending to pay off the debt is probably not getting elected. Nobody likes the sad-sack downer guy, even when he is right.

Jim Heitman, CFP®, is a writer, speaker, and Certified Financial Planning practitioner in Southern California.

The market drops and everybody wants to know why.  The popular press is carrying on about the government’s belated, small, and weak fraud suit against Goldman, Sachs (The real reason the market dropped? There were more sellers than buyers).  The market has been steadily advancing and is looking for a reason to take a break.  The Goldman suit provided the excuse; if it hadn’t that then there would have been another explanation for the drop: the volcano that ate the airline industry would have been faulted, or something else.  (By the way, that volcano will cause some real economic damage, though not likely severe, except in Iceland . Those poor folks in Iceland really didn’t need any more bad news.)

Though it is clear to see that Goldman is guilty of some wrongdoing, don’t get excited about justice finally coming to “the Wall Street Fat Cats that Did This to Us”.  On first blush the government’s case looks rather weak. There is only one individual named; a mid-level trader (age 29 years at the time) that bragged about how fab he was even though he did not understand the implications of what was happening.  Unless the government has or finds more evidence this thing will pass with little impact on the markets, and no significant punishments being doled out (unless you’re that poor kid with the big mouth).

Do not place bets on the beginning of the next great bear based on this, you’ll just get bit.  This market is lined up to take a breather before it continues on uphill.  My thinking is that we are a year into an extended bull (2-3 years).  As a reminder, a bull market is one that is trending positive, a bear market trends down.

A fair piece of the justice due those who “Did This to Us” has already been dealt out.  Who got punished?  We did, and most of us participated in creating this mess.  We over-spent, over-borrowed, over-rewarded excess risk, and generally applauded when it was all good.  It was quite a party, now we are recovering from the hang-over.  There are few innocents.  Oddly, one of the few innocents are folks in nations whose governments bought our poison debt derivatives like, well, like Iceland.

Jim Heitman, CFP®, is a writer, speaker, and Certified Financial Planning practitioner in Southern California.

In “Wall Street CEOs defend pay practices” you will read one of the best similes for what Goldman Sachs did when it sold mortgage-backed securities and then bet against them in the market.

Phil Angelides is Chairman of the Financial Crisis Inquiry Commission which is investigating the causes of the financial crisis of 2007–2010.

“I’m just going to be blunt with you,” Angelides told Lloyd Blankfein, CEO of Goldman Sachs. “It sounds to me a little bit like selling a car with faulty brakes and then buying an insurance policy on the buyer of those cars.”

One thing that concerns most people who live and work on Main Street is that Wall Street’s greed is sucking money out of small towns across America. After being bailed out by those who live on Main Street, Big Banks continue to flout the rules of fair play.

Just last week The Washington Post reported “AIG executives’ promises to return bonuses has been largely unfulfilled“. Today, one reads “GMAC Said to Discuss U.S. Aid Package of $3 Billion or More“, which would be a third bail out of GMAC, Inc. And just last week, reports surfaced that Citibank was able to buy it’s way out of TARP because the US Government granted it a $38 billion tax benefit, “The Mother of All Tax Breaks“!

If you have money in one of Wall Street’s banks, it’s clearly time to rethink where you keep it.

“Move Your Money: A New Year’s Resolution” describes a movement afoot in this country for people who live on Main Street to move their money home. Nearly every community in this country has one or more local, community banks or credit unions. Unlike Wall Street banks, community banks and credit unions tend to be very involved in their local communities. They make loans based on conservative lending standards and they tend to keep money in their community.

Learn more about this movement by reading “Move Your Money: A New Year’s Resolution” or by visiting the Move Your Money web site at: http://moveyourmoney.info/ The Move Your Money site has a video and a quick way to find financially sound community banks located near you.

If enough people do this, it may be the one thing that simultaneously helps your local community, sends a message to Wall Street and gets the attention of the U.S. Government.

Paul Farrell, of MarketWatch.com offers what may become the classic editorial indictment against Goldman Sachs. “Goldman’s secret moral pathology: 15 symptoms of a Wall Street disease destroying democracy and capitalism” details 15 ways Goldman may be ripping the heart out of the American financial system and the Federal government.

Who would you guess is more likely to quit paying an underwater mortgage, someone with super credit or someone with subprime credit?

The answer may surprise you.

In “Homeowners who ’strategically default’ on loans a growing problem“, writer, Ken Harney, reports on research by Experian and consulting firm Oliver Wyman.

The big surprise is that a person with super-prime credit is statistically more likely to default and walk away from a mortgage that’s underwater than someone with poor credit. This seems counter intuitive.

Read the article to learn more about this unexpected finding …

I’ve just read, “Bankrupt suppliers seek exec bonuses: Courts asked to OK paying millions as jobs, benefits are cut“, in The Detroit News.

After reading the article, I can only conclude there is something grossly wrong with the way business bankruptcies are being done. First, let’s get one thing out of the way: nothing requires that business or personal success be about greed.

When leaders with less than wholesome character (and by that I mean they lack an appreciation for the needs of others or the concept of fairness) are put in places of responsibility for others, odd and dangerous things can happen to their perspectives. They get all twisted up.

Everyone agrees executives are responsible. They are responsible for direction, for control, for profits AND losses. They are responsible for creating culture in a company. The buck (or lots of bucks it seems) stops at the executive’s desk.

Executives are responsible in good times. And they are also responsible in bad times.

How then can an executive of a bankrupt company not responsibly accept the logical consequences of a bankruptcy? Reading this article makes one want to say, “Your company is broke. Don’t beg the courts for outrageous sums of money at the expense of other employees. Be a real leader.”

Yes. The economy is bad. Business is bad just about everywhere. The supply chain in the automotive world has fallen apart.

But still, executives are responsible. And to reward executives for poor performance creates a poorly designed system based on greed. And anytime greed enters the picture, one party gains at the other party’s loss. And the more the gain of one, the more the loss experienced by the other.

Another way of looking at this is to consider how executives are rewarded when their business is successful. Of course, they receive bonuses. But should not the corollary also be true? When a business is so unsuccessful that bankruptcy is the only option, should the system still permit bonuses for executives?

That’s the problem being reported by the DetNews.com.

For example, one auto supplier won approval to spread $20.6 million among 29 executives for bonuses. That’s an average of more than $710,000 per executive – in bonus – on top of salary!

Another wants to pay its top 5 executives $6.7 million – or an average of $1,340,000 each – as bonus in addition to salary.

Ironically, while some of the executives of bankrupt auto suppliers are begging the court for millions in bonuses, some former employees may be allowed to purchase health insurance for $900 to $2100 per month! And the money for that will come from … ?

One bankrupt company did cut its top executive ranks from 12 members to 5 and reported a savings of $5 million. That works out to an average savings of $714,285 per executive cut from the payroll. That’s enough to fund up to 793 months of health coverage for a regular employee.

I just don’t get it. And I don’t believe they should either …

“It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.” Henry Ford

Do you feel a change on the wind? People of the nation are beginning to understand our banking and monetary system.

You can find it in articles in the New York Times, “When Debtors Decide to Default“, that tell about consumers who can get a credit card company’s attention only after they quit making payments.

You can read about it in Mish’s Global Economic Trend Analysis blog where he writes about “Preemptive Defaults“.

There’s a lot of anger in our society being directed at big banks and credit card companies that were bailed out by the U.S. Government, because they continue to refuse to act reasonably with consumers (aka “taxpayers”) who are paying for the bail out of Wall Street. In fact, Wall Street seems to be rubbing taxpayers noses in it with renewed reports of excessive bonuses.

It’s a crazy financial world, but I think consumers are beginning to look for the points in the system where they do have power and leverage.

Unfortunately, for many consumers, the issue of morality is no longer part of their financial world. By that I mean we should remember that no one has a credit card who didn’t apply for it and agree to the terms … including the terms that stipulate the credit card company can change the terms by increasing the interest rate at will.

Credit card holders agreed to be taken advantage of.

The moral issue is that consumers have agreed to the terms of their credit card accounts.

(Note: if you’ve lost a job and income and cannot afford to make payments, that’s a crisis. Missing payments in a situation like that is unavoidable. Talk to creditors and explain your situation.)

Otherwise, is it right to refuse to do what one has agreed to do? There seems to be two arguments many consumers are hearing in their heads:

The first, “The banks have been bailed out by tax payers. I’m a tax payer. I’ll be paying and my children will be paying and my grandchildren will be paying for this bailout for decades. Therefore, we’re even. I’m paying no more.”

And the second, “I’m a victim of a global crisis. I have no choice. The bank understood the risk they were taking and jacked up the interest rate because of the risk. They knew I couldn’t pay. My refusal to pay is a ’self-fulfilling prophecy’. They got what they wanted.”

Of course, if an individual refuses to pay his or her debts, there are consequences. Credit scores plummet, the bad debt is sold to collection agencies who harrass until paid, etc.

The change on the wind is the number of people who seem to be angry enough at what they perceive to be financial injustice (29% interest rates?) to quit paying en masse. For many, there seems to be only one point of leverage consumers have left in a financial system gone haywire: mass defaults.

You can read about it in the New York Times, Bank of America’s June default rate was at 13.8%. Things do not look good.

What do you get if you stir data from unemployment statistics, the inflation rate for food and beverages, gas and medical costs, year-over-year percent increases in credit card delinquencies, the price of housing, food stamp participation and deficiencies on home equity loans?

You get the Real Misery Index, a formulation of HuffPost. It may be a more accurate index reflection of life in this recession than the original Misery Index. For example, the traditional Misery Index for the current recession is 8.1. The Real Misery Index for 2009 is at 29.9.

The Real Misery Index is a financial index you’ll want to monitor as time goes by. it looks to be a closer to the real ground than some other ivory tower numbers.