Identity Theft Takes a New Turn

by Terry Savage

If you think your finances are safer now that you use a chip card, think again. The latest Javelin Identity Fraud Study reports the number of identity fraud victims increased by 16 percent in 2016 to more than 15 million consumers. And the amount the thieves took grew by $1 billion to more than $16 billion in the past year.

A large part of the increase came from “card not present” fraud in the first year since chip cards became widely used. Fraudsters are resorting to more invasive ways of getting your identity details than simply counterfeiting mag stripe cards.

So-called “phishing” schemes have become far more sophisticated. Gone are the days of the misspellings and clumsy grammar that made fraud emails obvious. Fraudsters have gotten better at tricking you into clicking on a link in one of these emails. Once you do that on your computer or smartphone, these links deploy malware called “bots” to collect all your data, including PIN and CV authentication numbers as you shop online.

There’s also a growing trend of identity fraud crimes enabled by victims’ social media posts. Harmless items on your pages, including celebrations of your birthday, or a college graduation or reunion, give thieves information they use open new accounts in your name. Fraudulent new credit accounts for more than half the increase in identity theft crime last year.

So what should you be doing to guard your identity? Here are some suggestions, which mostly involve common sense and a commitment to regularly review your finances.

—Check online accounts regularly. Visit your bank or credit card website at least once a week to make sure that no withdrawals or unauthorized charges have been made. Yes, you’re protected from fraud, but there’s no way to avoid the hassle of getting a new account number when you’ve been attacked. At least you can minimize the trauma by catching fraudulent purchases immediately.

Continue reading Identity Theft Takes a New Turn

Help With Health Insurance Choices

by Terry Savage

Making decisions about health insurance is complicated and potentially very costly. It’s no surprise that Americans don’t do a great job of it. It takes work to figure out the best health insurance options. And few people take the time to do it right.

Alegeus Healthcare, a provider of platforms for corporate insurance plans, compiles an annual Healthcare Consumerism Index that measures the “degree of engagement … exhibited during healthcare spending and saving decisions.” It reports that the index this year jumped to 54.4 from 48.3. So, we’re doing better.

But, to put that in perspective, consumers score 78.9 on the index when considering the purchase of a television and 76.2 when evaluating the purchase of a cell phone!

Everyone faces choices. Medicare recipients know that basic coverage is simple, though the monthly premium depends on their income. But they must also choose a supplement plan and a Part D prescription drug plan.

Continue reading Help With Health Insurance Choices

The Stock Market: What Should You Do Now?

by Terry Savage

The stock market is just plain scary these days.  What should you do when market gyrations make headlines?  The simple answer is:  Do Nothing! 

Never make investment decisions based on emotion. And the two most dangerous emotions are running rampant right now:  Fear and Greed.  The only way to overcome them is to have a sensible investment plan – and stick to it.

That’s the kind of discipline that comes from experience. And experience is an expensive teacher.  So if you can’t do it on your own, this is the time you’ll appreciate having a financial advisor.  There are three key ingredients involved in disciplined investing:

1.   You Need Perspective.   All historical context seems to fly out the window when markets go wild.  You’re influenced not only by emotion, but by your recent investment experiences. 

Right now, those experiences are in conflict.  You remember the three years in a row of double-digit gains in 2012, 2013, and 2014.  (Last year was basically flat.)  But you also remember the market crash of 2008-09, which literally cut market averages almost in half, wiping out your previous gains. 

And now you search frantically for a clue as to whether this is just a temporary decline – or the beginning of another bear market. No one can give you that answer definitively — in advance!

Continue reading The Stock Market: What Should You Do Now?

Mortgages Made Easy

by Terry Savage

Your home is likely the most expensive purchase you will ever make – and the largest amount you will ever borrow. Yet, the mortgage loan documents have always been shrouded in mysterious legal language and complicated financial percentages. Now, that’s a thing of the past.

Starting October 3rd, lenders must present borrowers with two streamlined, easy-to-read documents that allow them to understand costs and compare mortgage products. For a quick tour of those documents go to Bankrate.com. Here’s what homebuyers (and realtors) need to know about the two new consumer friendly mortgage documents:

1. The Loan Estimate. The new Loan Estimate form allows you to easily see the facts of your loan – including the amount of the total loan borrowing, the monthly payment, all of the closing costs, individually broken out. It also clearly shows any unusual features of the loan –such as if it has an adjustable interest rate (with disclosure of how much the payment can rise over the life of the loan) or any prepayment penalty. And, it clearly displays the total amount of interest you will pay as a percent of the loan amount over the life of the loan.

2. Five Year Comparison. One of the most interesting new features of the Loan Estimate is the simple comparison of costs and payments over the next five years, and how much those payments have reduced the principal of the loan. That is the easiest way to compare loans side by side. Your goal is to pay out the least total amount over those five years – and reduce the loan principal by the greatest amount.

Continue reading Mortgages Made Easy

Fall Is the Real Start of the New Year!

by Terry Savage

Summer flew by again, and the school year has started. Remember when “back to school” signaled the real start of a new year? Back when you moved into a new grade, got a new teacher, a new fall wardrobe and made new friends? Fall is still the most efficient time to get organized. Why wait until the calendar year turns. Start now and avoid the rush!

Here are five financial steps you should take now, ahead of the crowd:

1. Assess your retirement plan asset allocation. Even if the market weren’t volatile, this would be a good time to make adjustments, before the year-end rush to lock in gains and harvest losses. If you can’t do it alone, seek advice from a fee-only financial planner — or from the management services at major mutual fund companies. Or go to www.TerrySavage.com and click on the link to Financial Engines, which will get you a year’s free advice from this investment adviser to major company retirement plan participants.

2. Check your credit report and credit score. Do this before the holiday shopping rush. Go to www.AnnualCreditReport.com for your free report from each of the three major credit bureaus. (It’s not necessary to sign up for a credit protection service.) You can get a free credit score at www.CreditKarma.com (or on your Discover card monthly statement, among other places.)

And if you don’t plan on shopping for a major purchase, such as a home, a car or life insurance, you might want to pay a small amount to “freeze” your credit, so that scammers can’t open a new account in your name.

Continue reading Fall Is the Real Start of the New Year!

Home Prices, Sales Up — But Don’t Get Carried Away!

by Terry Savage

The housing industry is starting to boom again. The latest reports show that sales of existing homes rose to their highest level in eight years, and the median price for an existing home sold in June rose to $236,400 — the highest ever recorded by the National Association of Realtors — and surpassing the July 2006 peak. The Case-Shiller 20-city home price index rose 4.9 percent in May.

Home builders also report their sales of newly built homes have reached a seven-year high. Only sales of existing homes disappointed, with many analysts saying the problem has been a shortage of inventory.

While the surge in home buying started with investors looking for bargains to flip, the most recent sales have been to individuals, based on mortgage statistics showing a much higher percentage of purchases being made to homebuyers using low down payment FHA loans.

The American dream of home ownership is coming back in a big way, as the nightmare of the 2008 mortgage crisis fades from memory. But before you jump in to buy, here are five things to consider:

1. Your home is your residence, not a trading investment. Now you know that home prices can go down as well as up. Don’t speculate with the roof over your family’s head. In fact, when counting your assets, don’t even include your home equity.

2. The family home is not a liquid asset. If you think you might move in the next few years because of your job, think twice about buying vs. renting. While homes might be moving quickly now because they are in short supply, builders are rushing to build new, more desirable homes, adding to inventory. It could take months to sell your existing home — and you’ll be paying costly commissions on both sides of this transaction.

3. Pre-check your mortgage qualifications and costs. Get written confirmation from a mortgage lender about the amount you will be able to borrow. As well, check the interest rate you would be paying if you closed today. Of course, rates could move higher, but you want to know if you will be paying a higher rate than other borrowers because of past credit problems.

4. Check insurance costs. Yes, the cost of homeowner’s insurance may also depend on your credit score. But the big unexpected cost would come if you are required to take out private mortgage insurance (PMI), which is designed to protect the lender in case you default. Typically this is required if you put down less than 20 percent of the value of the house — unless you have a special deal like a VA mortgage.

5. Don’t get caught in the middle. It’s easy to fall in love with the next house. But put your current house on the market first. There may be enthusiastic buyers who don’t qualify for a mortgage. Even worse, your house may not appraise for the selling price. I’d you get caught owning two houses you could be very vulnerable when interest rates start to rise.

The easy part of buying a home is the hunt. That’s where optimism always overcomes financial common sense. Remember that remodeling always ends up costing twice the estimates, not only because of the problems you uncover but because of the three most expensive short words: “as long as….” Projects only come in on time and on budget on HGTV!

If you plan realistically, your home could be your best investment, especially with today’s low mortgage rates. Just don’t count your profits before you sell, and don’t withdraw them in a home equity loan. That advice will let you sleep well. And that’s The Savage Truth.

Message to Washington: Stop Scaring America

by Terry Savage

A spending cut of $85 billion is just 2% of our $3.6 Trillion in annual Federal spending.  Every American family with a job has just taken a 2% cut — as payroll taxes rose in January.  We survived — and Congress can too.

Especially since they’re getting our 2% to spend!

When American families face higher taxes, or higher gasoline prices, we make adjustments to our other spending.  We can’t “print” the money.

As reality sets in that there might be some limits to our ability to borrow and spend, Washington is insulting the American people with stories of impending collapse of government services because they need to cut 2% from their increased spending.

Here’s a roadmap to the “March Madness” that is upon us if Congress — both parties — don’t start talking about a serious deal that includes the entire budget:

Sequester

The “sequester” — a 10 percent budget cut in “discretionary” spending is upon us — with dire warnings of cutbacks in unemployment benefits, “head start” programs for children, air traffic controllers and TSA workers at airports. On the plus side, there will be fewer IRS agents!

The picture is painted in such stark terms because both parties agreed that they needed this discipline to force themselves into taking action with regard to the budget, an idea endorsed and signed into law by President Barack Obama.

Budget

Speaking of budgets, the United States hasn’t had an official budget for more than three years. Instead we are funding our government with a set of “continuing resolutions” that merely authorize ongoing deficit spending — with no oversight or judgment of which programs might be appropriate to cut.

In mid-March the president will send his budget message to Congress, a delay of about one month from the traditional budget message. Once again, it is likely that nothing gets done on a budget agreement.

Government shutdown

And without a budget deal, the government must shut down. That’s the next potential crisis coming at the end of March.

We lived through a shutdown back in 1995, when the first budget stalemate took effect under President Bill Clinton. The federal government shut down, starting in mid-November, and continuing through the winter holiday break, until everyone came back to their senses, and back to work — on Jan. 6, 1996. The world didn’t end. People even started wondering what we needed some parts of government for, anyway.

If we don’t have a budget — or agreement on another continuing resolution — the government will shut down March 27.

Spring break

Yes, put spring break on the calendar, too. From March 25 through April 7, our elected representatives will go home to celebrate Easter and Passover — right in the midst of this likely “no-budget-so-we’re-shutting-down-the-government” crisis. Just like they did in December for the holidays, in the midst of the debt ceiling crisis.

Congress will come back to “work” the week before all of us must pay our taxes on April 15. Funny how they force us to meet deadlines, while they “kick the can . . . .”

No budget, no pay

Maybe this time it will be different. Realizing that their joint committees, and self-imposed deadlines were not forcing them to do their jobs, both parties passed the “No Budget, No Pay” bill, which the President signed.

This new, and hopefully, persuasive law was passed as part of the negotiations over extending the debt ceiling. And, speaking of the debt ceiling, that’s the next oncoming crisis — again.

The debt ceiling

The No Budget, No Debt Act simply pushed the Debt Ceiling issue to May 18th , when Congress must consider it again. In the meantime, any new Treasury borrowings above the current $16.4 Trillion will push the country above its official limit. No word on how they’d deal with that issue, if Congress fails to lift the debt ceiling again. And no word on how the Treasury would stave off default to its creditors if the ceiling isn’t increased.

And so March Madness is but a prelude to another crazy spring and summer in Washington, D.C. How much of this can Americans take, without totally destroying respect for our system?

Does anyone seriously believe that Washington couldn’t find a sensible $85 billion to cut out of a $3.6 trillion government spending plan?

Somehow the American family manages to cope, to do more with less money in their pockets. But government will have more money in their pockets — from the tax increase they’ve taken from us.

We know how to set priorities. Why can’t government learn that lesson? It’s because they have no process for talking to each other about actual spending plans.

We will have our own March Madness if Congress can’t find a 2 percent budget cut — as every American family must. And that’s The Savage Truth.

The Fed is Destroying Retirement Plans!

by Terry Savage

The Federal Reserve is trying to save the economy – but it is killing retirees’ financial plans.  This prolonged period of low interest rates has been devastating to those who planned to live on their interest income.  And for those approaching retirement, it means you may need much more money to afford retirement.

Chicago-based Morningstar, the largest provider of 401(k) managed accounts with more than 800,000 participants, has just announced it is changing its retirement modeling program because of the Fed’s actions.   And whether you’re just in the “saving for retirement” stage or the “withdrawal planning” stage – or in the midst of actually trying to live on your savings – you might want to reconsider your plans, too!

Taking Money Out

How much can you withdraw from your retirement accounts every year and not run out of money before you run out of time?  That’s the overwhelming question facing every retiree – and those planning to retire.

The whole question is made far more difficult by the low interest rate environment of the past few years.  While the Fed pushes rates down to try to get the economy going, those who planned to live on their interest earnings are devastated.

Real interest rates are actually negative when you take into account the impact of inflation.  And inflation for seniors — which is heavily weighted toward medical care, and property taxes, and food and energy bills – is even greater than the inflation numbers measured by the traditional Consumer Price Index (CPI).  It’s fair to say that for seniors, savings invested conservatively in 10-year Treasuries is producing a real loss of buying power each year.

And that is the real issue here:  How much can you withdraw every month, or year, to keep your standard of living? And if low rates force you to withdraw more, how much sooner will you run out of money?

The Traditional Rule

Financial planners have sophisticated computer models to tell you how to diversify your investments – and how much you can withdraw on a regular basis.  The process is called Monte Carlo modeling.  It takes into account historical returns of investments, such as stocks and bonds.

Monte Carlo goes beyond using an average return for investments.  That would be dangerous, because averages mask great extremes.  Instead this computerized modeling takes into account the small, but existing possibility of extreme movements in markets.  That’s the kind of action we’ve seen in the past decade in the stock market.

The simple rule derived from this kind of modeling has always said that with a well-balanced investment portfolio that contains both stocks and bonds:  You can withdraw 4 percent a year from your principal and have a 90 percent probability that you won’t outlive your money.

Since Monte Carlo modeling takes into account the potential of wide swings in the stock market, retirees and their planners have felt confident in using this rule to plan their retirement investments and withdrawals – even during recent wild swings in the stock market.  Those kinds of stock movements have happened before.  And as we’ve seen, the market ultimately returns to its norms.

You could live with volatility in stocks as part of your portfolio – because you were getting a steady return from your conservative bonds.  But what happens when bond yields go to extremes – as they have today – extreme lows?  What happens when bonds are not yielding anywhere near their historic models, and the low yields persist over a period of years?

The impact could be devastating on a retiree’s withdrawal strategy – causing him or her to run out of money far more quickly than expected.

That’s the scientific explanation of the anxiety that seniors are facing today.

Changing the Model

Now the experts are considering changing their models to adjust for this unprecedented and prolonged Fed intervention in the bond market.   Morningstar says that a 4 percent withdrawal rate from a balanced portfolio, once considered a secure way to plan, could now lead to a 50/50 possibility of running out of money too soon.

Instead David Blanchett, head of retirement research for Morningstar’s Investment Management division,  suggests that a retiree who wants a high degree of certainty over not outlasting his or her money should reduce the withdrawal rate from 4 percent a year to only 2.8 percent annually.   And to get the same amount of money to withdraw each year, that means you would need 43 percent more savings before retirement!

Blanchett is not alone in his findings.  Well known financial planner Joe Tomlinson has just published a sophisticated research paper in Advisor Perspectives, Inc., suggesting that  the immediate impact of current low bond yields will crush most retirement withdrawal plans.  He notes that most planning software includes an average historical real (after-inflation) return of 2.4 percent for intermediate term government bonds.  But the current real return, as measured by yields on Treasury Inflation Protected Securities (TIPS) is a negative – 0.73 percent.  The impact of wrong assumptions exponentially impacts the likelihood of the plan’s success.  [http://advisorperspectives.com/newsletters13/Predicting_Asset_Class_Returns-Recommendations_for_Financial_Planners.php]

What to Do Now

No matter what your stage of retirement planning – or retirement living, this is the time to re-think your numbers.  If the Fed keeps rates low even for another few years, you have to think about working longer, saving more, earning some extra money in retirement, or living on less.

What you should NOT do is take on more risk!  Trying to get higher yields on the bond portion of your investments by purchasing riskier bonds, or locking your money up for longer time periods, could be even more devastating when the Fed loses control – and all the money the Fed has already created produces inflation, which will bring higher rates.

Yes, these are tough times.  And according to the financial models, times will get even tougher for retirees living on fixed incomes.  It’s time for AARP to take the Fed to task for its low-rate policies.  And that’s The Savage Truth.

Happy New Year and Good Riddance to a Bad Congress!

by Terry Savage

Happy New Year and Good Riddance to a Bad Congress!

The actions of Congress over the past two years, and especially the past two weeks should be an embarassment to all Americans, no matter what political party.

The last-minute “deal” was no deal at all — when it comes to preserving America’s future.  And the process destroyed respect for our country around the world.  We now look much like the governments of Greece and Italy and Spain — taking laughable baby steps toward the resolution of a huge and overwhelming debt problem.

Here’s a link to my comments on CNN yesterday.

http://www.youtube.com/watch?v=ZS-Cg9txdvQ&feature=youtu.be

(Either click on the link or cut and past it into your browser.  You will also find a link to this, and several other recent CNN commentaries, on my website.)

I called it an “Alice in Wonderland” moment — the “Mad Hatter’s Tea Party.”  This is what we have come to — and historians will look back on this moment with dismay.

The overwhelming issue is that the deal does absolutely NOTHING to change our annual budget deficits, which keep creating a larger national debt.  And the term “budget deficit” is more than an oxymoron — because while we have had trillion dollar deficits for each of the past three years, we have not even had a Federal budget!

The Congressional Budget Office just announced that this “deal” will actually add$4 Trillion to our national debt over the next 10 years!

And now that we have had so much ado about nothing, the new Congress will have to start out by dealing with the debt ceiling.  That’s a much more significant fight because it will call into question our legal ability to pay our bills and refinance our debt.

Will the next Congress be any more sensible?

Markets React

Don’t be fooled by the reaction of global markets and rising stock prices.  Markets think short term – -and in the short term the entire world is glad the United States didn’t destroy its economy with huge tax increases and spending cuts.  After all, if America doesn’t keep producing and buying, the rest of the world is in deep trouble.  So of course the global markets are cheering.

But keep your eye on gold, which though down recently from its highs for last year, responded to the “deal” by jumping nearly $20 per ounce to $1690, while the dollar fell on global markets.  Our lack of real fiscal discipline means that big bets are being placed against the future value of the dollar — even if it is the “least worst” place to hold assets globally.

What can and should you do?  Get back to work, and keep on investing.  And speak up! This kind of Congressional confrontation is only possible because so many in Congress find themselves in “safe” seats, because of redistricting.  Maybe if they understand they are vulnerable to our votes, they will get something done for America in the next Congress and in the New Year.  And that’s The Savage Truth.

Savage Truth: Cliff Hanger

by Terry Savage

It’s down to the wire, and they don’t seem to be taking it seriously in Washington.  At least not seriously enough to come up with some middle ground that will change the trend of huge deficits and increasing government spending.

Of course we all know the real solution:  Economic Growth.   A growing economy would reduce the need for government spending on unemployment benefits and to help the needy.  And it would automatically increase tax receipts, because more people would be working and paying taxes into the government.

Instead, what they’re debating is a huge philosophical and political difference over the role of government in America.

On the one side, you have those who firmly believe that the economy would grow if only government would get out of the way.  And on the other side, you have those who equally firmly believe that the only way the economy can grow is if government intervenes to help.

It’s no wonder that there can be no agreement, no compromise, no solution.

So here’s a closer look at what would really happen if, like Thelma and Louise, they lock hands and jump over the edge.

  • The Debt Ceiling    This is one of the two most critical issues we face immediately.  We will bump up against the official $16.394 Trillion debt ceiling by the end of this week!  If the government can’t borrow, it can’t pay its bills or salaries or refinance the Treasury bills, notes and bonds as they come due.   But Treasury Secretary Geithner has announced they can “borrow from other trust funds” to keep government going into mid-February.  Of course, if a corporate executive did this kind of financing, he would go to jail!
  • Unemployment Benefits  Lack of a deal will have a serious and immediate impact on the 2.1 million people currently receiving extended jobless benefits.   (States pay the first six months, and the government has continued those benefits for at least 99 weeks of unemployment.)  If no deal is reached, checks will stop on December 29th.  And an additional 1 million unemployed will lose their benefit checks over the subsequent three months.
  • Your Paycheck  If you’re working, you will immediately see less money in your paycheck in the New Year, for two reasons.  First, the so-called “Bush Tax Cuts” on which your tax rate and withholding are based, will go back to pre-2003 levels.  That higher tax will start to come out of your paycheck immediately.   Perhaps even more devastating to your paycheck amount, the “payroll tax holiday” (the Obama cut in Social Security taxes or FICA) will end, resulting in an additional 2 percent taken out of your gross pay.   Bottom line:  You will have less money to spend.  The government will spend it for you.
  • Your Tax Refund  The refund you expect may turn into a bill for more taxes.  That’s because the “Alternative Minimum Tax>> which makes sure that “rich” people don’t get too many deductions, will have to be calculated for your 2012 income.   An estimated 28 million more taxpayers will face this new, higher tax bill.
  • Your Doctor   Starting in January,  Medicare reimbursements to physicians will be cut by 27 percent, or $11 billion, unless an agreement is reached to extend the current payment levels.  Many physicians may decide not to accept new Medicare patients.
  • State Poverty Programs  The federal government annually sends hundreds of millions of dollars to state and local governments .  That spending would be cut immediately  if no deal is reached –  impacting programs ranging from school lunches to nursing home subsidies.
  • Government Jobs  Without a deal , expect notices of job cuts and pay cuts – ranging from civilian to military,  giving the media graphic ways to illustrate the plight of government workers and the impact on national defense.

These are just the most immediate and visible ways the “fiscal cliff” will impact you, your family, and our country.  They are planning a dangerous game of “Chicken” in Washington, D. C.    There’s some sense that both sides will be willing to actually go over the cliff – head off for vacation, and then let a new Congress deal with the mess in January.  That would leave everything from payroll tax schedules to business expansion plans in limbo, likely causing a dramatic and immediate slowdown in the economy.  A recession.

The real question is whether going over the cliff would actually be better than any deal the two sides might agree upon.  We’ve spent an “extra” trillion dollars every year, above what the government has collected in taxes, to get the economy going.  And we have a very lame recovery.

Will more government spending fix that problem?   Will an agreement to tax the wealthy raise enough money to solve our deficit problem – or will it destroy incentives and slow the economy?

If we don’t learn from history, we will certainly be forced to learn our answers the hard way – by living through this reality check.  And that’s The Savage Truth.