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Tuesday, April 25, 2006 - Page updated at 06:24 PM


Q&A with certified financial planners

In today's climate of vanishing pensions, outsourced jobs, mounting debt, rising health-care and college costs, international instability and iffy Social Security, we turn to experts for financial-planning guidance. Below are the responses from a daylong question-and-answer session with certified financial planners from the Financial Planning Association of the Puget Sound.

Read additional questions and responses from our live Q&A session

I see from several of the responses to other questions regarding home ownership that you seem almost discouraging. In the Puget Sound area of WA (King County) home prices have risen 12 to 17% per year for the last three years. I'm not sure about you, but my income level has not been increasing at that rate.

Furthermore, because of our limited land and horrible commute/traffic issues, our housing market is projected to remain increasing at the same level for the next 3-5 years. While I understand not recommending mortgages that are adjustable rates or perhaps Interest-only's, what other investments would you recommend that give that rate of return (and tax advantages) for those who do not already own a home?
Shara, Bothell

Financial planner: Shara, it is indeed rare to have a protracted growth spurt such as we have been experiencing in real estate. However, studies show that in the last 25 years the best investment has been in the stock market. Real estate at the present rate is tough to beat, but a well diversified protfolio in the market either directly or in mutual funds should give you the best long-term growth because you will be participating in all endeavors in our society, not just real estate. The Standard and Poors index for example has averaged 10% a year for nearly 50 years. This is not true of real estate. Do not be dazzeled totally by a short 5 to 10 year spurt in one asset class. Owning a home in a city like Seattle may become more and more prohibitive and possibly not the investment of choice for many of us anymore.

I'm a 24 year old engineer making around 60K per year. I currently dedicate 10% of my pretax income toward my company 401(k), to which the company matches 50 cents of every dollar, on the first 8%. Since I expect my income to increase (and thus, expect to be in a higher tax bracket when I retire eons from now), should I put the additional 2% which my company is not matching into a Roth IRA rather than in my company 401(k)?
Ray, Seattle

Financial planner: First I must commend you for taking full advantage of your employer's match.

You are right to consider your tax bracket in retirement versus the tax savings you will be forgoing now as the Roth IRA contributions are after-tax money (and don't provide a current year tax deduction). The tax benefit in the Roth IRA comes when you take your money out in retirement and you don't have to pay taxes on the money you have earned over the years. In your case the years will be 55+. This has the potential to be a large number. However we don't know what the tax rates will be in the future so we cannot say for sure it is the best solution.

There are some other potential benefits. One benefit is futher diversification of investment choices (since your can pick almost any firm that is different from your employer's choice for the 401(k)) and a second is the ability to have more than one bucket of investment money to draw on in retirement. If your souces of income in retirement are taxed differently then you have an opportunity to be flexible in managing your taxes after you retire. Remember, we don't know what the tax rates will be in the future, but more options means more flexibility.

You also would have the ability to push out your withdrawals from retirement funds beyond the age 70 1/2 since the Roth IRA does not have a required minimum distribution provision. You can pass your Roth IRA to the next generation income-tax-free (but not necessarily estate-tax-free). Keep in mind that this response is based on current laws and may be subject to change. You are on the right track.

I'm 47, single, and saving for retirement. What about I-bonds? It's just so simple to have the deduction from my paycheck and know that interest will accumulate tax-deferred for 30 years, plus have that inflation protection. Can I just keep it simple by saving with I-bonds every year, or do I really need to find out more about mutual funds and stocks? I hate the idea of having my retirement savings at risk to the stock market!
Terrell, Burien

Financial planner: A prudent approach to investing is the concept of diversification, or having assets in different types of investment vehicles (called "asset classes"). While investing in bonds is generally safer than stock mutual funds, past performance and history suggests that long-term returns for bonds are lower than those of stocks.

Since you are still young, and have many years before retirement (assuming you are retiring at a regular retirement age of 60 to 70), I would suggest that you consider having some stock mutual funds along with your bond investments. The exact stock/bond mix depends very much on your risk tolerance and time frame for needing the money.

Professional financial advisors counsel people every day, answering questions just like yours. Generally, try to contribute the maximum amount into your 401(k) or other retirment plan(s) at work. For more on seeking financial advice, see the story "How to pick financial planner who's best for you" on

I read Allison from Seattle's question and although similar, my question is: Should I borrow from my 401(k) when I just got fired to pay down my debts that have kept me in a bad credit profile?
Steve, Seattle

Financial planner: Steve, if at all possible, hang on to that 401(k)! No matter what your age, I have found virtually everyone later regretted having tapped their retirement savings before retirement. Are you going to be able to find work soon? If so, it would be better to work at paying off your debts on a monthly basis than tapping the 401(k). Do you have any savings to see you through to the next paycheck without requesting a partial (or full) 401(k) redemption? My advice: Everything else being equal, don't tap the 401(k) to improve your credit profile. Tap the 401(k) only if you can't eat!

Is rental real estate investment property a good investment? I see that house prices are skyrocketting. Is there really a real estate bubble?
David Axt, Seattle

Financial planner: Capitalization Rates (cap rates) are a common measure of the investment return on real estate representing the rate of return one can expect to receive after expenses. They are also a good indicator of the prices of real estate markets in general and whether they may be overpriced or not. In other words, when cap rates are high, demand for real estate tends to be weak and prices therefore tend to be lower. Conversely, when real estate prices are moving higher, cap rates are declining. At the present time cap rates nationally are generally around 7% and falling (due to the tremendous demand real estate markets have experienced since the tech bubble burst in 2000, when cap rates were in the low double digits).

Another concern is that should interest rates continue to rise, a large percentage of homeowners purchased their homes using 100% financing and adjustable-rate mortgages. These loans will adjust to prevailing rates when they roll over in 1, 3, 5, and 7 years out. If interest rates have risen too far, the default rates on homes may increase dramatically and real estate prices could fall.

It is just my opinion, but I would hold off on real estate investing until the market cools off and prices come down to more realistic levels, especially in this area of the country. The answer to whether we are experiencing a real estate bubble has been debated routinely by many experts with no conclusive answer.

Many gurus feel that Berkshire Hathaway is an undervalued security right now. Do you?
Jon, Renton

Financial planner: Jon, your question is more appropriate for an investment advisor. Certified financial planners are more likely to assist people with broad financial issues such as budgeting saving through a broadly diversified plan, saving for retirement, tax strategies and estate planning. With that said, even if it IS undervalued, that does not necessarially make it an appropriate investment for you.

I am 27 and have a decent amount of savings. I am not sure where to invest. Right now it is sitting in the bank and basically I am losing the interest.
Bozo, Seattle

You are asking a very typical question but have not provided enough information to enable us to give specific recommendations. Your age is only one aspect of the decision process. There are other factors that effect the investment choices such as: when do you need this money (2yrs, 5yrs, 40yrs?), what is your risk tolerance (can you sleep at night if the portfolio goes down significantly?) and other aspects of your financial life like debt level, emergency funds, security of your income stream, etc.

Most financial planners will suggest you have somewhere between 3-6 months of expenses on hand in a low risk account like passport bank savings and/or a money market mutual fund. If you have more than this level of savings then you may want to investigate "investing" this money by using a bond and/or equity mutual fund.

All of these questions, along with others, would be explored by a financial planner before any recommendations would be discussed. Bank savings may be the correct place for your savings if this is your emergency funds but may not be correct if this is primarily retirement money that's not needed for 40 years. For more on seeking financial advice, see the story "How to pick financial planner who's best for you" on

How do you pay off credit card debt and save for a down payment on a home? Is there an investment I can contribute to that will give me a tax deferrment for money used toward the down payment of a home?
Allison, Seattle

Financial planner: Allison, perhaps you should focus on paying down the debt first if your available income is limited. This will make it easier to handle the eventual mortgage payment. As far as saving toward the down payment on the house, I think you might be best off to save in a plain vanilla savings account at your bank, or another low volatility investment, and build your emergency funds, which may end up being a portion (or all) of your home's down payment. Although you could borrow from a tax deferred 401(k) plan at work (should you have one), you'll be better off in the long run to keep your retirement savings in place for the big goal of retirement.

Thank you in advance! I'm 27, single, and make $76K. I have no credit card debt or any other high interest debt, but I do have a student loan balance of about $32K (4% fixed; no longer tax deductible). I also bought my condo, so I have about $265K in mortgage debt.

I have about $12K set aside in a high-interest online savings account for my emergency fund (about 4 months of basic, necessary expenses) earning about 4.4%. In addition, I am putting $200/month into an unmatched government 457 plan and just opened a Roth IRA, to which I am contributing the max amount (about $330/month). My 457 balance is pretty meager at this time (probably $5K) as I've only recently started contributing.

I work for local government, so I also have a pension plan and I expect to remain in government for my career. I have a condo that I plan to live in for at least 5-10 years, so I don't need to save for a down payment. However, if I end up staying in my condo for longer than 5 years, I would probably like to do some remodeling (maybe $30K worth).

I maintain a detailed budget and expense spreadsheet and have determined that I have about $400/month in flexibility that I can save or invest (this amount was going into my emergency fund previously).

My main financial goals at this time are saving for retirement, paying off my student loans, and the remodel. Should I boost my contributions to my 457 plan from $200 to $600? Should I start paying down my student loan more aggressively? Should I keep putting the extra money into short-term savings to augment my emergency savings and to build towards my remodeling goal — and if so, what are the best instruments to do this? Is it best to keep all of my emergency fund/short-term saving in the online account, or should I move a portion into something else (i.e., i-bonds, cds, etc.)?

I would rate my risk appetite as moderate/aggressive. Thank you!!
K, Seattle

Financial planner: First, I am very impressed with your fiscal discipline. You are on track for a very comfortable retirement should you continue what you are presently doing.

If you have a good credit rating, you might want to take out a home equity line of credit (HELOC) to improve your flexibility if you run into financial difficulty in the future (it's easier to qualify for a loan when you don't NEED one). I would then focus on paying down the student loan as reasonably possible.

Further, consider splitting the $400 discretionary income per month between savings (investing in a balanced mutual fund such as Vanguard Star) and the student loan. Until the loan is retired, I would also apply the monthly Roth IRA contribution to the 457 Plan. This will save you nearly $1,000 in income taxes! Five years from now, you'll have the option of retiring the balance of the student loan with the mutual fund proceeds without having to delay accessing funds for the remodel (HELOC).

Other than purchasing dirt (buying land), where is the safest place to put my money.
John, Lynnwood

Financial planner: John, you hold a value or judgement that buying land is safe and some might argue with that point of view. There is really no totally safe or safest place to invest because the word "invest" means you are willing to take some risk.

If you want to save money versus invest, you will use insured certificates of deposit, bank savings accounts or mutual fund money markets. What could make land a less than safe investment is damage from the elements or storms or contamination from industries or development. After you progress from the banking level of safe places to save you get to the next level of securities like AAA corporate or municipal bonds, and then U.S. blue chip stocks.

By that time you may need a financial planner to assist you with determining what investments should be "safe" in your portfolio (in relation to the time frame you have) and in the context of all the other resources you have.

I am a single mother with 4 children. I make between 30-40K per year. I have some credit issues and the desire to pay off my debt of approx 5-7K but I often find it hard to make ends meet on one income and nothing extra coming in. I often put money into savings but I often have to pull it out because of an emergency. I have no college funds set up either for any of the kids and one will be going in 7 years. What steps should I take to get my finances on track?
Marie, Seattle

Financial planner: I wish I had an easy answer for you. It is going to take hard work and discipline for you to pull ahead of the game. Stepping back for a moment, what we really want is for you to have assets that are EARNING a return for you each month (and each year) rather than having debts, which COST you interest each month.

To accomplish this goal, you will need to spend less than you make for the next several years so that you can pay back the debts (accumulated when you spent more than you made) and then accumulate the funds which will begin to increase your income. As a mother myself, subject to all of the unexpected and unplanned events that come a parent's way, I understand that this is no easy task. But you did ask the question, and I hope you will take charge, and make this happen for yourself. Ten years from now, you will be very glad you did.

Step one: continue to set aside your savings each pay period. It is a terrific habit. If it turns out that the savings are needed for an emergency, and not accumulating, you should be setting aside more than you are. Your goal? To have that savings account growing modestly every year.

Step two: get rid of your credit cards. That's right, cut them up. If you cannot do that, then freeze them in a milk carton of ice in your freezer, and don't take them out of the freezer. Believe it or not, you can live without a credit card, and in your case, it may be a crutch that allows you to spend more money than you have.

Step three: set a target for eliminating your credit card debt. Pay the minimum balances on each card, and then put an extra $200 per month towards the one with the highest interest rate. Enjoy whittling them down, knowing all the while that they are making a smaller and smaller profit from you, and more of your hard-earned money is staying in your own hands.

Step four: learn to say no. If you don't have the money in the checkig account to pay for something, don't buy it. This is very difficult to do in our society, but if you can master the skill, you will never want to go back.

Step five: get back to me when you are almost done with step three. It will be time for phase two of your plan to get your finances on track.

In your retirement planning worksheet your figures reflect SSN retirement for married couples as follows: The full benefit paid to the highest earner and the full benefit paid to the lesser earner or half of the higher earner's benefit paid to the lower earner, whichever amount is greater. My understanding is that the choice for the lesser earner is whichever amount is smaller, NOT greater (otherwise most married couples would just take their full benefits and there would be no marriage penalty). Is there a recent change? Thank you.
Chris, Seattle

Financial planner: The article is correct. You have the choice of the higher of the two, not the smaller of the two.

I have a financial planner now. I want to check out her qualifications. What letters need to be after her name?
Jodi, Renton

Financial planner: Jodi, the professionals responding to this hotline today are Certified Financial Planning practitioners (CFPs). For more information on these letters please go to the web site The CFP is one of a number of industry designations. The CFP is one of the few designations that require ongoing continuing education, including ethics.

It is also a good idea to check your financial planner for any disciplinary issues by checking your planner against the NASD, the CFP Board of Standards (if she's a CFP practitioner) and WA State Insurance Commissioner's databases (available on their respective Web sites).

I've received a scholarship that will pay for my wife and I to live abroad for 9 months in Okinawa. We are 30 and 31 years old, own our house, but have little in the way of savings and some debt from home improvement. With our jobs, we clear about $1,000 each month after bills. How can we best prepare financially for the trip? Reduce debt? Boost savings? We are planning to rent the house to a friend, making mortgage payments that way.
Jeff, Bellingham

What a terrific opportunity! Congratulations on your scholarship Jeff! And congratulations on spending less than you earn each month! It is one of the first steps toward financial security and freedom.

You don't say what your current income is, or your tax bracket, so I will caveat my response with the fact that I don't know those things, which could very much impact my response to your question.

If your employers have tax qualified savings plans available that you are not "maxing out," I suggest you consider utilizing those as a first step. The after-tax cost will make this effective, even if you do not stay long enough to fully vest in your employer's plan.

Assuming you have fully utilized that option, I suggest accumulating an "emergency reserve" fund. As a rule of thumb (which is altered by individual circumstances) I think you should target accumulating 3 months of your living expenses in such a fund. I like FDIC-insured certificates of deposit and/or money maket mutual funds for emergency reserve funds, but any type of safe and liquid investment will serve the purpose.

Lastly, begin to pay off the home improvement debt if you feel that the interest cost is greater than the earnings you could reasonably expect on an alternative investment.

Good luck with your sojourn abroad!

I am 35 years old with a wife and an 8 month old son. Earlier this year we opened a GET [Guaranteed Education Tuition] account for our son's college education and contributed $3,300 to purchase 50 units. We were planning on making another $3,300 lump-sum contribution prior to the state raising the unit cost at the end of this month. Since then we have been advised on other "better" alternatives including a standard 529 plan or simply purchasing zero coupon munis. What is your opinion on the various college savings vehicles and which one do you tend to favor when advising your clients?
James, Bellevue

Financial planner: There are pros and cons to each solution. The GET program allows you to buy units at a set price today. When your child goes to college you will be spending those units to pay for tuition. The state has taken on the responsibility of the investment return with their guarantee. The state will take your $3,300 and invest it. Then when your child goes to college in 18 years, you will be able to call in your 50 units to pay for his tuition. There are other limitations on the use of GET units to cover certain costs such as living expenses, but all the limitations are beyond the scope of this e-mail.

The 529 plan allows you to pick the investments, but you also bear the responsibility for the return on those investments. If your choices do well, then you may have more buying power when you son goes to school. However, if your investment choices do not do well, you could have less buying power. This type of 529 plan is more lenient in what is considered "qualified college expenses" than the GET program's qualified expenses.

The choice of GET or 529 is not clear-cut and your risk tolerance, investment choices and ability to take responsibility for the investment return are all factors that will affect your choice. A combination will also allow you to diversify your sources of college funds.

Remember, there are other educational savings vehicles beyond 529 plans that you may want to investigate as well, Coverdell/"old" Education IRA, Hope Tax Credit and the Lifetime Education Tax Credit. For more on seeking financial advice, see the story "How to pick financial planner who's best for you" on

How do you decide whether it is better to pay of debt or start a savings account? I'm 28 and a single parent. I have about $10K in credit card debt and no savings aside from my 401k. Which to tackle first? Paying off debt or starting a savings?
Lily, Seattle

Financial planner: Lily, it is difficult to know how to prioritize with limited resources. One thing to keep in mind is that if you don't have a basic savings account, you are going to keep being tempted to add to the credit card. The 401k savings plan is a great idea for retirement savings, but first you'll need a savings account that you can draw on as needed to pay for things you can't pay for out of your normal paycheck. That's called an emergency reserve, and ideally your reserve would enough to cover about 3-6 months of living expenses.

You might set this up as a savings account at your bank. Ideally, you would scrutinize your current expenses, and determine just how much you have to go toward your savings account and toward debt repayment. Then, perhaps split your available cash between the debt and new savings. It is essential that you stop adding to your debt burden. Try very hard not to carry over additional debt from month to month on the credit card, and if you need to, borrow from your savings account to buy necessities. Eventually when the debt is paid off, you'll be able to dedicate the whole payment to the savings account. After you have reached your savings goal that is equivalent to 3-6 months of living expenses, you'll have a firm financial base to build from.

By this time, perhaps you've had a salary raise. Yahoo! Here is a little more money that you can save systematically. This time you might want to put your new raise toward your 401k. Remember, the 401k money is for retirement, and you want to be able to keep it invested for the long term. Your emergency reserve/savings account is key to being able to spend more than your income occasionally without going into debt.

It is difficult to get started, but I suspect you'll feel very proud of yourself for systematically paying off your debt, and systematically building your savings. You can do it!

My wife and I (62 & 57) earn $160,000 and, having raised our kids, are now focusing on saving for retirement. We have $300,000 equity in our home and are saving approx. $70,000/year. We have $450,000 in IRAs and another $350,000 in a mix of stocks and bonds. We would like to retire in another 4 years. Are we financially ready?
Stanley, Kent

Financial planner: The answer to your question is: maybe.

If you can support your retirement lifestyle on an income of $50,000 from investments (this assumes a 4% withdrawal rate at your desired retirement in 4 years, a 4% growth rate of your portfolio, and your adding an additional $70,000/year from savings), $23,364* from the older spouse's Social Security in 2010, followed a year later by the younger spouse's $19,524**, then the answer would be yes. Although not guaranteed, the assumptions is that a well-diversified portfolio consisting of stocks and bonds will grow faster than your withdrawal rate even accounting for inflation.

While reviewing your retirement budget, please keep in mind the anticipated costs you will incur for healthcare, travel, and housing/taxes, etc.

*SS assumption: $80,000 of annual income retiring at age 66 in March 2010
** SS assumption: $80,000 of annual income retireing at age 62 and 1 month in 2011

I am a 26 yr old married medical student with three years to go until graduation. My wife is working and makes about $40,000/yr. We are interested in buying a house (though not in the Seattle area) after I finish school. Does it make sense to borrow the maximum amount allowed now for school, in order to save it to use as a down payment three years from now? Or is it better to borrow the minimum we need right now, but then have to borrow more of the principle on a home because we will have less in the way of a down payment?
Roger, Seattle

Financial planner: Congratulations on seeing the light at the end of the tunnel in your medical school. It certainly makes sense to look ahead toward life after school.

If I understand your question, you are asking if you should borrow money now, to use as a down payment on a future home, or if you should wait until you have finished school to borrow those funds. Whether the loan is secured as an educational loan or against your home equity is not very material unless you are unable to pay the loan back. I'll assume your financial plan is working well for you, so we won't deal with that potential aspect of your question.

The issue boils down to whether you qualify for education financing which would be more favorable to you than that available to you at the completion of your schooling.

Do you qualify for an educational loan where the interest is deferred until 6 months from graduation? If so, this type of loan could make some good sense. In the worst case, if at the time of graduation you could borrow more cost effectively with the more usual home equity financing, you would be able to use the funds you have stashed aside to pay off the loan. In fact, you would probably have earned a little interest over the years which you could keep in your pocket. Seems like a good choice.

But if you would be charged interest on the loan for the next three years, (even if payment is deferred until after graduation), most likely the interest costs will exceed the earnings you will be able to achieve in an investment that is suitably safe and liquid to ensure the funds are available intact for the downpayment in the next three years.

At that point the evaluation comes down to forcasting whether or not the cost of carrying the loan for those three years will be paid back via a more favorable loan rate and repayment schedule than what is available through conventional home financing. Depending on what the net cost of carrying the loan turns out to be (I think you could calculate that with some basic information on the loan and assumptions on earnings), you could then evaluate if that cost would be worth paying to lock in a "known" financing plan, vs. the assumption of what might be available in the future.

I am a tax consultant (and Enrolled Agent) with offices in Washington and Alaska. I just finished up my 31st tax preparation season. In the process of planning whether someone has enough taxes set aside for the next tax year and investments they might make (such as greater 401(k) contributions, IRA contributions, start up of a business or simply lower the number of exemptions claimed on their current forms W-4, I have continuously come up with a couple of things.

The first is the lowering of the AMT exclusion in tax year 2006 from its $58,000 level to $45,000. Nearly 60% of my clients will be affected with higher taxes in 2006 than they had in 2005. What I also have seen is the phase-out of the tax legislation first signed by President Bush in his first term of office and in subsequent years. In 2009, qualified dividend income no longer receives preferential tax rates, and capital gain goes to oridnary income tax rates. 2005 was the last year of the Tuition and Fees Adjustment (above the line deduction up to $4,000).

With this many oncoming changes to tax law and the possibility of higher tax rates, my personal belief, but guaranteed if the Bush tax laws are not made permanent. I think and have advised my clients to not only seek out financial planning, keeping in mind that they might be simply interested in selling you an annuity, a security or life insurance policy, but to invest to the maximum in a Roth IRA. I have advised them to stop contributing to a 401(k) when the employer stops matching and instead put that money into a Roth IRA. I have advised that the clients rollover their Traditional IRAs to Roth IRAs.

The ROTH, under the current rules and the "known" tax law changes in the near term, is the best vehicle for tax planning, whether you're 21 or 70. It is tax-proof. It doesn't matter what the tax rate is in the future ; it's withdrawal does not count in determining how much of your Social Security is taxable. It has no minimum required distribution (with a 50% penalty for not making a RMD). And it is passed to heirs tax free. All of this is unlike the Traditional IRA. I, of course, have not recommended where to keep or invest that Roth money; that's up to you guys to advise.

I have read all of the postings today in this forum and nowhere have I seen the factor of increasing tax mentioned. I find that misleading to all of your readers. Financial planners, in my opinion, should be very aware of the tax consequences that erode one's lifetime financial goal. Or can be used to increase the achievement of those goals.

Thank you for your time and I look forward to more balanced financial planning as the day progresses.
Larry, Vancouver, WA

Financial planner: Your point is well taken. Taxes are an extremely important element in financial planning. However, the issue of taxes like the issues of how much insurance to carry, or where to invest your money, is best dealt with in the detail and not in the general nature of most of the questions we are answering today.

Frankly, is is as inappropriate to espouse one tax strategy, such as the Roth IRA, in all cases, as it is to espouse one investment approach in all cases. Lastly, in a forum like this one, where we do not have the benefit of asking probing questions or seeking clarity to one's situation, general suggestions (or steering people in the right direction to find the answers to their specific questions) is the best we are going to be able to do.

Whoa! All the rich people don't know what to do with their money. I'm truly impressed! Anyway. On to my question.

I'm 39. I live in America for about 17 years. During these years my total number of unemployment was about 7 years. In the remaining 10 years that I've actually worked, I had 11 full time jobs because of constant layoffs due to company buyouts, restructurings, bankruptcy, and bad management reasons. I guess I have a talent to pick the "right" companies to work for.

I've just ended my 4 years of unemployment, during which time I've lost all my previous savings of about 50K. I don't have any retirement accounts, IRAs, 401Ks, and you name it investments because I had the constant fear of when a layoff is coming. I don't owe anything to anybody. I don't have car, house, credit card, loan or any other payments. I know how to save money since I wasn't grown up in this country, but my problem is that CEOs, CFOs, and other greedy individuals with 3 let ter designations don't know how to run a company.

Now the company I work for is having trouble and already had 2 rounds of layoffs. I don't understand where others get their money because it seems that with decent, honest work, I will not be able to retire in this country. What can I can do so I don't end up homeless? Thank you.
Gertrude, Seattle

Financial planner: Gertrude, your story is not a happy one and I wish we could do more to help. My first thought is that you could be assisted at a community college in your city where they do career counseling and aptitude testing. It seems that somehow you have not found your career path yet and that may help you get steady employment. For example, engineers and accountants are needed in large numbers and many of the companies they work for experience these layoffs and restructuring also. They survive because they have a career line and can do similar work for another employer. You are still relatively young and may just need to do some career exploring or update your skill set.

My second thought is that your layoffs or breaks between jobs seem unusually long and you may need to change the type of work you are willing to do or the city you work in, in order to reduce the chances of being out of work again. If you are going to save for the future you cannot afford to be out of work again. Do something for employment — anything! Do not accept even one month of no work if at all possible.

I'm currently with eTrade and would like to start investing in equities. Commission rates are "higher" at $12.95 per trade versus other brokers (e.g., Scottrade, TradeKing, etc.). Is there any advantage or disadvantages with going to a more heavily discounted broker? Should I stick around with eTrade or even move to a more service-oriented broker?
Daniel Hoang, Bellevue

Financial planner: I really think it is a question of personal preference. If a company is not staffed properly or does not have the technology resources, you may find trading unavailable or phone lines are jammed during busy days. This could cost you much more than a few dollars. However, just because a broker charges a few more dollars does not mean they will have the needed resources.

If I was happy with a company that I was doing business with I do not think I would change providers over a couple of dollars/trade. If I was unhappy with the company, I would not care how little they charged! Perhaps you should try a couple different brokers and see which one fits you best.

With that said, I have a question for you: Are you planning to invest in equities or are you just speculating on their short term moves? I would be wary if your intentions are to speculate on the market vs. investing in quality companies over time.

At what size U.S. equity portfolio does it start to make sense for me to consider purchases of individual equities versus investing via mutual funds? $100K? $250K? More? Please assume that I'd like to maintain the same risk level, and that the non-U.S. equity allocations in my portfolio will remain level and are appropriate for my age and financial situation (and that I'll be consulting a financial planner for advice as to which particular equities to invest in, of course!). Thanks!
Andrew, Washington, D.C.

Financial planner: You are going to get a wide range of opinions on this question. I feel that diversification and risk management are very important. That said, I am generally not in favor of individual stocks in a portfolio.

Many experts tell us that you need a large number (most would say at leats 15 positions) individual stocks in order to diversify away the specific company risk associated with those stocks. It becomes a monumental task to stay on top of that large number of individual companies to make sure that you are responding to market changes effectively. I generally advise my clients to avoid individual stocks at least until their portfolio is large enough to give reasonable assurance that they can achieve their planning goals. The dollar amount will clearly vary according to those goals. At that point their most important objectives are not likely to be impacted by the addition of risk associated with owning individual stocks.

With that said, most investors, when investing in individual stocks, typically invest exclusively in U.S. Large Cap (and perhaps a few mid cap or small cap) stocks because that is where most of the investment research is available. Therefore, I strongly suggest that a prudent asset allocation is critical to your overall investment success (whether individual stocks are used or not).

Lastly, as your tax bracket goes up, an argument could be made that individual stocks (and Exchange-Traded Funds) become increasingly more important for non-tax-qualified accounts because they may be more tax efficient than the average actively managed taxable mutual fund.

Since the past isn't a good predictor of the future and we can't know which mutual fund managers will do well in any given year, are index mutual funds the way to go, given their reduced expenses? On the same general subject, what are your thoughts on the pros/cons of ETF?
Sasha, Alexandria, Va.

Financial planner: Money managers and investment advisors will vary in their use, and attitudes, about Exchange-Traded Funds (ETFs) and Index Funds. With that said, most investment professionals I know use index funds and ETFs interchangably...but some asset classes are ONLY available as an ETF. The management costs of ETFs and index funds (like Vanguard) are often similar.

As a financial planner I take the position that all investments have their place and few are inherently good or bad. When I work closly with an individual (or family), and know enough about their time frame, risk attitudes and goals to create a prudent asset allocation, I may or may not use ETFs or index funds; it depends much more on the attitude of the client.

Through time we will continue to refine their asset allocation through perodic rebalancing. When we plan this way we diversify the assets so we can be forward thinking — and proactive — therefore making it less necessary to look to the past as a predictor. Often a blend of both index funds and actively managed funds creates a good compromise between having a "manager at the helm" (for some asset classes) while index funds help reduce the overall management cost of the portfolio.

I help clients make the conscious decision of whether they want to pay an additional management fee for an actively managed fund(s) or rely on the much less costly index funds/ETFs — or both.

I'm currently 27 and make roughly $60 a year. I have about $4K left on my car loan, no credit card debt, and around $3K left in student loans. Am I being too idealistic in looking for a house to buy? And how do I determine what I can afford?
Gabriel, Seattle

Financial planner: Home ownership is a great thing. I would hate to discourage it, but have you saved for the down payment yet? I assume you have not. Are you at a stage in your life were you can be confident that a house will fit your lifestyle for at least, say, three years? It is generally not wise to purchase a house if you may have to sell it after a short period. In recent history, housing prices have risen dramatically, so the risk of "selling at a loss" (after selling expenses) has been unlikely. However, price trends could change at anytime. Perhaps you will need to move for your job or your family situation will change (I assume you are single now). During a housing market flattening or downturn, you could be forced to sell your home at a loss.

For starters, you may want to take the amount that you would expect to be paying for the house payment, property taxes, insurance and upkeep on a house and save it. This will build up some funds to use for a down payment and you can see how it will feel financially to have these additional cash outflows.

And do not forget about retirement. You should be saving for that as well. Does your company have a retirement plan, and if so, do they match your contributions? You should at least be saving enough to take full advantage of any employer match.

Good luck and do not be discouraged. With time, you will get there.

Is it better to keep money in an emergency fund or pay off credit card debt? My emergency savings account is about the same as my credit card debt, and I've been debating if I should just take all that money and pay off the card.
Pam, Seattle

Financial planner: Pam, ideally, you could pay off the card and simultaneouly keep funding your emergency fund, but it sounds like it is either/or. As planners, we recommend you have about six months' expenses in a liquid place as an emergency fund. I recommend, in most situations, that you pay off the card and continue to pay it off monthly going forward. Credit card debt is usually far more costly than what you are likely earning in the emergency fund.

The risk is that IF you pay off the credit card...and you have no emergency fund, you will likely have to put money back on the credit card. Hopefully you can accomplish both goals over time. Remember what Benjamin Franklin said: "Neither a borrower nor a lender be."

What about conflicts of interest for planners who are compensated a percentage of the assets under management? Doesn't that mean they would be more inclined to steer their clients' money into accounts they manage, rather than 401(k)s, real estate, etc.?
Carla Pryne, Seattle

Financial planner: In my opinion, there is an inherent conflict of interest in any professional service relationship. For example, a accountant or attorney (or a financial planner) who charges by the hour, has an incentive to generate "billable hours." With that said, I am convinced that no compensation structure is, in and of itself, good or bad.

Professionals in their respective industries must put the client's interests before their own. Quality service providers will do just that. As a client or prospective client, I think that you should ask yourself if you know what you are being charged (is it fully and fairly disclosed?), and whether you are receiving value for the fee you are paying. Certified financial planners have taken an oath to follow their code of ethics, which demands that the client's needs are put before the own...each and every time.

I was married a little over a month ago. My husband and I would like to start saving for our future, but there is so much to plan for and we're not sure what our options are. We have no debt and earn modest incomes. The only money we have saved is the $2,000 we received as wedding gifts. We pay $900 a month in rent and could afford to put away about $100 towards savings every month. We both want to go to graduate school and eventually we'd like to buy a house. Could you help us figure out where to start?
Kat, Seattle

Financial planner: It sounds like you have already prioritized your goals for me and so I will use this to make my recommendation.

First, I recommend taking the $2,000 in wedding funds and opening a money market mutual fund with a no-load mutual fund company such as or Once this is set up, add the $100 per month you are able to save into this fund. You will not receive the highest return, but the risk and costs are low and they allow you to add small monthly amounts.

When you have built up enough funds to replace 3 months of expenses, take some of these funds and buy a 3-6 month certificate of deposit (shop around for the best rates like Keep these funds as your emergency back up funds in the event one of you loses your job or gets sick and can't work for a period of time. Keep renewing this CD as it matures and keep it as an emergency fund.

Keep the monthly investments going into the money market mutual fund and increase it as you get annual raises and/or bonuses. These savings may then become part of your graduate school savings. Once enough is accumulated for graduate school costs, use this fund as needed to pay for schooling - and then start over to begin saving for the down payment on your home. All of this will take time, but you now have a system and a plan on how to achieve each of these goals.

What is better: Making 5 percent to 6 percent on the market while paying 7.5 percent on a home equity line of credit (with its interest being a deduction) or just paying off the home equity line of credit?
James, Woodinville, WA

Financial planner: James, in general you should pay off a 7.5 percent HELOC unless you steadily and comfortably make more than that in the market. Many do not make much more than that in the market because they have a conservative risk temperment and would not feel comfortable putting dollars at much risk. I would not base this decision on whether or not I could deduct the interest on my taxes.

Taking risk is necessary if you are going to make close to 8 percent in the market, on average. Perhaps more important, interest rates seem poised to continue to go up. So as interest rates rise your payments will likely go up as well...perhaps making it more advantageous to pay the HELOC off.

By working with a professional financial planner you will evaluate your time frame, overall financial goals and discover your true risk attitude so you will be able to make an informed decision. For more on seeking financial advice, see the story "How to pick financial planner who's best for you" on

My husband and I are very responsible and share credit cards. Will that lower our FICO score if we don't have our own cards (in our individual names)? As long as we both pay on time and keep our credit in good standing, does it matter? In addition, what is considered a "long credit history"? We have canceled cards that we have had for 10+ years. What's the least amount of years you would ideally like to have held a credit card for credit history purposes (since the credit bureaus only report back seven years)?
Jennifer, Seattle

Financial planner: The credit bureaus compute credit scores on each of you separately. If you own a card in your name only, your payment history will not affect your spouse's credit score. If you jointly own a credit card or other debt, your payment history on that card or debt will affect both owners. As long as you make your required payments on time it really doesn't matter that you both own the credit card.

Lenders, such as mortgage lenders, will pay close attention to your scores which are affected most by the most recent two years of credit history. Your credit history is the aggregate history covering all of your creditors. It is not necessarily important that you owned a particular credit card for some minimum amount of time. What is important is your payment history to that credit card company while you owned their card.

For more information on how your credit score is determined, check the web pages for the three credit bureaus:

I own a whole life insurance policy that my parents purchased for me when I was very young. A few years ago, I took out a policy loan to help cover some wedding expenses and consolidate debt. Now that we've started a family, I'm looking into term life insurance. (By the way, how does one decide between 20- and 30-year policies? Is the longer term worth it? Or am I better of going with a 20-year term and using the balance of monthly premiums to invest for 20 years?). I'm wondering if it makes sense to keep the whole life policy in place (and either continue annual interest payments on the policy loan; or pay off the policy loan; or use dividends to make loan/interest payments) or close the policy once my term life insurance policy is established. I should have sufficient cash value to pay penalties plus income taxes on the policy if it is surrendered. The annual premiums for the whole life policy are very low (about $185/year) and the policy has gained a small death benefit (about $75,000) as dividends over the years have been used to increase cash value and coverage (about 6 percent to 7 percent gain annually). Its cash value is about $18,000. The policy loan is about $12,000 at 6 percent interest. Aren't I wasting money by 'borrowing' from myself but paying interest to the insurance company? Thanks for your thoughts.
Dave F., Seattle

Financial planner: Dave, you are asking the basic and somewhat classic life insurance question. It is a good question and one I wish everyone understood so they could make the best decision for themselves. I am not certain I will be able to fully inform you in this brief response, but here goes:

Insurance is for the risks in our lives. Most of us have car, home and health insurance, among others. We know we are going to die with 100 percent certainty, but none of knows when so it becomes a decision of assumptions and resources. First look at the risks you are trying to protect. Do you have a wife, children, a business, and/or a mortgage? Are these the matters for which you wish to provide if you die prematurely? How much money will be enough to cover those needs?

When you are young the best buy for the money is ususally term insurance because you can get the most death benefit for the fewest dollars. But what if you expect and do live beyond the 20 or 30 years of term you could afford? (your question about 20 or 30 years ties to your age, age of your kids, etc., and how much you can afford. The longer the term the more the insurance premiums will be).

How much will you have saved in investments by then? How much will you still need? Will your health still be acceptable to the insurance companies so you can qualify? What kind of health history runs in your family? Are you in a high risk occupation? Do you expect a major inheritence that will replace the need for insurance?

Once you can answer these and similar questions you can decide on the way to best cover you and your family's needs. In your situation, I would keep the old policy for awhile if it is crediting 7 percent and the interest on your loan is 6 percent. You might want to keep the whole life policy anyway (as the premium is quite low). You are in essence paying yourself back for the loan. Perhaps you will be able to afford to have a term policy for 20 years and then retain the whole life policy for the remainder of your life. Remember: very few term policies ever pay out death benefits but most whole life policies do. There has never been a widow who complained that her husband had too much coverage.

The company I work for is giving us the choice of staying on the Defined Pension plan or switching to the 401K at end of the year. I am vested with the company (five years) our union negotiated in writting that the non-profit employer would not end the Defined Pension Plan in the future. I am a 40-year-old male with no dependents and I have 20 years left on my monthly mortgage. Which plan would be best for me? Who might be best to advise me further?
J. Styles, Seattle

Financial planner: Hi J,

That is a tough question. There are many important factors that I do not know. I can say that I would be very hesitant to give up a defined pension plan. Companies are moving away from such pensions because they are very costly to provide whereas 401(k) plans tend to cost the employer less money.

For more on seeking financial advice, see the story "How to pick financial planner who's best for you" on

Upon retirement, do tax free municipal bond fund dividends become subject to federal income tax? Also, if I write a check from this account, are there any tax consequences regarding the amount withdrawn?
Myrna Munn, Bothell, WA

Financial planner: Thank you for the question.

The tax free nature of municipal bond fund distributions is not related to whether or not you are retired. It is not clear to me what type of municipal bond fund you are referring to, but given the description you provided, it sounds unlikely that you would have any tax consequence by writing a check on the account. It would be best to ask your tax advisor or the custodian of the account just to make sure.

I'm a 51-year-old single teacher. I have $130K in state retirement (TRS 3) and $30K in TSA. I want to retire by 65. Gross income: $5200, $260 a mo into TRS, $190/month into TSA. I own a condo and have a $165K mortgage for 29 more years. I want to know what I should be saving each month in order to be ready for retirement.
Lori, Auburn, WA

Financial planner: Hi Lori,

That is a tough question. There are many important factors that I do not know. The most important question is how much income you think you'll need to retire. We all have different lifestyles and expectations.

I would take advantage of the free consultations offered by many financial planners. For more on seeking financial advice, see the story "How to pick financial planner who's best for you" on

Thank you.

I have about $250,000 invested through Ameriprise. Would I be better moving that to a target fund at Vanguard? I am about 10 years from retirement. Thank you.
Ruby, Seattle

Financial planner: Thank you for the question. Unfortunately, it's impossible to answer this question without more information. You should seek the advice of an independent financial planner who can give you advice on what types of investments would be appropriate for you in your situation. There are certainly many possibilities and it doesn't necessarily boil down to a choice between just these two companies. If you have paid commissions on any of your Ameriprise investments, you may want to think twice before moving the assets.

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