I’ve been thinking about my parents a lot lately, since they are approaching retirement age. My husband’s dad retired last year, and his mom expects to retire this year. So I’ve been contemplating their situations. I also had a brief email conversation with Patrick over at Cash Money Life in which he wondered how many people are considering putting off retirement because of the current economic issues. So, really, it is no surprise that over this past weekend I’ve received a few emails to this effect:

I’m a couple of years away from retirement. Should I put it off for a couple more years?

Over the past couple of decades the concept of “retirement” has been changing. We have largely shifted from a pension-based retirement society to one that relies more on personal investment accounts like 401(k)s and IRAs for retirement income. This has also been resulting in earlier retirement ages. However, WREX news points out that an AARP poll shows that some are thinking about putting off retirement now, due to the economy.

With the stock market doing what it’s doing, many people are experiencing statement shock as they see that their retirement accounts are losing money. But, as Patrick points out, withdrawing money from your retirement account really isn’t the best solution. And, it may not be in your interest to retire just yet, either.

You should look at your personal finance situation to see where you are at. Chances are that the stock market will recover in the next few years, so if you can work for a couple more years, it might actually be beneficial for you to put off retirement. That way you can still earn an income while you wait for your retirement account to recover. Additionally, it you might consider continuing your retirement account contributions. Your money will buy more while it’s cheap, and that could benefit you later — provided you have chosen solid investments that are likely to recover.

Disclaimer: I am not an investment professional. This should not be construed as investment advice. All investment carries the risk of loss. Before investing, do your own research and/or consult with an investment professional.

We’ll take a little break from all bailout all the time to answer a reader question:

Three years ago my husband and I were talked into purchasing permanent life insurance policies as a means to eventually supplement our retirement.  This was in addition to my husband’s 401k but at the time was my only contribution to retirement of any kind.  We are both 33 now and my question is was this a really bad decision?  What is your opinion of using your cash surrender value for retirement? Should we get out while we can and put the money in our IRA or wait until the cash value is greater than our premiums paid (5 years from now)?

First of all, I don’t like life insurance as a form of retirement income. Especially with cash rates what they are right now. Inflation is likely to eat up any returns. My husband and I have small universal life insurance policies to supplement the term life (because you do need life insurance to secure the finances of loved ones), but we don’t consider them sources of income. We plan to use the cash value on a small trip to celebrate retirement.

I’m actually inclined to say “cut your losses” and get out. If you are having trouble affording the premiums, then the current economy could make things tight. On top of that, if you use the money to beef up your tax-deferred retirement accounts now, you can get more bang for your buck as the market recovers in the coming decade. In the long run, that will accumulate better than putting up premiums for cash value for another five years.

Do any readers have any suggestions or thoughts on this?

I received this interesting question from a reader last night:

I’ve been hearing a lot about inflation lately. But now I’ve started to hear about deflation. What is deflation?

An excellent question! At its most basic, deflation is a fall in prices. It is the opposite of inflation. In the sense of this economy, deflation is most connected with the stock market and with housing prices — both of which are falling. (Consumer prices haven’t quite reached a state of deflation, so it’s not very helpful to household budgets.)

One of the biggest worries right now is that the economy will enter a deflation spiral. This is a great fear on the stock market, as there is a pullback in investment as  stock values (especially in the financial sector) fall. If you have a retirement account, or if you have stock investments that act as passive income, this sort of deflation is going to affect you.

Another concern is the continued fall in home values. As less equity is available in homes to provide support for spending, less spending happens. And this can create deteriorating economic conditions. Deflation also brings liquidity problems. Money does not flow as easily, and banks are not willing to lend to each other — or to you.

Inflation: the solution to deflation

As a result of deflation fears, the Federal Reserve authorized central banks around the world to release dollars into their economies (the Bank of Japan, for example, is now offering loans denominated in U.S. dollars) in order to increase liquidity. The idea is that by releasing more cash into the market, inflation will result in order to battle the deflation.

Don’t ask where the money for all this liquidity injection comes from, though. Because, basically, it comes from the promise of future returns on debts owed to the Federal Reserve. And some of it is, in fact, just being created out of thin air.

image source: Wikimedia Commons

I love me some questions from readers, and I thought this one, in light of my recent adventures in banking, was a great one:

Is overdraft protection worth it?

One of the things I love about personal finances is that they’re, well, so personal. Really, it depends on your habits. First, though, a little background on overdraft protection.

What is overdraft protection?

Overdraft protection is a loan. It is a line of credit that you are allowed (usually between $1,000 and $10,000, depending on what you are approved for) to use when your account goes into the red. The idea is to help you avoid the hefty fees that come, per transaction, when you overrun your account.

There are, however, fees associated with overdraft protection as well:

• Interest charges (usually in the neighborhood of 13% to 18% APR).
• Annual fee (around $25).
• “Advance” fee (somewhere between $5 and $7 per transaction, if you don’t move the money from your credit line yourself and the bank has to do it for you after you go negative).

Is overdraft protection worth it?

Now we answer the question. If you occasionally go into the red due to cash flow realities, carelessness or for some other reason, overdraft protection can be worth it — especially if you know the money will be replaced almost immediately. Fees on overdrawing your account can range from $34 to $45 per transaction (my bank charges $38), putting you ever deeper in the hole. Each $4 coffee that you buy results in a hefty fee once you go negative.

Even at the relatively high interest rate, overdraft protection can be worth it, since, as a revolving line of credit, the interest is only charged while you are negative. Just one transaction that puts you negative could make overdraft protection worth it. If you feel that it will ease your cash flow, it is worth considering. But remember: Overdraft protection is a loan.

If, however, you are very scrupulous about your account, and if you stay out of the red all the time, with adequate padding, there is no reason to get overdraft protection. It’s just so much extra cost.

image credit: sxc.hu

As the new school year approaches, many people turn their thoughts toward school costs. And this includes college costs.

Here is a question I received from a reader about college costs:

My oldest daughter will be starting college in three years. What can we do now to prepare for saving money on college costs?

First of all, kudos for thinking ahead. Like many other life expenses, college costs are something that you need to plan and prepare for. Here are three things you can do to prepare for saving money on college costs:

• Research scholarships, and consider steps that can be taken in order to get them.
• Tax advantaged college savings plans like 529 and Coverdell.
• Think about a state university or starting at a community college.
• Consider encouraging your child to get a part-time job.

Encouraging your child to help pay college costs

Especially in these economic times, it is a good idea to have your kids help pay for their own college costs. Not only does it teach them responsibility (in a personal finances capacity), but it can aslo make things a little more affordable for you. Many parents are considering raiding their retirement accounts to help for college, and this — honestly — isn’t a very found decision for your personal finances.

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I got this great question recently from a reader:

I really don’t use my health insurance that much, beyond preventative care visits and a couple of regular prescriptions. What is it that is causing my health insurance premiums to go up?

This is a common question that many people are asking right now. After all, the cost of health care has become expensive — prohibitively so in some cases. Indeed, I just received notice that my health insurance premium is being increased by $70 per month, starting in July.

But why is this happening? Lucky for me (and my questioning readers) there are answers. Several of them. My health insurance company was kind enough to provide a list of reasons why health insurance premiums go up. Let’s have a look:

As you can see, the insurance company highlights rising claims costs. Not just yours, but people in your “group.” I have individual insurance through a group plan. This means that if costs go up for most of those in my group, so do my costs. This is similar to employer health plans. If a few people in your company have a lot of claims, your insurance premium goes up as well. (As one of my friends says, “Who says we don’t already have socialized health care?”)

Of course, the kind of coverage you have matters as well. I have maternity coverage on my health insurance plan, which means that the base premium is a little higher. But it kind of annoying that my health status doesn’t qualify me for a lower premium. After all, I take preventative measures and live a relatively healthy lifestyle.

Wouldn’t it be nice if health insurance premiums truly factored healthy lifestyle into account? Maybe premiums could be incentivized so that you get a lower premium if your blood pressure is lower, or if you exercise regularly, or if you keep your cholesterol under control.

Age matters as well to health insurance premiums. As you age, regardless of how healthy you remain, premiums go up. After all, something is more likely to happen to you when you get older. In 2009, I find from this handy guide, I can expect two premium increases, one at the regular annual adjustment (the insurance rep assured me that, technically, my premium could go down — of course she did confide to me, in a lowered voice, that it was highly unlikely) and one when I turn 30. Happy Birthday to me, in December of 2009.

The insurance company was kind enough to offer some suggestions to help lower health insurance premiums: Switch to a different plan (based on eligibility, of course), or increase the deductible.

What I really want to know, though, is where “executive compensation” is on the list of factors. I mean, there are insurance company CEOs that make in excess of $150 million per year. And don’t forget that there are other corporate officers that enjoy large salaries and generous bonuses. Don’t tell me that supporting executive perks don’t figure into the cost of health insurance premiums. We are in an economic slowdown. Why should CEO compensation go up again (which it continues to do, in general, for most CEOs across a variety of industries). We’re to tighten our belts, but CEOs are protected from inflation by their compensation?

It’s true that this election should have some major impact on health care in this country. John McCain and Barack Obama have two very different solutions to health care in this country. (And neither of them — even Obama’s — is completely universal health care.) If health insurance premiums continue to rise, soon there will be very few people who can afford health care at all.

image credits: my scanned letter from my health insurance company

Today I am pleased to answer a reader question about investing. Here it is:

I’ve heard a lot lately about the advisability of investing in index funds. What is an index fund?

If you’ve been reading advice about investing lately, you might have the same question. After all, many financial planning experts and investing analysts recommend index funds for long-term investing, as well as a good choice when it comes to riding out a down stock market.

An index fund is a mutual fund that follows a specific index. The S&P 500 Index is one of the more popular for this purpose. You basically invest in every company listed on an index. Other stock indexes that have funds include DJ Wilshire 5000 (the whole stock market), Russell 2000 (which consists of small companies) and the MSCI EAFE (European and Asian stocks).

These are considered low-maintenance  ways to invest. Index funds usually perform well, and often beat managed funds. Look for a low-cost index fund. Realize that while the returns won’t be anything really sexy, they will usually provide stable, reasonable returns that beat inflation.

If you want to ask a question, email the Piggy Bank.

Disclaimer: I am not an investment professional. Nothing in this piece or on this Web site should be construed as investment advice. Before making investment decisions, do your own research and/or consult with an investment professional. 

Here at Yielding Wealth, there has been many posts about the tax rebate, and the economy and a possible recession. And, of course, I’ve got many questions along these lines:

There is a lot of debate about whether we are in a recession, and how we can prevent a recession. I want to know: What IS a recession?

This is an excellent question! Many people are wondering this.

The definition of a recession is basically two consecutive quarters of negative GDP growth.

Of course, there is debate over that simple definition as well.

At the National Bureau of Economic Research, a committee defines a recession as the period that business activity starts to fall after reaching its peak. The recession lasts until business activity bottoms out and begins to rise again.

Either way, though, it is clear that you don’t know that you’re in a recession until you can go back and look over the data. However, some economists think we’re in the midst of a recession right now, and that when we look back, the data will show this as a period of declining GDP.

No matter whether we’re in an economic slowdown or a recession, though, it is a good idea to apply sensible personal finance practices to your situation, that way — whether economic slowdown or recession — you are prepared for the future.

Jennifer Hoffman over at My Organized Biz is once again prodding me. This time with a question about the 401(k). When it comes to retirement plans, even in times of economic downturn, the main advice it “don’t panic.”

Many people, in times like this, violate the main rule of investing: “buy low, sell high.” Instead, they freak out and sell low. A measured and calm approach to your 401(k) — and other retirement plans — is what is needed.

First, look at your allocation and compare it to your goals. You may need to do some shifting around, but in general if you have some good value investments, coupled with a few (carefully chosen) growth investments, you should be okay. If you are diversified in your investments you should be okay.

Next, consult with a licensed (fee-based) financial planning expert about your goals and your allocations.

Remember: over time the stock market tends to gain. If you have chosen careful investments, you should be able to ride out the downcycle. Just don’t expect to be making great gains in the next few months — or even years.

Have a personal finance question? Email the Piggy Bank.

Disclaimer: I am not an investment professional. Nothing in this piece or on this Web site should be construed as investment advice. Before making investment decisions, do your own research and/or consult with an investment professional.

Jean, over at Small Business Boomers and of The Thriving Writer fame, submitted this question for Ask the Piggy Bank:

I’m looking at buying an annuity and I’m wondering what the difference is between a variable annuity and a fixed one.

This is an excellent question. Annuities are used as retirement income. Basically, they are savings investments that offer an annual rate of return.  They are tax-deferred and pay a death benefit should you die before collecting. Like other retirement investment accounts, you can’t access them before age 59 1/2 without penalty.

Fixed annuity

When you add a fixed annuity to your retirement savings portfolio, you get a guaranteed rate of return. At the beginning of each period, you are told the rate of return, and it remains the same for that period (the period depends on the annuity).  The rate of return is generally fairly low, since it is guaranteed. But it is a safer investment and can be a stable and secure way to build tax-deferred retirement savings.

Variable annuity

A variable annuity offers more flexibility. With the fixed annuity, you don’t have as much control over where the investments in the annuity are directed. A variable annuity offers that control. As a result, the return you get changes regularly. The returns can be higher than those in a fixed annuity, but you also have greater risk of loss.

Remember that annuities come with surrender charges and costs in terms of fees. Check to see how much of your investment goes to administrative fees and other charges before making your choice.

Do you have a personal finance question? Email the Piggy Bank.