Before long, Sylvia was in well over her head. “I was up to a balance of nearly $7,000, and paying interest rates as high as 39.99 percent on seven different cards,” she says. “I realized that I was going to have a very hard time ever paying that off and I became very depressed.”

In today’s economy, Sylvia’s story is far from unusual. Americans hold an estimated 610 million credit cards, and the average household with credit card debt carries a balance of nearly $16,000.

With so many people owing so much, a large debt settlement industry has emerged. By way of unsolicited phone calls and advertisements on radio and television—usually late at night when the debt-ridden presumably are sleepless—these companies make promises of fast, painless relief. “We’ll cut your bills in half!” the ads promise. But, as the old adage states, if something sounds too good to be true, it usually is. According to a recent investigation by the Government Accountability Office (GAO), the debt relief industry is rife with fraudulent and deceptive practices that often leave people only more in debt, sometimes facing multiple lawsuits and bankruptcy.

Here’s what’s behind those promises of miraculous debt reduction. First, the firms tell you to stop paying your bills. After your creditors haven’t been paid for several months, the strategy is for the debt settlement attorneys to go to your creditors and offer them a lump sum payment for far less than the amount owed. It actually can work. The catch is that you’re stuck paying fees to the debt settlement company that may be close to—or even exceed—the amount you’ve saved. Plus your credit rating is shattered. In the worst case scenario, you might pay thousands to the debt relief company and still fail to reduce your debt in the slightest. These companies’ actions are “appalling beyond words,” said Senator John D. Rockefeller (D-WV), who ordered the GAO investigation. “These debt settlement companies are kicking people when they are down.”

There is a legitimate alternative to all this. It’s called “debt consolidation.” Such programs are usually managed by nonprofits following strict ethical guidelines that help you group your debts together into one payment (often using your home as collateral) so that your interest rates can be lowered.

In part due to the GAO investigation, new federal laws went into effect in October of 2010 that make it more difficult for unscrupulous debt relief firms to continue doing business as usual. But industry insiders warn that the new laws will not protect consumers from all fraud and deception. If you are in debt and can’t find your way out, consider the following tips to help you distinguish good help from bad.

1. Check under the hood. Look for a nonprofit credit counseling agency—not a for-profit “debt settlement” company. The nonprofit should belong to either the National Foundation for Credit Counseling (NFCC) or the Association of Independent Consumer Credit Counseling Agencies (AICCCA) or both.

These organizations set ethical standards that all member agencies must follow.

2. Beware extravagant claims. Legitimate companies aren’t going to cut your debt in half—or anything close.

3. Refuse up-front costs. Charging fees in advance is typical among the firms investigated by the GAO. Some of these companies demanded hundreds or even thousands of dollars on day one. A legitimate nonprofit agency will charge you no more than $50 a month, often less, and only after they’ve worked with you to lower your monthly credit payments by at least that amount, says Gail Cunningham, spokesperson for the NFCC.

4. Do a background check. Ask the Better Business Bureau and your state Attorney General’s Office if complaints have been lodged against any credit counseling enterprise you approach.

Sylvia Mitchell finally landed a fulltime position with the Transportation Security Administration. At the same time, she sought help from a nonprofit agency called InCharge Debt Solutions (a member of both the NFCC and AICCCA). With its help, she was able to consolidate her loans, lower her payments, get control over her budget, and, over two years, reduce her credit-card debt to zero. “I’ve learned my lesson,” Sylvia says. “No more credit. From now on, it’s just cash and carry for me!”

National Foundation for Credit Counseling (NFCC). In addition to the main website, you might want to explore www.debtadvice.org, which offers a wealth of information on budgeting and the smart use of credit. The MyMoneyCheckUp tool will help you assess your debt, and to decide if you need help digging out.
Contact: 800-388-2227. www.nfcc.org

Association of Independent Consumer Credit Counseling Agencies (AICCCA). The AICCCA represents the common interests of member agencies to ensure that all who seek help with their debt problems receive the highest quality of assistance.
Contact: 866-703-8787. www.aiccca.org

Council of Better Business Bureaus. Check with the Better Business Bureau (BBB) and with your state Attorney General’s Office (below) to see if any complaints have been lodged against any credit counseling enterprise you approach.
Contact: 703-276.0100. www.bbb.org

National Association of Attorneys General. Visit the website (below) and click on the colorful map of the United States to find your home state’s office of the Attorney General.)
Contact: www.naag.org

That worry helps explain the popularity of annuities, financial products designed to generate a steady cash flow as long as you live. But today’s annuities are very different from yesterday’s pensions, says Christopher Jones, CFP, principal of Las Vegas-based Sparrow Wealth Management: “They certainly are not for everyone, and choosing the right one is crucial.”

You buy an annuity by forking over a lump sum, and, in return, the annuity company agrees to pay you a set amount of cash each month for the rest of your life. Why annuities? Bonds generate steady dividends too, but you’ll get more monthly cash from the annuity. That’s because of something called the “mortality premium,” which is a polite way of saying that annuity providers will pay you more today because when you die they, not your heirs, will grab your principal. The mortality premium gets larger for every candle on your birthday cake. The very best candidates for an annuity are older (65+) and have expectations of living a good long time.

You are probably a good candidate for an annuity if…

You’re not certain you have enough money coming from Social Security and your savings to cover your basic expenses in retirement. Say you’ve crunched the numbers (see “What’s Your Retirement Number”) and have calculated that you’ll need to tap $1,000 every month from personal savings, but that’s really more than your nest egg can handle. Buying an annuity that pays out $1,000 a month will allow you to sleep at night.

You are probably a bad candidate for an annuity if…

You have a good-sized nest egg, are in little danger of running out of money, and can stomach a bit of market risk. “The return you’ll get on a diversified portfolio will very likely be much greater than what you’ll get on an annuity,” says Jones. In addition, your heirs—not the annuity company—will get your money when you pass away.

The standard annuity is a fixed-income annuity. To receive a guaranteed $1,000 a month, a fixed annuity today would cost a 65-year-old man roughly $165,000 (about $175,000 for a woman because women usually live longer). You may choose to purchase add-ons such as a “joint-and-survivor” benefit, which allows your spouse to continue collecting if you die in exchange for reduced cash flow while you’re alive.

The other kind of annuity is called a variable annuity. Unlike the fixed annuity, this option ties your cash payments to underlying investments. The payout fluctuates, but you still get security. However, Jones warns that variable annuities, often pushed by aggressive salespeople, can be incredibly complex and expensive, and often don’t deliver as they promise.

Ready to start shopping? Kerry Pechter, publisher of the online newsletter Retirement Income Journal and author of Annuities for Dummies, offers the following tips and caveats:

• Buy only from a strong company. You may be around for several more decades; you want a company that will be around, too. Choose only companies with the very highest credit ratings. Ratings are listed on the websites of the providers.

• Compare offers. Prices change frequently, and during any given month the best deal might shift from one carrier to another. You can compare prices easily online. The following sites will give you competitive quotes from top-rated companies: Fidelity.com, ImmediateAnnuities.com, and IncomeSolutions.com (that last one is available only to customers of Vanguard and fee-only financial planners).

• If you are concerned about inflation (and you should be), don’t put all of your money into an annuity. Leave enough aside to invest in stocks or buy an annuity with inflation protection (which costs a bit more but adjusts annually to reflect cost-of-living increases).

• Because annuities pay you based on current interest rates, and interest rates are now very low, you might want to “ladder” your annuities by putting some money into an annuity today and buying another every year for several years.

• If you feel a bit lost, you might think about getting an unbiased expert to help. Consider a fee-only financial planner; find one at napfa.org.

Even though Huggins was a victim of ID theft, he received no sympathy from banks or the collection agencies. Under the Consumer Credit Protection Act, an individual cannot be held liable for charges incurred on a credit card for which the individual did not apply and did not receive. Therefore, the banks would ultimately be forced to absorb the bad debt, but, in the meantime, that did not stop collection agencies from trying to collect the money from Huggins.

Huggins spent countless hours writing multiple letters, making and documenting phone calls, leaving and returning messages, sending certified mail, and doing anything he could to right a wrong he never committed.

For his troubles, Huggins sued the banks for negligent enablement of imposter fraud, alleging they were negligent for issuing the credit cards without investigation, verification, or corroboration of the imposter. Further, he claimed the banks were negligent in attempting to collect the debt from Huggins, an innocent victim of a crime made possible by the banks’ lack of due diligence.

The banks—also victims of the fraud—asked the court to dismiss the case because Huggins was not their customer and, therefore, they had no legal duty to protect him. Huggins disagreed, arguing that banks have a duty to protect potential victims of identity theft from imposter fraud.

To legally establish a claim for negligence, a plaintiff must prove there is a legal duty of care owed by the defendant to the plaintiff and that there was a breach of that duty by negligent act or omission. In a negligence action, the court must determine, as a matter of law, whether the defendant owed a duty of care to the plaintiff. If there is no duty, there should be no action.

You be the judge.

DECISION:

“We are greatly concerned about the rampant growth of identity theft and financial fraud in this country. Moreover, we are certain that some identity theft could be prevented if credit card issuers carefully scrutinized credit card applications.”

Having said that, the court ruled in favor of the banks, citing that negligence liability does not attach unless the parties have a relationship recognized by law and “South Carolina does not recognize the tort of negligent enablement of imposter fraud.”

Adding an editorial note, the court also pointed out “that various state and national legislation provides at least some remedy for victims of credit card fraud…. While these regulations may not fully compensate victims of identity theft for all of their injury, we conclude the legislative arena is better equipped to assess and address the impact of credit card fraud on victims and financial institutions alike.”

If he can save enough by the time he’s 60, Stoloff can see himself quitting his day job at Chrysler. But will he be able to save enough? And just how much would “enough” be? Stoloff, despite his mechanical engineering skills, doesn’t know. “I should, but I haven’t really run the numbers,” he admits.

Stoloff is both unusual and usual—unusual in that few Americans have been “saving, saving, saving,” but usual in his admission that he has yet to run the retirement numbers. According to a recent survey done by the Employee Benefit Research Institute (EBRI), only about four in 10 workers have ever actually tried to calculate how much money they will need to have saved by the time they retire.

Why is that? For some, no doubt, retirement seems simply too far away—so why even bother thinking about it? For others, “They are probably too scared to do the math,” says Jim Otar, CFP, a financial advisor based in Ontario.

You’ve heard that ignorance is bliss, but you may not wind up so blissful if you get to the age at which you wish to retire and suddenly realize that the bills aren’t going to pay themselves. So please consider rolling up your sleeves and joining us for just a few moments of quick and simple arithmetic.

This exercise boils down to subtracting your estimated expenses from your estimated income. The math is easy. Doing the estimating is the tricky part.

No one can read the future, but to give yourself a clue, look at how much you’re living on today and figure you’ll probably be spending a bit less. After all, you’ll likely be putting fewer dollars into the gas tank, having fewer lunches out, your kids may have finished college and left the nest, and your house may be paid for. Your tax hit should also be less—partly because your income should be lower and partly because investment and pension income is typically taxed less heavily than earned income. Also, you’re no longer saving for retirement!

On the other hand, some costs may go up; you might find yourself spending more for travel and recreation, and—if health problems crop up—more on medical costs not covered by Medicare.

For a ballpark estimate, most people find that they need somewhere between 70 and 90 percent of their pre-retirement annual income. For a more precise number, tally up your costs below.

YOUR EXPENSES
My Estimated Monthly Costs at Retirement for:
_ Food
_ Clothing
_ Housing (rent/mortgage)
_ Utilities
_ Insurance (home, auto, life, medical, long-term care)
_ Transportation (car payment, bus, train)
_ Taxes
_ Gifts
_ Recreation
_ Leisure travel
_ Cable and phone service
_ Household maintenance
_ Debt payoffs (other than mortgage)
_ Miscellaneous
_ Total monthly expenses
_ Total annual expenses (monthly expenses x 12)

YOUR INCOME
Calculating money coming in is usually a lot simpler than estimating expenses. Let’s run those numbers.

My Estimated Monthly Income at Retirement is:
_ My Social Security (If you don’t know your S.S. payout, go here.)
_ Spouse’s Social Security
_ Part-time work
_ Pension or annuity income
_ Rents or other sources
_ Total monthly income
_ Total annual income (monthly income x 12)

Ready to do the math? Subtract your annual expenses from your annual income. The result for most people is a negative number or shortfall. This is the amount you’ll have to contribute from your own savings each year, as shown in the equation below:

INCOME – EXPENSES = SHORTFALL

For instance, if you think you will need $50,000 a year to live comfortably and you expect to receive $20,000 a year from Social Security and other income, you will have to pull $30,000 a year from your nest egg ($50,000 – $20,000 = $30,000).

Multiply your shortfall by 25 to get your minimum target retirement portfolio (assuming you wish to retire in your mid-60s). In the case above, you would multiply $30,000 by 25 and come up with $750,000. Why 25? Because that would allow you to pull 4 percent a year from your savings, and—provided you have a well-balanced portfolio—your savings, studies show, will have good chance of lasting as long as you do—at least 30 years.

CLICK HERE for our quick guide to retirement calculators.

Quick and Easy

Employee Benefit Research Institute

AARP

Not So Quick and Easy (but Very Detailed)

Jim Otar’s Retirement Optimizer (Note: The free trial version includes all the features of the full version, except that you cannot change your current age, which is preset to 55. The full version costs $99.99.)

A Middle Ground

FIREcalc is not as quick as the AARP or ERBI calculators, but it’s also not as detailed or time-consuming as Otar’s calculator.

Fake insurance policies are certainly not new. “Insurance fraud is as old as the Himalayas,” explains James Quiggle, executive director of the Coalition Against Insurance Fraud. “It has been around as long as there has been insurance.” In the early 1900s, for example, a group called “The Phoenix Underwriters of New York City” fooled insurance-shoppers with official-looking paperwork and too-good-to-miss prices. The Phoenix and similar scams collected millions in premiums, while offering little to no actual coverage.

More than a century later, insurance scams are as prevalent as ever. “We followed a group called the American Trade Association (ATA),” says Cheryl Fish-Parcham, director of health policy at the consumer protection group Families USA. “It went by other names — Smart Data Solutions, Serve America Assurance — but it was really just one group of operators doing this huge scam across the country.” Before getting caught, the organization sold misleading policies to tens of thousands of consumers and raked in as much as $100 million by some estimates.

As health policy evolves, so do the scams. “A new breed of swindlers emerged after health care reform passed,” says Quiggle. These swindlers preyed on citizens’ confusion, especially over the fact that the reform bill requires all Americans to eventually buy health insurance. “Crooks knocked on doors with a straight face saying they’re selling Obamacare insurance,” says Quiggle. These con artists insisted  that consumers needed insurance ASAP. And yet, clarifies Quiggle, “There’s no such thing as an Obamacare insurance. Everything they were saying was a lie.”

During economic downturns, “it’s not unusual to see fake health plans pop up, because consumers are vulnerable,” explains Quiggle. Parcham concurs, explaining that new scams will likely always be around the corner. “Many of the people involved with ATA had already been indicted in other insurance scams,” she says. “Some of these are players that have been around a long time inflicting damage on consumers. I’m sure others will rise up and do bad things, so consumers and state insurance departments must remain vigilant.”

Here are some tips to help you avoid being duped by illegitimate insurance companies:

• Anything that uses the word “Obamacare” is almost certainly fraudulent. The official name of the health care reform bill is the Affordable Care Act (ACA).
• Don’t feel pressured to buy insurance immediately, or believe that it is only available through one provider. “The ACA doesn’t require people to buy insurance until 2014,” says Parcham. “When that happens, people can buy it at an exchange. Exchanges are regulated marketplaces where you choose from several licensed insurance companies online.” Visit healthcare.gov to learn more about exchanges, as well as current private and public health coverage options.
• Say “no thanks” to door-to-door salespeople. “Be careful of someone who shows up at your door and tries to make you sign up on the spot,” warns Quiggle. “Very few legitimate door-to-door insurance salesmen are operating today.”
• The old cliche “If it sounds too good to be true, it probably is” is appropriate for health coverage. Remember, a legitimate health insurer can’t stay in business if their rates are unbelievably low.
• Make sure the insurer is licensed by your state. If a company says it’s regulated by the Employee Retirement Income Security Act (ERISA) instead of state law, it is likely completely fraudulent. Visit the National Association of Insurance Regulators to find your state’s insurance department.
• Be wary of “union” or “association” plans representing a trade or hobby in another state (e.g. “The Photographer’s Association of Kansas” offering policies in Ohio). This is often an attempt to bypass regulators. Legitimate union or association plans don’t offer insurance to non-members.
• Do your research. “Check with your state insurance department before you buy,” advises Parcham. “They can usually inform you of complaints against a company. In some cases it may take a while before a state finds a problem, so you should also do a quick online search. Just googling the name of insurance companies can sometimes help you find out whether there’s been a problem.”
• Read the policy closely. “It may have all kinds of exceptions that make it very hard to have routine claims paid,” explains Quiggle. “Marketers will flat lie that you get full-benefit coverage when it is merely a discount card. People have given up legitimate health plans for what looked like a better deal only to find out their ‘insurance card’ left them on the hook for tens of thousands of dollars.”

.

To read the related print article, “The Health Insurance Boondoggle” — complete with tips about disability and long-term care insurance — subscribe to The Post.

Susan Ellis, 78, a retired U.S. Department of State worker residing in Washington, D.C., lives partly on a pension and partly from her savings. Those savings are half in stocks and half in bonds, with the lion’s share of those bonds being Treasuries. While Ellis’ stocks sagged in the recent recession, her Treasuries more than held their own. “Having part of my portfolio in U.S. government bonds provides me with great comfort,” says Ellis. “It helps me to sleep at night.”

Treasuries give many investors similar peace of mind. “When there is fear and turmoil in the markets, people seek safety; Treasuries fulfill that role admirably—and they always have,” says Christopher Philips, a senior analyst with the Investment Strategy Group at Vanguard Investments. Indeed, during this past recession, Treasury bonds were the only place to seek safety, adds Philips. “U.S. stocks were down, so were foreign stocks, real estate, and corporate bonds … every kind of major investment lost value, except for Treasuries.”

According to data from Morningstar, while U.S. stocks fell in value 46 percent between October 2007 and March 2009, long-term Treasuries rose by 25 percent. In the recession prior, between March 2000 and September 2002, U.S. stocks fell by 38 percent, while long-term Treasuries soared 40 percent. This zigzagging pattern of returns between stocks and government bonds has existed for decades, which is why smart investors, wanting to dampen volatility in their portfolios, own Treasuries.

The “catch” with Treasuries—in fact, all bonds, but especially Treasuries—is that they produce modest returns over time. Since 1926, per Morningstar data, stocks have returned 9.8 percent a year, while long-term Treasuries have generated 5.4 percent. If you mixed-and-matched, combining 60 percent stocks with 40 percent Treasuries, the average yearly gain of your portfolio would have been 8.6 percent.

To make Treasuries a part of a balanced portfolio, consider this:

• The first step in constructing a portfolio is to determine what portion you want in stocks and what portion bonds. The higher the return you desire, and the more volatility you can stomach, the more you want in stocks. Important note: Bonds in the past 20 years have done exceptionally well (see chart on page TK), but the relative return on bonds to stocks may revert to long-term norms, says Philips. “Treasuries have done very well in the past 20 years because bonds tend to shine when interest rates fall … but when rates rise, bonds tend to not fare as well.”
• Whatever your allocation to bonds, consider putting roughly 40 percent of that into conventional Treasury bonds, recommends Philips. The rest could be in corporate bonds (which tend to return slightly more than Treasuries), municipal (tax-free) bonds, foreign bonds, or inflation-protected Treasury bonds (discussed below).
• Treasuries, like all bonds, may be purchased with various maturities: short-term, intermediate-term, or long-term. In general, the longer the maturity, the higher the return, but the greater the price swings. Philips recommends that you shoot for the middle—“intermediate-term” bonds that mature in about seven years.
• You can buy individual U.S. Treasuries, free of trading costs, by going to Treasurydirect.gov. Or, you can buy a fund of Treasuries, which allows for instant diversification of maturities and ease of management. Choose a fund with low costs. Options include the SPDR Barclays Capital Intermediate-Term Treasury fund (ticker symbol ITE) or the Vanguard Intermediate-Term Treasury fund (VFITX).
• Add TIPS. Treasury Inflation-Protected Securities (TIPS) are a different breed of Treasury that offers little interest, but is adjusted for inflation twice a year. Consider allocating a part of your bond portfolio above and beyond conventional Treasuries to TIPS, suggests Philips. Like conventional bonds, TIPS can be purchased individually through Treasurydirect.gov or as a fund. Options include the Vanguard Inflation-Protected Securities fund (VIPSX) or the iShares Barclays TIPS fund (TIP).

Whichever way you decide to go to buy Treasuries, once you do, your sleep, like Ellis’, will likely improve, too.

Only the first question is easy. The traditional IRA allows you to sock money away and get an immediate 
tax deduction. But when you eventually withdraw the funds, you pay tax.

The Roth, in contrast, gives you no deduction stepping in, but you pay zero tax when taking the money out. In other words, the traditional IRA offers tax-deferred growth; the Roth offers tax-free growth.

The ability to convert from the traditional to the Roth is nothing new. That’s been allowed since 1998. As of January 1, 2010, however, there is no longer a $100,000 income cap on who can convert to a Roth. Now anyone can. All you have to do is pony up the taxes due. But just because you can convert does not mean that you should.

“For many people the conversion can make enormous sense. For others it can be a disaster,” says Robert Keebler, CPA, MST, a partner in the accounting firm of Baker Tilly Virchow Krause, LLP, in Appleton, Wisconsin.

Which group are you in? Here’s how to tell:

Will your future tax rate go up?

With the federal debt mounting and personal income tax rates lower than they’ve been in decades, taxes overall are likely to rise. But what about your personal tax bracket? That is perhaps the single biggest consideration in deciding whether to convert.

“If you are paying 30 percent in taxes today, or 30 percent tomorrow, you are, in a strict mathematical sense, going to be no better or worse off by converting,” says Keebler. If you expect your taxes to rise in future years, however, you are a good candidate for conversion. If you expect your taxes to fall, which might be the case for a highly paid professional looking to retire soon, the conversion will probably not make sense.

When will you need the IRA funds?

The longer you have before tapping the funds, the more the Roth can grow tax-free and the more the conversion will help secure your nest egg. If you plan to use the funds within the next three to seven years, converting to a Roth probably won’t work to your advantage, says Keebler. If, on the other hand, you plan to not touch the money for decades, or perhaps never touch the money—leaving it to your kids, for example—the Roth conversion may add substantially to family wealth, he says.

Do you have the cash to pay the taxes now?

If you convert, say, $20,000 of your traditional IRA to a Roth this year (you can choose to convert all or part of your traditional IRA), you will likely owe income taxes (both federal and state) on the $20,000. If you are in the 30 percent total tax bracket—assuming the $20,000 doesn’t push you up into a higher tax bracket—you’ll have to cough up an extra $6,000 ($20,000 x 30 percent) by tax time. Or, you can take advantage of a special law currently in effect that allows you to defer recognizing the conversion income until you file your 2011 and 2012 tax forms. “Either way, the conversion will be more advantageous if you have the cash outside of your IRA to pay the tax,” says Scott Jacobsmeyer, CFP, president of Argent Wealth Management in Round Rock, Texas. In addition, he warns, if you pay the tax due out of the IRA and you are not yet 59 1/2, you may be subject to a 10 percent penalty.

Fortunately, you don’t need to figure this all out today. To convert for tax year 2010, you need to make your move by the end of December. And there’s always next year … and the year after that. “In fact,” says Jacobsmeyer, “for many people, partial conversions over a number of years (so you’re not taking too big a tax hit in any one year) might be the best strategy of all.”

A rash of media stories called for abandoning the diversified portfolio, rejecting buy-and-hold investment, or adopting new tactics, such as market timing (jumping in and out of the stock market in the hopes of buying low and selling high) and cherry-picking (banking on one or possibly a handful of investments that you think will do better than all the others out there). Other stories have advocated just keeping your money under the proverbial mattress.

Investors are listening. According to the investment resource Morningstar, $573 billion in cash flowed into low-yielding but secure money-market funds in 2008 when the stock and bond markets (other than Treasury bonds) were suffering the most. As soon as the stock and bond markets started to come back in 2009, so did the investment money.

We’re here to tell you that you might want to think twice before following the pack and abandoning the tried and true—the well-diversified, broad portfolio of stocks and bonds and cash that you pretty much buy and hold—and jumping onto any bandwagon that promises to do better. Here’s why:

1. Cash is costly. Keeping your money in cash (money-market funds, savings accounts) may spare you from market volatility, but in the long run, the return on a diversified portfolio of 60 percent stocks and 40 percent bonds still clobbered cash. According to Morningstar, the respective 30-year returns on the diversified portfolio, after accounting for inflation, were three to four times that of a portfolio held in cash.

2. Markets are unpredictable in the short run. If you’re thinking that you’re going to keep your money in cash and pop into the markets at just the right time, think again. Pro investors often can’t even time the markets, says Cathy Pareto, MBA, CFP, president of Cathy Pareto & Associates, a wealth management firm based in Coral Gables, Florida. “Studies show that investors who buy and hold a diversified portfolio, rather than try to rush in and out of investments, tend to do much better.”

3. Specific winners and losers are unpredictable, too. If, instead of diversifying your portfolio, you try to zero in on individual securities or small segments of the market, you may be adding to your risk, but not your return. “People are often overconfident in thinking they can pick one stock or perhaps one industry that is going to do well,” says Don Bennyhoff, CFA, a senior investment analyst at Vanguard Investments. “Professional investors often do a very poor job when they attempt such picks—the average investor won’t even do that well.”

4. Costs are bigger than you think. When you buy and sell (whether popping in and out of the market, or gambling on individual stocks or market sectors) there are substantial costs involved, says Bennyhoff. The “spread” (the middleman’s cut) on stocks can be as high as several percentage points. There is often a commission or markup to pay the broker on any trade of a stock or bond, and fees on fund swaps are not uncommon. You may also pay higher taxes on a shifting portfolio than on a buy-and-hold one.

5. Look at the bottom line. The downturn of 2008–2009 was unusual in the manner in which so many investments, and entire classes of investments, turned sour at the same time. Still, diversification paid off, assures Bennyhoff. Bonds overall didn’t do quite so bad; some bonds, namely Treasuries, did very well. Certain segments of the stock market even shot off like rockets in the second half of 2009. Overall, if you had a highly diversified portfolio of 40 percent bonds, 30 percent U.S. stock, 20 percent foreign stock, and 10 percent cash, your portfolio on September 30, 2009, would have earned you 4.25 percent annually, or 51.63 percent cumulatively, over the prior decade. “Despite what you may have read, diversification and patience hasn’t entirely let us down,” says Bennyhoff.

Russell Wild, MBA, is a NAPFA-registered financial advisor who has written nearly two dozen books, including Index Investing for Dummies and Bond Investing for Dummies.

These are the everyday money questions consumers ask. Answers come in the form of economic indicators—those seemingly daily reports describing the American economy and predicting how it will fare in the future.

Indicators include the unemployment rate, the consumer price index, and home sales. They even include the stock market reports and the constant handwringing about what the Federal Reserve System decides to do—or not do—with interest rates.

But there are so many indicators, and the media reports the latest ones as they’re released, making them all seem equally important when they’re not. In fact, indicators you hear reported regularly aren’t necessarily the best ones to pay attention to. Here are a few of the indicators you most commonly hear about

on the news, with suggestions on what’s worth following.

Consumer Price Index (CPI)

Measures: Inflation

Released by: U.S. Department of Labor, midmonth.

What could be more relevant than the CPI? It measures inflation—the rising prices or falling value of the dollar from the perspective of the average consumer paying for everyday goods and services. The CPI strives to represent price movements in a typical “market basket” of goods and services, from orange juice to airline tickets. But the CPI applies to all of us collectively, not individually. That’s because all households buy different stuff, of course.

If gasoline prices are down but prescription drug prices are up, that may be good for a young, healthy guy with a long work commute, but bad for his grandmother, who takes 11 prescriptions a day and only drives to church on Sundays. Her inflation rate is much higher than the CPI rate announced by the government.

Another problem is that food and energy prices are volatile and can skew a monthly reading of the CPI. So, economists talk about the “core” rate of inflation: the CPI minus food and energy prices. But that number is divorced from a consumer’s reality—has there been a recent month when you didn’t have to pay for food or energy?

A final drawback: After weeks of paying higher prices for gas at the pump or milk in the market, do you really need an indicator to come out a month later to tell you those prices rose?

But for all its problems, CPI is a decent indicator for the general direction of consumer prices. And you can get CPI estimates for various regions of the country and for individual spending categories at bls.gov/CPI.

What to watch: A more predictive indicator of inflation, however, is the monthly producer price index (PPI) that measures prices factories are paying to make stuff. For example, if producers are paying more now to make their goods, they will pass along those costs, and the consumer will pay more at retail. Find the current PPI at bls.gov/bls/newsrels.htm.

Unemployment Rate

Measures: Joblessness

Released by: U.S. Department of Labor on the first Friday of every month.

“This is the big Kahuna of economic data,” says R. Mark Rogers, a senior economist with economic-data firm Econoday and author of The Complete Idiot’s Guide to Economic Indicators. “The employment situation report is probably the most watched economic report in the world.”

And for consumers specifically, employment is far and away the most important indicator of economic well-being. An old economist joke is about how the average Joe defines recession: “My neighbor lost his job.” The definition of depression? “I lost mine.”

Granted, many Americans receive a majority—or all—of their income from a job. But the unemployment rate might not be the best indicator to follow. For one, it’s a lagging indicator, which means it tells you nothing about the current health of the economy or its future. Hiring and firing workers is a big deal. So employers are slow to lay off workers as recession approaches and slow to hire them back as the economy recovers. Hiring may not return for months or even years after a battered economy has healed.

There’s a lot baked into the single number called the unemployment rate. Instead of being a direct count of unemployed people, for instance, it uses a survey based on a sample of 60,000 households—“Hi, I’m from the government. You got a job or not?”

But being jobless isn’t enough. The unemployment rate doesn’t include a jobless person unless he or she is actively looking for work. During tough times, the unemployment rate would be much higher if it included hapless job hunters who temporarily gave up a job search because they’re discouraged.

What to watch: A better indicator is the monthly jobs report, also known as the nonfarm payroll employment. It, too, is based on a survey, although a more comprehensive one—of employers, not individuals. Look for whether the total number of jobs is going up or down. This is a closer reflection of the current job market. View the latest report at bls.gov/bls/newsrels.htm.

Perhaps better yet is a weekly employment indicator that looks ahead. It’s called initial unemployment insurance claims, often reported as “first-time jobless claims.” This is an actual count—not based on a survey or otherwise contrived—of everybody who for the first time applied for an unemployment check that week. Loosely, it’s a measure of people who had a job last week but don’t now. See dol.gov/opa/media/press/eta/ui/current.htm.

Existing Home Sales

Measures: Sales activity in the used-home market

Released by: National Association of Realtors around the 25th of the month.

Home sales and prices are always important indicators for consumers.

The value of your home is important for more than its potential sale value.

It could affect whether you can stop paying private mortgage insurance and how much you can borrow using a home-equity loan or line of credit.

Problem is, like weather, all real estate is local. It would be silly to say, “It’s partly cloudy with a chance of showers in the United States today.”

Just so, a national home-sales number might not say much about the value of your house or sales activity in your neighborhood. Fortunately, at realtor.org, you can get house prices for metropolitan regions.

What to watch: Keep an eye on monthly housing starts. Officially called new residential construction, it’s released midmonth jointly by the U.S. Census Bureau and the U.S. Department of Housing and Urban Development. Housing starts is a count of residences newly under construction. The idea is that demand is strong if builders are putting up new homes. When demand is high, prices rise for both existing and new homes.

“If you want to know where the economy is going, housing starts is much better than home sales. It’s a good leading indicator about what’s going on,” said John Silvia, chief economist for Wells Fargo.

Slightly more ahead of the curve is monthly building permits, also tracked by the U.S. Census Bureau. Permits are issued when a builder first gets permission from a municipality to start digging foundations.

Other good price data—and some would argue superior data—on housing come from the Case-Shiller Home Price Index and the Federal Housing Finance Agency’s House Price Index. Both measure prices differently than the Realtors group and offer prices in local regions. For the newest releases, visit macromarkets.com/csi_housing/sp_caseshiller.asp (index from S&P/Case-Shiller) and fhfa.gov (index from the Federal Housing Finance Agency).

Following the Fed, the Market, and More

Other economic indicators may not always have an alternative option, and they’re not always easy to interpret either, but they’re worth understanding:

Federal Reserve Bank Interest Rate Decisions: The Federal Open Market Committee (FOMC) controls short-term interest rates by setting obscure banking rates, which they do eight times per year. But changes in those rates affect consumer saving and borrowing. For example, Fed moves can influence interest rates on credit cards, bank CDs, and auto loans. However, those changes have little effect on longer-term rates, such as for 30-year home mortgages.

FOMC rate decisions are important, but in recent times, target rates have been essentially zero. So, short-term rates haven’t varied much.

The Stock Market: The market is one of the most forward-looking indicators, as traders try to guess how companies will perform. They buy shares based on whether they think the price will rise or fall. But whether you follow the Dow Jones industrial average, the S&P 500, or some other measure, there’s a whole lot of speculation and human emotion built into share prices. Indexes can fluctuate wildly day to day, which is why, as an economic indicator, it may be better to look only at longer-term stock market trends. Watching those indexes daily could drive you mad, so don’t bother unless you’re a professional broker—or a seriously committed amateur.

Gross Domestic Product (GDP): On the one hand, the GDP is very important because it’s an overall snapshot of the United States economy—it’s the total output of the nation, including consumer spending, business investment, government spending, and imports and exports.

The biggest problem with GDP is it comes out just quarterly, and the first number reported is often significantly revised later on, which might change its meaning. It’s like a newspaper that prints an article with an error and then later prints a correction in some obscure part of the paper where nobody sees it. Most people will go on believing that what they originally read was correct. Terry Connelly, dean of the Ageno School of Business at Golden Gate University in San Francisco, calls the first release of the GDP figure “the biggest fraud on the market” because it lacks so much hard data.

Your Personal Indicators: The most important economic indicators for you won’t appear in the newspaper or the evening news, but you could probably lay your hands on them right now. Look at your paycheck stub. Check your bank statements. When was your last pay raise? How much is your employer deducting for health insurance? Do you have a cash cushion in your savings account? And what’s the amount of debt you carry on your credit card? Ultimately, the big-picture number that matters most to individuals is their net worth, which is all you own minus all you owe. If you liquidated your life, sold all you have, and paid off all your debts, what’s the final dollar value on your name? Is your net worth rising or falling?

Your personal information gives you important data, but so do your own on-the-ground observations as you go about your day. Pay attention to crowds, which in many situations signals prosperity. How much traffic is on the highway? Do you have to wait to be seated at restaurants? Is the jewelry store bustling? What you see may not appear on any report, but it can give you valuable clues about economic health as it applies directly to you and your community.

“Most people simply don’t want to do tax planning, often fearing that it is too complicated. But tax-loss harvesting isn’t very difficult, and some people — especially with most investments beaten down — could truly save a bundle.”

Tax-loss harvesting refers to selling investments you’ve lost money on and asking Uncle Sam to essentially share the pain. Here are five easy steps to make that happen. Be aware, however, that you must act by December 31 to take a deduction for 2009.

Step 1: Peruse your portfolio
Chances are that you lost value on your investments in the past couple of years, but to tax-loss harvest, you must have lost value in a taxable (non tax-deferred) account. IRAs and 401(k) plan losses don’t count. What you’re looking for, in most cases, is either a stock or a stock fund that has fallen in price since you purchased it.

“Since the markets have dropped dramatically, many of your holdings will likely fit the bill,” says Kazan. In investment-speak, the price you paid for a security is known as the “cost basis.” So you are looking for a cost basis greater than today’s market price. If your investment papers do not list cost basis, you’ll need to contact a representative at your brokerage firm or mutual fund.

Step 2: Sell your losers
Selling the securities — after finding the cost basis — is where many people freeze. “It’s often hard for people to sell securities that have lost value. They feel like they are locking in their losses,” says Kazan. That’s true, in a sense, that you would be locking in your losses. But (as you’re about to see in Step 3) losses aren’t always such a bad thing.

Step 3: Seal your nest egg
Simply having sold a loser, you have experienced what’s known in the tax business as a capital loss, and capital losses are generally tax-deductible. So far, so good! Now you have just two main things to be careful of. First, the “wash-rule”: Don’t ask why, but the IRS will disallow any tax deduction if you repurchase the same security within 31 days … so don’t. But being out of the market for a month presents you with a second potential problem: The market will heat up, and you’ll be left out in the cold. The solution is to “seal” your portfolio by buying a similar (but not identical) security. You can then keep your proxy, or, if you prefer, sell it after 31 days and repurchase your “old” security. And here’s where selling your depressed security should not be seen as anything horrible: Your proxy is going to be similarly depressed and poised for a like price pop if the market starts to boil.

Step 4: Garner your profits
Suppose you bought a stock or a stock fund for $10,000 several years ago, and the market value has since swooned
to $6,000. If you sell, you will have a capital loss of $4,000. You can use that $4,000 in one of two ways, explains Will Holt, CPA, with Financial Symmetry, Inc., a financial planning firm in Raleigh, North Carolina. First, you can apply the entire amount to offset any capital gains (gains from selling a security at more than you bought it for).

But even if you have no capital gains this year, you can still deduct up to $3,000 from your regular income when calculating your taxes owed. “That’s a substantial saving for minimal effort,” says Holt. The remaining $1,000 of your capital loss can be written off next year’s (2010) taxes. And if you pay state income taxes, you likely can write off some of those, too. Invest your total savings, and it will grow with compound interest over time. “Your simple tax-loss harvesting, which took you perhaps a few minutes, could wind up adding significantly to your wealth,” says Holt.

Step 5: Fine-tune the process
If you are unfamiliar with tax-loss harvesting, you might want to bring in the assistance of a financial professional, at least until you feel comfortable with the process.

“There aren’t too many potential snags, but there are some,” says Holt. Be careful when buying and selling mutual funds if there’s a load or short-term redemption fee. Be aware of the commissions you pay for trading individual stocks or exchange-traded funds. And finally, know that the IRS rules can be a bit tricky regarding what constitutes a “similar, but not identical,” security. “There’s a bit of a learning curve with tax-loss harvesting, but the potential savings are great enough that it is well worth putting in the effort,” says Holt.

Russel Wild, MBA, is a NAPFA-registered financial adviser who has written nearly two dozen books, including Index Investing for Dummies and Bond Investing for Dummies

According to Sonja Lyubomirsky, Ph.D., professor of psychology at the University of California, Riverside and author of The How of Happiness: A New Approach to Getting the Life You Want, happiness, in the long run, provided you are not living in poverty, really does not depend on how rich you are. Numerous studies, she says, make that point rather conclusively. (Happiness, as we’ll see in a minute, is much more about relationships and attitudes.) But in the short run, things can be very different. We become accustomed to a certain level of material wealth. Should that level adjust either up or down, our mood is likely to swing with it. And that, according to Dr. Lyubomirsky, is why you are feeling blue.

What to do about it? There are several options. You can wait until you naturally adjust to your new level of wealth (whatever that is); wait until the economy starts cranking again and your nest egg makes a welcome comeback; or you can follow these tips to lift your spirits, regardless of which way the economic winds may blow.

Buy experiences.

“Spending your limited money on experiences, things that help us make connections — time with friends, a French class, traveling with family — tends to have a much larger impact on happiness than spending money on mere material possessions, such as dining room furniture or new kitchen cupboards,” says Dr. Lyubomirsky.

Forget about status symbols.

Advertisers spend billions to drive us toward one particular brand or another. But spending your money, especially in hard times such as these, on expensive, trendy products (handbags, perfumes, or mineral water in fancy, odd-shaped bottles) is money down the drain as far as adding to your happiness, says Dr. Lyubomirsky. “These brand allegiances do nothing to enhance your well-being.”

Separate needs from wants.

“Many advertisers count on the fact that we don’t reflect. Becoming mindful — taking time to think about whether or not we really need something — can go a long way toward having a better life,” says Tal Ben-Shahar, Ph.D., author of The Pursuit of Perfect: How to Stop Chasing Perfection and Start Living a Richer, Happier Life. “We are vulnerable to advertising when we’re mindless. That’s when we don’t notice its effects. Even worse, we don’t notice the wonderful (often free) things in our lives; we do not stop to savor.”

Love what you have.

“Happiness is not a function of what we have, but rather a function of what we appreciate. Studies show that people who regularly express and experience genuine gratitude for what they have — family, a meal, work, wealth — are happier, healthier, and more successful in the long run,” says Dr. Ben-Shahar. He suggests that you might want to keep a journal in which you take daily written notes of all that you are most grateful for.

Reset your goals and ambitions.

“Your happiness is not about high versus low expectations, but about right versus wrong expectations,” says Dr. Ben-Shahar. “If we expect additional income or wealth (assuming our basic needs are already met), accolades, or the attainment of certain goals to make us happier, then we have wrong expectations. These things do not contribute to our well-being other than in the form of a temporary high,” he says. “If, however, we expect that spending quality time with those we care about, acting kindly, and expressing gratitude regularly will make us happier, then we have the right expectations, and we are likely to achieve happiness.” And that’s true, he says, regardless of whether the economy is cruising or sputtering.

Russell Wild, MBA, is a NAPFA-registered financial advisor who has written nearly two dozen books on finance, including Index Investing for Dummies.

Few — amateurs and financial professionals alike — anticipated anything like the 57 percent drop in the Standard & Poor’s 500-stock index over the 17 months prior to this March. No one can be sure if the worst is over. But out of this greatest sag in our economy since the Depression, some important lessons can be gleaned.

Here are a few tips from the pros to help you recover — and then some — in the years ahead.

Be True to Yourself
“It’s one thing to say you can stand to lose, say, 25 percent of your portfolio; it’s quite another to actually see it disappear,” says Matthew D. Gelfand, Ph.D., CFA, CFP®, managing director and chief investment officer of Lynx Investment Advisory in Washington, D.C. “Many investors discovered that they weren’t quite as able to handle risk in reality as they were in the abstract.” Gelfand suggests that moving forward, you seriously question how much volatility you can truly stomach. “Put market risk into very concrete terms. If your portfolio today is worth $300,000 and you have two-thirds in stocks and the stock market again tumbles by half (assuming the worst-case scenario), you will be left with $200,000. How exactly will that affect your current lifestyle and your retirement plans? Could you live with that?”

Diversify Your Portfolio Intelligently
As you know from just about any other investment article you’ve ever read, diversification is all-important. But a lot of people who thought they were well-diversified before the recent debacle really weren’t. “It’s still important to diversify within your stock holdings, but as we’ve seen, you should pay much more attention to making sure you divide your portfolio into stocks, bonds, and cash,” says Christine Benz, director of personal finance at Morningstar, a leading provider of independent investment research. Stocks offer the potential for highest return, but also position you for potential loss. Although getting the optimal mix of stocks, bonds, and cash involves many factors, a good rule of thumb, says Benz, is to not invest any money in the stock market that you might need in the next seven to 10 years. “Prior to the recent collapse, most financial professionals were saying five years, but that clearly isn’t long enough,” she says.

Trust in Uncle Sam
Within the bond side of your portfolio, diversification is also key. During the dark days of 2008, when stocks were sinking fast, corporate bonds surprisingly sank, too. U.S. Treasury bonds, in contrast, soared by nearly 14 percent. “Corporate bonds were overestimated to hold up during the financial crisis, and the diversification power of U.S. Treasuries was underestimated,” says Benz. She suggests that a good portion of your bond holdings, at least one-fourth, should be in bonds that hold the full backing of the U.S. government and tend to rally in times of financial worry. Treasury bonds come in two basic flavors — conventional and inflation-adjusted, otherwise known as TIPS. You can buy both kinds directly from the U.S. Department of the Treasury at treasurydirect.gov, or you can purchase them in fund form through a company, such as Vanguard (vanguard.com) or iShares (ishares.com), that offers various Treasury fund options at very low cost.

Don’t Lost Faith
You don’t want to go overboard and invest all of your money in the safest securities such as Treasuries or CDs, warns Frank Armstrong III, CLU, CFP®, AIFA®, founder and principal of Investor Solutions in south Florida and coauthor of Save Your Retirement. In order to recoup whatever you lost in the recent downturn, you’re going to need the growth power of stocks. “The stock market has seen serious slides in the past and has always come back to recover nicely,” says Armstrong, who has more than 35 years experience in the securities and financial services industry. “Stocks, over the long-run, have far outperformed bonds and CDs in the past, and will very likely continue to do so in the future,” he says. In only two months after the stock market’s low on March 9, the Standard & Poor’s 500-stock index soared approximately 35 percent — in the absence of any good economic news. Armstrong sees that as a sign of the stock market’s resilience. He recommends that you invest in stocks through low-cost index mutual funds or exchange-traded funds that track large segments of the market. Consider such fund options from Vanguard, Tiaa-Cref (tiaa-cref.org), or State Street Global Advisors (spdrs.com).

Destroy Your Debt
Perhaps one of the biggest lessons learned from the economic turmoil of late is the peril of debt, says Morningstar’s Benz. “The whole crisis, which started with our financial institutions’ overindulgence in debt, carries a strong lesson for individual households,” she says. “We all need to look at our personal balance sheets and make certain that debt doesn’t drown us.” Start by trimming your credit card use and then perhaps begin to chip away at the principal of your mortgage, suggests Benz. “As you near retirement, one of your goals should be to enter that phase of life with as little debt as possible.”

Negative 44 percent. That’s what one of my investment statements pegged my return for last year.

I tried to cope with the bad news by trotting out phrases I’d shared with clients as a financial representative for 16 years: Stocks will go up and down, but over time outperform all other investments. Even if a return was down for years, the market ultimately rebounded, as dependable as a happy ending in a romance novel.

But my years of levelheaded investment planning failed me when the chips were down-more literally when the blue chip stocks dropped, then dropped some more.

As the negative economic news continued to roll in, I was in near panic. How could my husband and I retire? What about sending our kids to college? Forget about going on vacation.

Seeing our assets deteriorate in the worst economic downturn in decades is both alarming and discouraging.

However, we must not forget that our real treasure is time spent with loved ones and enjoying the priceless gift of good health, which allows us to enjoy life.

No matter what our financial futures hold, we can follow practical tips that I learned while growing up on my parents’ small farm in the Midwest to survive and thrive.

1. You reap what you sow. It’s discouraging when an investment loses money, but you can’t let it derail your investment strategy by sitting out the market. Consistent investing over time is the best way to accumulate a nest egg and allows the advantage of dollar cost averaging. That means when you invest regularly, sometimes high, so you should make more over time. Continue your investment plans unless something in your personal situation changes that warrants a different strategy. For example, if you lose your job or are within 10 years of retiring, you may need to adjust your plans.

2. The early bird gets the worm. Much of the success of an investment strategy is the added value of compounding interest and reinvested dividends. Waiting to see what happens next with the economy is not a good idea. There is never a better time to invest than right now, so go full stream ahead and consider investing more. Your individual efforts at saving are more important than outside events.

3. A bird in the hand is worth two in the bush. Although investing can be exciting in some ways, be careful about investments that make claims that are “too good to be true.” Many investors have lost money by being tempted by claims of investments that “beat the market.” Weight the risk versus the reward in analyzing an investment. Even something as steady as U.S. Savings Bonds can be a good option.

4. Don’t count your chickens before they hatch. Many stocks made significant returns in the years prior to the market’s decline. Investors thought of those increases as permanent money in their pockets. However, the return on an investment can and will go up and down, until the money is withdrawn. Keep in mind that shopping on sale or buying low works in the stock market as well as at grocery and department stores. When your investment return is down, the stock market offerings are essentially “on sale.” Conversely, when you’ve seen a nice increase, maybe it’s time to move some into less volatile investments.

5. Save for a rainy day. Always have some money in liquid accounts, such as savings and money market accounts. Aim to have six to nine months of household expenses set aside. The silver lining to the economic may be that, if your credit is good, you could refinance a mortgage, which can help you accumulate more savings. Also in tough economic times some consumer goods are sold at deep discounts and the interest charged on loans may be lower.

6. Get your ducks in a row. To make good decisions, keep your financial information together and know where you stand. You won’t be able to take advantage of lowered interest rates if you don’t know your current mortgage rate, how much you owe, or don’t keep important papers handy to prove your income and liabilities.

7. Don’t put all your eggs in one basket. Diversify your investments by owning a mix of stocks and bonds based on your individual needs and your philosophy about investment risks. Get expert advice if you need help. Also, don’t invest all your retirement money so that it is tied in with your job. Think of Enron employees who lost jobs and retirement simultaneously. Take advantage of your employer’s discounted stocks, if available, but convert them into other investments when you can. And consider having some money in a couple carefully chosen places outside of your pension.

8. You can’t make a silk purse out of a sow’s ear. Although an investment prospectus can be challenging to read, learn to find the details about the expenses of an investment. If you can’t find it in print, ask. Numerous studies have found that some investments with the highest initial and ongoing fees are not outperforming the market. Even good investment returns cannot offset excessive fees. Always compare fees among similar investments before deciding where to invest. Consider index mutual funds, which often have lower fees because the stocks are not individually chosen but are preselected based on specified criteria.

9. Don’t let the foxes guard the henhouse. It has been widely reported that the institutions created as watchdogs for the financial industry broke this rule. And some “experts” have stolen their clients’ money. Investors must carefully research their current as well as their potential investments and advisors. If you seek expert advice, meet with more than one person and compare information. By educating yourself and moving cautiously, you may stay clear of fraud. Seek out the best advice available and double-check everything by going to national consumer Web sites, such as helpforinvestors.org or investoreducation .org, and calling your state regulator. Find out what a legitimate investment statement looks like so that you will recognize fake documents.

10. Separate the wheat from the chaff. When bombarded with economic news and investment information, work through a mental checklist. Ask yourself if the news is something that affects you personally or could in the future. Decide if there is action you should take now. If appropriate, do more research or consult an expert on the topic, such as a financial advisor, banker, or accountant.

Whether the market is up or down, you can have a solid investment plan if you remember to think like a farmer. No matter if the previous season brought good times or bad, drought or flood, farmers return to their fields as each spring arrives. They optimistically sow the new season’s crop with resolve and hope for the future.

Intelligent Investing in a Bear Market

By Elliot Raphaelson

The present bear market that started in the last quarter of 2007 has been cruel to investors of all sorts, whether they are in stocks or bonds. Most have seen their investments drop by 40 percent or more, and even those with diversified portfolios have been unable to escape the damage. In reaction, many have sold their remaining assets and reinvested the proceeds into very conservative investments such as Treasury bills, money market accounts, money market mutual funds, and short-term certificates of deposit.

Such investments are considered safe from capital loss, yet the interest they provide is small in comparison to past history. Since the Federal Reserve has adopted an “easy money” policy, meaning it has made short-term interest rates low, people who put their money only into these conservative investments will probably be making returns that are less than the rate of inflation.
But there are other investments that can provide a reasonable amount of income without exposing one to undue risk. The following are five safe places to park your cash while you are waiting for the economy to turn around and interest rates to rebound.

1. GNMA Mutual Funds
While most common stocks and bonds were falling dramatically through 2008, the majority of GNMA funds provided investors with consistent monthly earnings, yielding a five percent return on an annual basis. GNMA (or Ginnie Mae) stands for Government National Mortgage Association, a U.S. government-owned corporation within the Department of Housing and Urban Development (HUD). The association provides guarantees on mortgage-backed securities backed by federally insured or guaranteed loans issued by various Federal agencies. Both principal and interest is guaranteed on GNMA funds. Mutual fund companies purchase a pool of these mortgages and offer them to the general public.

GNMA funds are considered an intermediate term investment, maturing on average in three to 10 years. The share prices of GNMA funds fluctuate daily as with all mutual funds, but the amount of fluctuation is minor compared with other types of funds. For example, in 2008 the difference between the high and low price for Vanguard’s GNMA fund was less than 6 percent. Over the past 10 years, the vast majority of GNMA funds had positive results each year with average returns of more than 5 percent.

2. Intermediate-Term Investment Grade Bond Mutual Funds
For the slightly more risk tolerant, intermediate-term investment grade bond mutual funds offer a slightly better rate of return than an investment in GNMA funds. Standard and Poor’s, Moodys, and other rating agencies classify by risk level individual bonds issued by the U.S. Government, government agencies, and corporations. The lowest risk bonds are categorized as AAA. Other high rated bonds receive AA or A ratings. All three are categorized as investment grade bonds. A portfolio of these bonds with an average maturity of approximately five years would be categorized as an intermediate-term investment grade mutual fund. You can go to the Web site of Vanguard or any other leading mutual fund to determine the current yield and the volatility of any fund. You should also look at the prior year’s overall return and volatility. These bond funds pay interest monthly.

3. Intermediate-Term Treasury Mutual Funds
Another option for you to consider is an intermediate-term Treasury mutual fund. The U.S. Treasury issues three types of bond instruments. All are rated AAA. Treasury Bills have maturities of one year or less. They are the safest in terms of capital preservation, but they also pay the smallest amount of interest. When the Federal Reserve maintains an easy money policy, as they do now, the rate of interest paid on Treasury bills is less than the inflation rate. The Treasury also issues Treasury bonds, which have a maturity greater than 10 years and up to 30 years. The interest rate for these bonds will always be greater than that of Treasury Bills, but there is a great deal more risk for the investor. When you purchase a bond with a long maturity, such as a Treasury bond the value of the bond will fluctuate a great deal based on the direction of interest rates. If interest rates increase, and they eventually will, the value of Treasury bonds will fall dramatically because of the long maturity. For this reason, I do not recommend investments in Treasury bonds or Treasury bond mutual funds.

The third type of maturity is Treasury notes. Their maturity is more than one year, up to 10 years. Mutual funds which hold these securities are called intermediate-term Treasury mutual funds. These are stable funds which have had good long-term performance. Interest is paid monthly. The return for this investment may be lower than that for GNMA funds if the Federal Reserve continues to follow an easy money policy. Again, you can go to various fund Web sites to determine current yields.

4. TIPS Mutual Funds
Another portfolio option to consider is Treasury Inflation-Protected Bonds (TIPS). These funds are a pool of high quality bonds securities issued primarily by the U.S. Treasury and governmental agencies that are indexed to inflation. With this investment, you receive a nominal amount of interest, but you also receive an additional payment based on the rate of inflation. In periods of high inflation, this is an excellent investment. You receive payments of interest, and the inflation adjustments quarterly. You should purchase these funds in a tax-deferred account. Otherwise, any increase in value because of inflation is immediately taxable as a capital gain.

5. Intermediate-Term Municipal Bond Funds
Municipal bonds are issued by state and local governments. Most have very good ratings. For individuals in high tax brackets (greater than 28 percent) municipal bonds offer a tax advantage because the income received is not taxed at the Federal level. Short-term municipal bond funds generally do not earn a great deal of interest, while long-term municipal bond funds have a significant amount of risk. Intermediate-term municipal bonds, on the other hand, have been stable, offer reasonable interest, and should be considered by individuals in higher tax brackets.

The Following are the yield to maturity for various mutual funds with the Vanguard’s risk ratings. The ratings go from 1 to 5 with 1 as the lowest risk and lowest rate of return. All of the investments mentioned in my article have a risk rating of 2, meaning some risk, but better income. The Securities and Exchange Commission yields are quoted for Vanguard funds, but they would be similar for all the major fund families.

Wendy and Jim Longacre have always been good money managers. Since May, though, they’ve even ratcheted up their efforts. That’s because Wendy joined a personal finance class at church.

“I think since joining the class, I am far more mindful, particularly on getting better deals in making major purchases,” says Wendy, 30, a computer programmer for an international photography company.

The Fairmount, Indiana, couple live on two acres of land, and over the summer they analyzed whether to buy an expensive lawn mower attachment that mulches leaves. With insights gained from Wendy’s class, they weighed cost versus convenience. They decided not only to go ahead but were able to get a better deal because others in the class shared how they saved extra money on purchases.

“The preseason price was at a $150 discount,” Wendy says. “We asked if there were any extra bits of money we could squeeze out of the deal. Based on the wheel choice, we saved another $25.”

The Longacres and their classmates are using an important strategy for increasing how much you save: Associate with people with similar goals.

Belinda Fuchs, C.P.A., president of ownyourmoney.com, based in Boston, offers group-coaching services for that reason—so people can cheer each other on.

“Most people feel very alone about the struggles they are going through with their finances, no matter what their age or income bracket. Look at the 2007 report from the American Psychological Association: 73 percent of Americans name work and money as the greatest factors that affect their stress level,” she explains.

Longacre agrees the camaraderie and ongoing support from friends help sustain her commitment to save.

“It reminds me of the saying about ‘birds of a feather flock together’,” she says. “I think the class is comprised of enough like-minded people who seem to share similar interests and financial goals. Each person brings different ideas on reaching those goals. Some of those ideas I can use, some of them I have to tweak to apply to my own life….”

Studies prove Americans need all the help they can get to improve their savings rates.

The Employee Benefit Research Institute (EBRI) cites a 2004 government study that pegged the savings rate in the U.S. at only 1.4 percent, among the lowest in the developed world. More recent studies say the rate of savings is -1 to 0 percent. To be fair, some studies don’t include money saved in employer retirement accounts. And since the statistics are average savings rates, some people save significantly more.

The overall picture is sobering: In an EBRI annual Retirement Confidence Survey, 55 percent of workers said they believe they are behind schedule with planning and saving for retirement. And while almost 70 percent have begun, many have saved less than $25,000. In addition, 68 percent of today’s workers are skeptical that Social Security will be able to provide them benefits of at least equal to those of current retirees.

Pay Yourself First

A mistake many people make is trying to save money out of whatever is left over after the bills are paid. Unfortunately, people usually spend all the money each month. So experts say the most significant decision you can make to achieve a higher savings rate is to “pay yourself first.”

Jonni McCoy, author of Miserly Moms: Living on One Income in a Two Income Economy, advocates the concept and explains how it works.

“I recommend that people have an automatic withdrawal made from their paycheck each pay period so that they don’t see the money. This forces people to live within the rest that is deposited into the checking account. And most of us are perfectly able to live within what is left. We are just not used to it,” McCoy says.

Fuchs agrees and has a minimum target you should aim to save.

“People need to start by figuring out where their money is in reality being spent. Most people think they know, but when we detail out where they think it is going and where it is actually going, there is invariably quite a disconnect. Once they see this in black and white, then they need to take at least 10 percent off the top….”

Phyllis Vance, a high-school health and physical education teacher, for example, uses payroll deduction to pursue her aggressive savings goal of retiring at age 55.

“I had great role models for saving money because of my parents,” Vance says. “They didn’t buy anything they didn’t have the money for: neither do I. I’ve eaten a lot of peanut butter sandwiches, too.”

Vance loves to travel, funding her trips by working at extra events for the school. “Along with saving money, I have also been able to travel to 48 states and five other countries as well as ride my bike across the United States,” she says. “You can have fun along the way to reaching your goal.”

Sumner Sheets committed himself to a savings plan most people wouldn’t even attempt. As a result, he saved hundreds of thousands of dollars he later used to go on big-game hunts around the world. In fact, in 2005 he and officials from Huntington, Indiana, opened the Sheets Wildlife Museum, where more than 70 animals he bagged on his travels are on display.

“Everybody says to live on 90 percent and save 10 percent,” he says. “I tried to live on 10 percent and save 90 percent. My philosophy is pretty simple about money if you want to reach your goals: You spend what you have to spend and everything else, you don’t spend. It depends on how bad you want to do what you want to do.”

Sheets, 80, and his first wife, now deceased, wanted to travel the world and hunt. So they lived the first 15 years of their marriage in an old farmhouse without an indoor bathroom and drastically controlled vehicle expenses. In 1963 they built a house and paid $33,000 in cash.

“I knew if I had done what a lot of other people did, buy a home and then pay for it, I’d pay for it two or three times over because of the interest,” Sheets says.

These days Sheets still drives a 20-year-old car. Although his big-game hunts are over, he still enjoys fishing and says saving money is a choice worth making.

“You only live this one time, so you only have one shot at everything you want to do. You’re either going to do it or give up on doing it,” he says.

Never Too Late

Another important aspect of saving large sums of money is believing that you can.

“It is never too late to improve your financial situation,” money management coach Fuchs says. “Well into midlife, Ray Kroc created the franchise that would later become the McDonalds Corporation. If you start now to improve your money management practices and remain open to the opportunities, you may still achieve the results you want.

“Ray Kroc said about the year he purchased the McDonalds franchise: ‘I was 52 years old. I had diabetes and incipient arthritis. I had lost my gallbladder and most of my thyroid gland, but I was convinced that the best was ahead of me.’” Obviously it was.

“There are a lot of people who come to me in their 50s, haven’t saved much, and are worried that they’ll never be able to retire comfortably. They have an important choice to make: Either they can continue to feel bad about the choices they made in the past or they can choose to do something different and move forward. Too often their past mistakes hold them back; they’ve lost hope or are afraid to get help,” Fuchs adds.

Fortunately, if someone takes the first step toward saving, they often find many more ways to improve their situation.

The Longacres say their personal finance efforts continue to gain momentum. Wendy’s tracking her grocery store spending more closely, and the couple plans to see a financial advisor, among other goals.

“It’s almost like a hobby,” she says.

Now that’s a hobby to have: A true golden retirement.

• Sweat the Small Stuff: Do the math to see the cumulative cost of small indulgences and then motivate yourself to cut back.

• Deal With the Big Stuff: Comparison-shop for the best mortgage, credit card, and insurance rates, etc.

• Beware of Analysis Paralysis: While researching investment options, start socking money away in a bank or money market account.

• Ignore the Joneses: Only buy what you need and want, not what will impress others.

• Ramp Up Your Knowledge: Join a class, buy a book, and/or get expert advice. For online financial assistance, visit these helpful websites: www.miserlymoms.com, www.choosetosave.org, www.ownyourmoney.com.

• Tame Taxes: Corporate employees may invest in 401(k)s, if your employer offers them, and utilize Flexible Spending Accounts. The self-employed may be able to maximize deductions and/or shift income.

• Seek Expert Advice: Carefully select advisors for areas you need.

• Visualize: Hold a mental picture of the financial life you seek. Cut out pictures of enjoying retirement. It may seem corny, but evidence shows it helps.

• Control Debt: Eliminate as much debt as you can.

• Save Anyway: Even if you have debt, get into the habit of putting some money aside regularly for emergencies.

• Separate Your Savings: Put long-term savings in a separate account from regular savings so it’s hard to get at, then forget about it.

• Believe You Can Do It: Follow these sensible savings steps, and you will believe you can do it—because you are!

An annuity makes sure your cash flow doesn’t kick off before you do. In other words, an annuity provides a guaranteed retirement income for life. That makes it unique compared to other investments, which end when the money in the account is depleted.

However, annuities have always been one of the most complex investment vehicles, even more so in recent years. So if you’re thinking about purchasing an annuity, definitely do your homework thoroughly and enlist the help of a trusted advisor as well.

Only insurance companies can issue annuity contracts because your payout is not just based on how much money is invested and the rate of return, but your estimated lifespan, too.

Right now, annuities are something more people are looking at, says David Stoeffel, vice president of investment products for the Northwestern Mutual Financial Network of Milwaukee. According to its annual report, in 2007 the company received $1.3 billion in new premiums and deposits for annuity contracts, an 11 percent increase over the previous year.

“Annuities are a ‘paycheck for life,’” Stoeffel says. “I think annuities address a need, in an environment where corporate, defined benefit plans are things of the past and the Social Security system is changing and may not be adequate to meet lifestyle needs for most Americans.”

Alvin Schulz retired at age 68 from Dana Corporation’s Indianapolis plant without qualifying for a pension. He faced a choice about what to do with his company-funded Cash Plus account: receive a lump sum of money reduced by income taxes owed, or buy an immediate annuity—a type of annuity funded by a single deposit with the payments to begin immediately—and receive the money spread out over his lifetime with taxes taken out as he received payments.

Schulz and his wife, Mary Ann, chose the immediate annuity, electing a lower monthly payment to make his wife a joint annuitant. Under this arrangement, if one person died, the other would continue receiving an income for life. He calculated they would break even at 10 years. If one of them lived beyond ten years, they would exceed what they put in.

Many of his coworkers also opted for an annuity, while others disagreed, thinking they could make more money by taking lump sums and investing them.

“We thought about putting it in CDs (certificate of deposits),” adds Schulz. “But when we looked at the taxes and the return, the annuity was a better deal, if you lived long enough. A lot of people said, ‘You’re crazy to buy an annuity.’”

Schulz, 74, speculates that if he were in his 20s or 30s, he might have taken the lump sum and invested in the stock market. But having seen the market “skyrocket” and “plunge,” he likes that this relatively small piece of his retirement planning remains stable. Sadly, Mary Ann died unexpectedly last year at age 71 after 53 years of marriage.

Matthew Tuttle, president of Tuttle Wealth Management, LLC in Stamford, Connecticut, however, isn’t a fan of annuities. He thinks there are too many fees associated with them.

In fact, the fees vary widely among companies, so a cost comparison is critical.

If you choose a variable annuity, you can select from a wide variety of accounts that offer numerous investment choices, similar to mutual funds. The fees are based, in part, on what investments are selected. Because the money in an annuity grows tax deferred, you can make changes in the investment choices without incurring taxes. In comparison, with mutual funds, unless they are invested in an individual retirement account making the growth tax deferred, you may pay on capital gains if you change investment choices.

If you want to keep things simple and have an absolutely stable investment, both immediate annuities and deferred annuities include options that offer a fixed return on the money. While rates are lower, you no longer need to worry about the fluctuations in an annuity invested in the market.

However, deferred variable annuities contain a clause that guarantees a death benefit equal to at least what the investor put in, even if the market goes down and the annuity account loses money. Tuttle says the fees for the death benefits and the cost of commissions paid to financial representatives to sell annuities are reasons to steer clear of annuities.

“Very rarely do I put someone into an annuity,” Tuttle says.

Tuttle especially cautions investors about some variable annuity riders that emerged in the past several years. The riders sometimes charge one percent of the total contract to offer living benefits, which guarantee a certain minimum amount of income can be taken out yearly, before you have chosen the retirement income option. How much a person can take out under these riders is based on a complex formula.

Whether you invest in an annuity or another investment vehicle, there are always some fees associated with investing. Mutual funds charge an array of fees, and personal investment advisors are compensated in a variety of different ways.

After considering the pros and cons, Michael Havens and his wife, Suzanne (not their real names), purchased a variable annuity. They elected a rider that provides living benefits. If they meet certain criteria, they can take out a guaranteed minimum amount annually.

The Havenses lost their middle-management jobs while still in their 50s because the plant where they’d worked for decades closed down. With their former employer’s future uncertain, the couple worried whether their pensions were secure. They elected to take their pensions in lump sums and immediately invested a portion in a tax-deferred variable annuity, while the majority of their retirement savings is spread over a variety of investments.

“To me, the whole key is diversification,” Michael Havens says. “You have to hedge your bets everywhere. We wanted something with the lowest risk possible, which could still have that upside potential. The bottom rate is guaranteed. Do you pay for that? Sure. You always pay for security. There are a lot of annuities around that are charging fees that are pretty outrageous.”

Stoeffel advises people considering annuities to look at individual needs. Then, he says, sit down with a knowledgeable advisor to explain the complexities and determine which annuity riders warrant the costs.

“It’s like when you buy a car,” Stoeffel explains. “Do you want a GPS (Global Positioning System)? I don’t want one and don’t want to pay for one. I like to read maps. But my wife wouldn’t have a car without one. She loves her GPS.”

Choosing the income plan is another important decision. You’ll get the highest monthly payment if you select to have the annuity pay you until you die, then stop and pay no one else. But there are other options that may serve you better. Ask for calculations on several income options. Depending on your situation, you may find you’re willing to take a reduction in the amount you receive in order to provide for your loved ones. For example, Northwestern Mutual and other companies offer a “Single Life with Refund” income option. There is also “Single Life with Period Certain,” so if you die before the specified period of time, payments continue to your beneficiary.

State insurance commissioners are on the front lines of regulating advisors who sell annuities. And consumer complaints about annuities, especially from seniors, have increased. Officials became so concerned that the Wisconsin insurance commissioner’s office, for one, put together a committee to address the problems. The National Association of Insurance Commissioners has followed their lead and created a committee to come up with ways to be sure the public, as well as advisors, become educated on annuities. The Wisconsin panel originally addressed issues regarding seniors, but the topic has since been expanded to consumers of all ages.

“We continue to see various problems in the sales of annuities to senior consumers,” says Kimberly Shaul, deputy insurance commissioner. “Sometimes, there were misrepresentations made in the sale. In some cases it appeared the producers selling the products did not clearly understand them.”

In June of 2005 the National Association of Securities Dealers—a self-regulatory organization of the investment industry—issued an investor alert for equity-indexed annuities. It warned to pay close attention when considering that type of annuity.

Checking the financial ratings of the insurance company issuing the contract is also important. An annuity contract may possibly be an investment you own longer than any other. Depending on your age, you may buy a deferred annuity and let the money accumulate for decades. Then you’ll select an income plan, which will last the rest of your life. You don’t want the insurer to get into financial trouble along the way. If the insurance company that issued your annuity contract becomes insolvent, an organization called a state guarantee association may cover part or all of your fixed-rate contract. But the provisions vary by state and the process to get your money can take time. However, the protections don’t usually provide full benefits, and getting what is owed you can be difficult and time-consuming.

Insurance officials say surrender fees for annuities are higher than other investments because they’re meant to be a lifetime investment. However, sometimes the same company will offer several choices in how surrender fees are structured. So be sure to ask and to also compare among companies. But aim to make a selection you’re happy with and can stay with. That way you will avoid having to pay surrender fees.

Tuttle says one client brought him an annuity with surrender fees of 15 percent. If you decide you’ve made a mistake, you can do something called a 1035 exchange, but you may have to ask about it and there is extensive paperwork involved. If you experience buyer’s remorse immediately or see that the contract isn’t what you wanted, there is an option. Annuities offer a ten-day free look period after receiving the contract, in which time the investor can return the contract without penalty: this review option may not be available in all states.

Because an annuity is for retirement and grows tax-deferred, there is a 10 percent penalty if someone takes out money before age 59½, plus unpaid taxes would be due.

One unusual legal consideration with annuities may be important to you. In some states, annuities receive special status and are sheltered if you are sued in a malpractice case or in other legal trouble. However, you can’t just run and invest in one when a lawsuit is imminent. It would need to be a legitimate purchase that fit with your overall financial plans at the time.

Despite the daunting complexities, annuities are the only way to guarantee a retirement income that lasts as long as you do. If outliving your money is a concern, they are worth exploring.

“I think you have to be careful what you select, and you have to know what you’re paying,” Havens says. “I know what I have and what I’m paying for it. I’m satisfied.”

“I think annuities address a need, in an environment where corporate, defined benefit plans are things of the past and the Social Security system is changing and may not be adequate to meet lifestyle needs for most Americans.”