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Personal Finance Blog By MoneyRates - May 2011

Falling oil prices take some of the heat off of savings accounts

May 27, 2011

| MoneyRates.com Senior Financial Analyst, CFA

Good news has been pretty rare for depositors over the past couple years, but one trend this month should be cause for cheer, or at least relief. No, CD rates, money market rates, and savings account rates have not yet started to rise, but the value of those rates may start to gain back a little of the ground that has been lost to inflation.

The reason? Oil prices have made a u-turn this month, slipping back below $100 a barrel and reversing a trend that had seen them climb 25 percent in the first four months of 2011.

CD, savings, and money market rates vs. inflation

Low CD, savings, and money market rates have left depositors virtually defenseless against inflation. According to the FDIC, the average interest rate on savings accounts is just 0.15 percent. Money market rates are at an average of 0.21 percent, and CD rates range between 0.12 percent and 1.63 percent. With inflation back over 2 percent, this meant that depositors have been steadily losing ground to inflation.

The chief culprit in the resurgence of inflation was the rising price of oil. Oil began 2011 at $91.38 dollars per barrel, and rose to $113.39 by the end of April on a combination of optimism about the U.S. economy and concern about uprisings in the Middle East. There also seemed to be a not-so-healthy dose of speculation thrown in.

The reversal in oil prices

More than anything, it is probably the speculation that has eased in recent weeks. News on the economy and the Middle East continues to be uncertain, but oil prices have backed off, falling to around $98 as of this writing.

Oil prices tend to have a ripple effect on other components of inflation. Just halting the rise in oil prices should be enough to take some of the pressure off of inflation, and a fall in oil prices could cause inflation rates to start declining. Given the level of CD, savings, and money market rates, depositors could use the break.

Posted in: Savings Accounts

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Baby boomers fearful, indecisive about retirement

May 26, 2011

| Money Rates Columnist

A new study has found that the oldest baby boomers, who are starting to turn 65, are frozen with fear about retirement.

The study from Financial Engines, a California investments advisor that manages 401(k) savings accounts for nearly 500,000 U.S. workers, also found that these so-called 'early boomers' don't trust financial advisers - even as they admit they need financial advice.

Retirement anxiety

The early boomers' big fear, according to Financial Engines, is that they could wind up in poverty if their retirement savings accounts run out. More than half of the 300 boomers interviewed for the study between 2008 and 2011 said they were afraid of their retirement checking account running dry.

According to The Baltimore Sun, these anxieties are a result of early boomers who have to transition from workers counting on a pension to workers relying on their own investments, such as money market accounts, 401(k) plans and similar savings accounts. What's more, it's a group that lost a lot of money during the recession and has watched as the financial industry has been wracked by fraud and mismanagement.

The report comes on the heels of a Bankers Life and Casualty Company Center for a Secure Retirement study that found that baby boomers making between $25,000 and $75,000 annually say they will be delaying retirement for at least five years because they can't afford to stop working.

That study found that two-thirds expected to have more saved than they have and less than one in four feels they are on target with their retirement savings needs. Three out of four expect to work in their retirement.

Who's judging your retirement funds?

Part of the problem is that retirees who haven't saved enough don't attract much attention from financial services companies while those who have large retirement savings accounts get plenty of offers in the mail. Participants in the Financial Engines study said financial advisers, after reviewing their meager assets, made them feel worse about their situation.

In May, The Wall Street Journal quoted study co-author David Ramirez saying that the financial services industry needs to be sensitive to the fact that "people don't need to be judged."

The Journal recommended retirees with questions about such key matters as when to take their pension or when to file for Social Security benefits should check to see if the company they work for has a retirement-income product to help them manage their money in retirement. It also recommended hiring such companies as Smart401k.com, which charges an annual flat fee for retirement-investing advice.

Posted in: Retirement

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SEAL Act aims to restore funds leaking from 401(k) accounts

May 25, 2011

| Money Rates Columnist

A new bill would limit the number of loans workers can take from their 401(k) savings accounts to three but would make it easier for them to repay the loans if they were to lose their jobs.

The bill from Senators Herb Kohl, a Democrat from Wisconsin, and Mike Enzi, a Republican from Wyoming, aims to reverse the recent trend of 401(k) loans going up while the amount of money being saved for retirement is going down in the U.S.

The bill would limit the number of loans a person can take to three at a time. It would also ban things that turn a 401(k) account into a checking account like allowing debit cards to be linked to the 401(k) accounts. During the recession, many savers had to empty their money market accounts and savings accounts and dig into their retirement savings for transfers into the checking account in order to make ends meet. These 401(k) loans are particularly attractive to some borrowers because although they have to pay them back with interest, the interest they pay goes to themselves and not to a bank.

Taking out a loan on your future

A 2011 study by Aon Hewitt, a worldwide retirement, health care, and business consultant, found that nearly 70 percent of those with 401(k) retirement savings accounts have had one loan outstanding against their account, while nearly 30 percent have two loans outstanding. Only 2.5 percent had more than two loans simultaneously.

The Kohl-Enzi bill, titled the Savings Enhancement by Alleviating Leakage in 401(k) Savings Act of 2011, or SEAL Act, would make it easier for people to repay outstanding loans if they lose their jobs--and access to their employer-sponsored 401(k)--before paying off the loan.

Currently, employees are required to repay the balance within 60 days of losing their job. Any unpaid amount is subject to tax and early withdrawal penalties.

Kohl and Enzi, however, would give employees until their tax deadline to contribute the balance to an IRA and avoid the tax penalty. The Aon Hewitt study found that nearly 70 percent of those who lose their jobs with an outstanding balance default on the loan and wind up paying penalties. Only 3 percent of those who remain employed default.

Posted in: Retirement

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Hard times for CD investors but safety remains attractive

May 25, 2011

| Money Rates Columnist

It continues to be a difficult time for savers who are hoping to get a good return on their savings accounts. Bank deposits are up and loan demand is down, despite low current mortgage rates. This gives banks very little incentive to increase rates. After all, you can't make a lot of money off money market accounts or savings accounts if you aren't loaning the money out.

Even the best CD rates continue to be very low. The only national certificates of deposit paying more than 2 percent all have terms of three years or more. That's a long period of time considering that interest rates are expected to climb in the near future.

Go to bank or go online

Blogger Ken Tumin recently conducted an online survey asking his readers if they would rather open a CD online or at a local branch, and the results indicated that people generally preferred to go to a brick-and-mortar establishment. Why? Here's are three reasons:

  1. You can often get the best CD rates at a local bank or credit union.
  2. The process may actually be quicker to set up the CD in person.
  3. Your check can be deposited immediately; mailing a check or making an ACH transfer to an online CD could mean the check will be lost or rates will fall before the payment arrives.

More than one CD?

Another factor might be whether you are buying just one certificate of deposit or a series of CDs that have staggered maturity dates. This process, known as laddering, is a way to avoid having all your money locked into one account for a long period of time.

An example of laddering would be if you divided your money up into five separate accounts and put one in a one-year CD, another in a two-year CD, the third in a three-year CD and so on. You still get the advantages of the higher interest rates on a five-year CD but you also have the flexibility of having some of your money being freed up every year.

With complicated transactions like this, you might be more comfortable sitting down with your banker to do the paperwork. Your banker may also have such products as high-yield savings accounts or a rewards checking account that would provide a better return than the CD you're contemplating.

Posted in: Personal Finance

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If we're not saving enough for retirement, why do they want to cap contributions?

May 24, 2011

| Money Rates Columnist

We've all heard time and again that money in our savings accounts for retirement. And for many of us, it's true; despite the wealth of tax advantages available from everything from 401(k) plans to deferred profit sharing, nearly half of us have less than $10,000 in savings accounts and investments. According to the Employee Benefit Research Institute, nearly 70 percent of Americans are saving for retirement--they are just not saving very much.

But before this starts to sound like another harangue about saving for retirement, let's take a look at how much Americans ARE saving. And let's look at it from the point of view of, say, a politician in Washington who is looking for extra funds to whittle away at the U.S. multi-trillion-dollar debt.

How much do 401(k) plans cost the government?

According to the usnews.com, the federal government missed out on $52.2 billion in income tax in 2010 because of 401(k) contributions. Tax breaks related to 401(k) accounts cost the government another $12.6 billion, and other retirement plans that allow workers to defer income tax on the retirement savings cost nearly $40 billion. Keogh plans cost the IRS another $13.8 billion.

All told, the bill comes to nearly $120 billion--far more than the $79.2 billion to government lost in income tax from people who deducted their home mortgage interest from their gross income.

Those are big numbers, so naturally federal policymakers are wondering if there is a way to reduce the deficit in part by capping contributions such tax-limited savings accounts. That's one of the suggestions of the National Commission on Fiscal Responsibility and the Bipartisan Policy Center's debt reduction task force.

What? Really? What's going on here? In one breath you tell us how woefully unprepared we are for retirement and in the next you're telling us that you want to cap how much we can save?

Who's saving and who's paying

It does get confusing. But the truth is that since 1989, the share of household wealth held in tax-qualified retirement plans has grown from 17 percent in 1989 to 32 percent in 2007, and many policymakers would like to see that continue. In fact, they are also looking for ways to spur Americans to save even more--particularly blue collar workers who struggle to put enough in their savings accounts.

The real target of these proposed retirement savings reforms will be the wealthy--particularly those who take advantage of the system and convert their assets into tax-free retirement assets. In particular, the policymakers are taking aim at the 15 percent tax rate on capital gains and dividends, which according to usnews.com cost the federal government $67.4 billion a year. Having that extra revenue might help Congress strengthen Social Security and ensure it is the safety net it was intended to be.

So if you're saving diligently for your retirement and you're struggling to find ways to increase your retirement accounts, take heart. No one's looking to make it harder for you.

Posted in: Personal Finance

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