Color of Money Live: Addressing your fears about a possible recession

Aug 15, 2019

Send in your questions to Washington Post nationally syndicated personal finance columnist Michelle Singletary.

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So what a week, right?

Talk of a coming recession. Dow drops about 800 points yesterday. 

Me on looking at my retirement account earlier this week :(

But today is about addressing your fears. My guest is Dan Egan from Betterment. So ask away if you aren't sure what to do. 

Also, always love those Thursday Testimonies.

Let's get started. 

You took some questions recently about credit monitoring. I'm signed up with two free services -- Credit Karma and Credit Sesame. When I applied for a new credit card recently, I received prompt alerts. Is there any reason not to use the free services, and is there any reason to pay for a paid service?

I wouldn't pay for a service because you can get monitoring free or most likely as part of the Equifax settlement. 

I would say just be aware that not all free monitoring services cover all 3 credit bureau reports. At least for the first four years the free monitoring by Equifax does.

Read: Don’t count on a big cash payout from Equifax. But still get the free credit monitoring. It’s far more valuable.

 

I have been waiting for months to do this but I PAID OFF A CREDIT CARD!!! I managed to pay off a little over $8,000 in 9 months. I paid $250 a pay from both mine and my husband's paychecks so we weren't hit with one large withdrawal each month. It was tight some months but we did it. We have one more to go and if my budgeting is correct, it should be gone by March 2020. Thank you, Michelle for your chats and columns. I read them each week and try to put as many of your suggestions into play.

WOW! Nine months to get rid of $8,000. That's fantastic. So proud of you. 

Wish I could hug you right now. But here's a virtual hug ( )

Keep going and let us know when you knock off the other card. 

Michelle, It took 40 years but I am a total sucess as a parent. All 4 of my children have 401k's! My lovely daughter in law is employed by a small concern which does not offer a 401k. But she has an IRA! Sometimes it takes a while but parenting can pay off!

Yes it can. Congrats to you. I'm writing about a similar thing for this Sunday. My 21-year-old asked about investing for retirement. You would have thought he won a Nobel Prize I was so pleased. 

 

I recently traded in my 10-year-old car for a 2018 certified pre-owned car. I’m not happy with the new car at all. I’d like to sell it and get something a little less expensive that I’d be happy driving for 8-10 years. I put a $5k deposit on the new car and financed the rest. Should I sell the car or pay it off as quickly as possible first (about three more years)? I can’t figure out the math. I feel like I'd be throwing money away if I sold the car. Thanks.

With a $5,000 deposit you should have enough equity to sell the car, pay off the loan and have around the $5,000 (maybe a little less) to get a car you want. I wouldn't spend another three years paying off a car you hate. 

You might take a small loss if you sold but that's okay. Lesson learned, right? 

But going forward, after you pay off the next car, take those payments and save the money for the 10, 12, 15 years you'll own the car. Then when it's time to buy a car -- used or new --you will have the cash and won't need a loan. 

if you're an investor in bonds, doesn't the market downturn help you?

Hello, 

Dan from Betterment here. 

While it make you feel better to have dodged a bullet, the market going down doesn't make your bond portfolio go up any faster. 

Best of luck, 

Dan

 

There is wide range of opinions about how to allocate assets during retirement, ranging from mostly bonds to as much as 60% stocks/40% bonds. During what might be 25 or 30 years post-work, retirees need to at least protect their principle and keep pace with inflation, but they also hope for some growth. Any thoughts?

Great question! 

A common approach that many retirees find helps is a 'bucket approach'. This consists of having separate buckets for different horizons, and the right risk level for each of them.

 

For example, for your:

- near-term expenses (say the next two years) are kept in very low risk accounts. 

- moderate term expenses (3 - 7 years away) are kept in a moderate risk allocation that glides to lower risk over time. 

- longer-term expenses (7 years +) are kept in a higher risk allocation that will glide down to near-zero risk in 8 years or so. 

This gives you the comfort of near-term security with potential to let your longer-term horizon assets grow. 

 

Best, 

Dan

It may seems obvious to not give up free money, but there is money out there. In my state, the state offers matching grants to your child's 529 savings account up a $500 a year for up to five years! That's a free $2500 and that doesn't even include the compound interest that free money will acrue. Alright, now to go buy some tools I don't need with all the money I got for free :-p

Totally agree. Look for that free money folks! 

P.S. But be careful it's actually free and not some scam!

We made the mistake of cosigning for student loans 10 years ago. My daughter has not been very diligent about paying them off. We are in no position to help her. We have no other debt and all credit cards are paid on time yet every month Navient Crushes our credit score even now I think they wrote off the Bad debt. Any solutions besides the obvious

I'm so sorry this happening to you. It's why I constantly warn people about co-signing. Don't do it!

You are right, you have no recourse since it's unlikely your daughter can get a loan to pay off the student debt and release you as co-signers. 

If you haven't already talk to your daughter about the late payments and see if she is eligible for an income-based repayment plan if she doesn't have one now. Or, maybe she can get a deferral until she's in the position to pay consistently. Although that will grow the loan.

Or, you have to figure out how to help her pay the loan that honestly is your loan too. When you co-sign you are not a backup borrower. You are on the hook as much as your daughter. So it's your loan too I'm afraid. 

Here's some past columns on the topic

Co-signing a loan? That puts more than your name on the line.

Co-signing a loan is a favor you should think twice about

Another story of co-signing gone wrong

 

Betterment and other robo-avisors, and most traditional financial advisors, take a percentage of the principle as their fee. A traditional advisor might argue, rightly or not, that he gives more personal attention to bigger accounts. But robo-advisors are largely automated. It doesn't cost Betterment much more to maintain a $1,000,000 account than a $10,000 account. How do you justify collecting the same .25 percent from every account, large and small?

It's a fair question. 

We want alignment (to win when our clients win, to lose when they lose) so that they know we're invested right alongside them. 

We also charge based on the *value* we provide to our customers. We're generally doing more (both trading and advice-wise) on larger accounts, and providing more value through tax-loss harvesting, asset location, retirement planning etc.

Again, we want to incentivize ourselves to maximize our clients success, regardless of portfolio size, and that means being rewarded the more value we add. 

 

 

Much of the advice during this volatile stock market centers on those who have years to retirement. What about those of us who are already retired? At age 74, I have about 30% of my IRA in stocks. Is that too risky? I am forced to draw down the account each year because of the RMD. There was an old formula where one was to subtract one’s age from 100 (or now 110?) to get some idea of the amount to keep in equities. In 2008 I sold all of my stocks, which was a terrible mistake. I don’t want to do that again, but I probably do not have a 10 – year timeframe to wait out any serious dip in the stock market. Any help would be greatly appreciated. I have no background in finance, so all of this is a bit daunting.

Hello, 

 

I'd first look into a vanilla deferred annuities: the goal of this is to insure you don't outlive your money if you do live to 110 or so. Deferred annuities tend to be more affordable than ones you are taking immediately, and only kick in at a certain later age. 

 

If you're sufficiently worried about a market downturn that you'd react to the next 10% or 20% drop (which at 30% stocks would manifest as a 3% or 6% drop in your portfolio), I would go lower. The worst strategy is to sell at the bottom, and it's good to remove the risk of that. 

 

Also, I'd recommend looking up bucket strategies, so you can segment your wealth into different time horizons, and take on the risk you feel comfortable with over them. Knowing you have 2 years expenses in cash (to wait out a downturn) often helps people take on more risk in the long run. 

 

 

With the current volatility in the stock market, much of the current advice is for those far from retirement. What about those of us currently retired? I am 74, investment- challenged (Read clueless) and currently have about 30% of my IRA invested in equities. Is that too risky? I am forced to draw down my account due to the RMD. Any advice for those of us already retired?

Thanks for your question. And I know it can be scary when you are drawing down on the money you need. Here's a Q&A I did one of the last times the market was down.

As stocks go wild, here’s what should you do if you’re retired

Hi Michelle - just sending a quick thanks ... my sibling asked my parents to co-sign a lease for a luxury car this week. One parent was tempted, the other reluctant. They asked my opinion and I said no way. I forwarded your 6/18/2016 column on this topic to my parents to help them see this more clearly. So the signing didn't happen. Thanks for all you do!!

Wow. I love that you sent them the column. And that they listened to me and you. 

Here's that column again, which walked people through why it's bad to co-sign and gave you guidelines if you're going to be hardheaded and co-sign anyway.

Read: Co-signing a loan? That puts more than your name on the line.

Also for those considering co-signing a student loan: The alarming consequences of co-signing your child’s student loans


 

 

I am 10 to 12 years from retirement. I assume I should not panic about the state of the stock market and just ride it out. At what point should I start considering major adjustments (5 years before retirement?)? Also, is there a rule of thumb about how much money should be liquid once I retire? I've read that some retired people keep 5 to 10 years of living expenses outside the stock market.

Hello, 

Definitely don't panic: that won't help anything. You want to set up a strategy that doesn't rely on you timing or reacting to the market, so that you don't have to! 

First, I'd say you should start reducing risk at about 20 years out from your retirement date. At about 10 years from retirement, Betterment recommends about 75% stocks, which decreases as you get closer to retirement. You can read more here:

Using investment goals at Betterment

What is a glide path, and how does Betterment’s glide path work?

I'd definitely keep about two years spending money in a very low risk account (just make sure it's giving a competitive real return!) so that you aren't stressed about near-term impacts of downturns. That also helps you invest in a longer-term fashion for the later years. 

We recently bought an investment property. We paid 1,085,000 and have a $346,000 mortgage. We got a 30 yr fixed mortgage and are wondering how fast we should pay it down vs how much to use the funds for our living. For reference we are in our early 40s have no debt except this mortgage and another 140k mortgage on another investment property. We have a fully funded emergency, life happens, college funds etc. and a paid off primary residence. The additional income from this property is really about vacations, extracurricular for 2 kids, gifts, more nights out, camps etc. So should we pay it off quicker than 30 yrs and do less fun stuff or take longer and spend more?

I'm all about being debt free. I would aggressively pay off the mortgages. Free yourself. 

Hello Michelle and Dan, I am within about 6 years of retirement, and reading your response to the different buckets--- does this work in a downturn, or is it better in a neutral or upswing market? If I have any leftover money after contributing to retirement accounts (Life Happens and Emergency funds fully funded), should I, for the short term, put money into paying off the mortgage, given my short-ish timeline? Thank you, R

Hello, 

 

The whole point of a bucket strategy is that it works in any market environment, because you aren't reacting to market environments. If your retirement strategy relies on you constantly monitoring and reacting to what the market did recently, it's not good! You want to set up a plan that runs without you getting stressed about whatever the market did recently. *That* is the point of a bucket strategy: to give you confidence/comfort for the short term, and allow you to take on the right risk for the longer term. 

And of course, you shouldn't be 100% in the market for longer term, but rather a glidepath allocation appropriate for how long you're investing for. 

Generally, if you have a low mortgage interest rate, it's also tax deductible, so it's ok to let it run. Read more here.

 

On the mortgage question, I say pay if off before you retire if you are saving well for retirement and paying off the mortgage won't make you house rich and cash poor. 

Read:

Yes, you should pay off your mortgage before retiring.

These retirees say: Pay off that mortgage before retiring.

 

Hi Michelle, I was recently in a car accident and will receive a statement from the insurance company. Since my car was 15 years old, I did not get much for it. I did not expect to have to buy a new car and recently just got out of debt. I have enough to buy a used car (about five years old) with my savings, but brand new cars are only a few thousand more. I am wondering if I should use my savings to pay for the down payment and have low monthly payments or just buy a used car outright.

I'm no fan of car loans or any loans so I tend to side with paying cash. If it were me, I would try to get the best car I could get with cash. Now, having said that if you find a car that has safety features you've been dying to get, then a tiny -- and I mean tiny enough to pay off early -- loan to update to a newer car (doesn't have to be new) is okay. 

Whatever you do however, don't wipe out your savings. 

Hi Michelle, I’m on week two of a four week spending vacation (seems I fritter way too much away on online shopping). I just paid off a student loan and am now on the last of five loans (the largest, but, still). Thanks to my Life Happens account, I am able to cover several big expenses that came up: vet care for a senior dog, new fridge, deductible for storm damage to the house, and car maintenance. Whoo! But I’m nervous about more life happening before I can replenish the account, particularly with a looming recession and possible layoffs that come with it. What to do?? I’m hoping spending less online will become a habit, and planning homemade holiday gifts, but how I shake the bad feeling in my gut after using so much of my account? Thanks!

Good for your for taking control over your spending. If you are concerned about your income you can dial back your aggressive debt reduction plan to build back up your life happens fund. When the fund is replenished you can get back on track for paying off the debt. 

You just recommended a deferred annuity. Many advisors would avoid annuities because the fees are generally high and you give up control of your money. If you die early your heirs get nothing, unless you paid extra for a survivor benefit. In the poster's case, how long do you think a 74-year-old should defer a "deferred" annuity? And why would that be better than a conservatively managed investment account?

I am not a fan of annuities. So this is a good question. Dan? 

Hello! 

I think *many* annuities do have generally high fees. So do most  funds! That doesn't mean you shouldn't buy funds, but rather you should buy low-fee funds. I believe there are low-fee annuities out there (I believe Vanguard offers some), and you can ask a fee-based fiduciary CFP for assistance in picking the right one. 

 

I recommend *deferred* annuities to hedge longevity income risk - that you might outlive your money. You don't have to do it with *all* your money: you can set aside a desired control/inheritance amount they get when you pass, and you can keep control of that. Deferred annuities are good deals *because* some percentage of participants die before claiming, so the remainders get more. 

If you want to read up on comparisons of strategies, this is a good reference: 

https://www.kitces.com/blog/calculating-longevity-insurance-rates-a-longevity-annuity-comparison-to-stock-and-bond-returns/

this isn't a question but a story. after years of having a small vegetable garden I converted almost all of my entire backyard into a vegetable garden. I know that I spent probably $800 on the one time cost of filling my raised beds with soil & getting the materials for trellises so my garden won't save me anything this year but the simple joy I get from being able to come home from work and walk out & pick something fresh & organic for dinner is priceless. plus, I have looked at how much packages of vegetables cost at Costco & believe me, at $4.99/bag of squash, $3.99/package of cucumbers, $5.99/package of green peppers, $4.99/bag of tomatoes plus almost unlimited fresh herbs, I have saved many times over the cost of buying the plants. never mind what I am able to give to friends. I know that having a backyard garden isn't for everybody. I used to press my lips together in disapproval at how ugly backyard gardens looked. my food jungle was definitely a journey starting with a few pots of herbs 30 years ago. I know that this year my garden actually cost me money getting it started, next year about this time when 85% of what we're eating is something I've grown, it will be a great money saver.

I love your story. I have a brown thumb. Seriously, my plants hate me. I feel them looking at me with disgust when I water them after forgetting to water them.

But I have such fond memories of the great veggies my grandmother Big Mama grew in our tiny backyard in Baltimore. Her tomatoes were so sweet!

So good for you!

You recommend putting short-term money into an account with "low risk and competitive returns." That would be what, exactly? Money market fund? Government bond fund? Total bond market fund?

Yes, those are all good options. Online high yield savings are yielding just over 2% right now, so that's a good reference point. Money market or short-term treasury bond funds are other good options. 

My money market is paying a little over 2%. It's where my husband and I parked the money we pulled from our investment account (non-retirement). 

We just got the car.  A hybrid. It's beautiful. Paid cash. 

There might -- maybe -- be an argument to be made for paying off a mortgage in retirement. But the previous posters are in their '40s. Why should they forfeit two decades of investment growth to pay off their mortgage early? Think of a mortgage as an investment; if you can borrow at 4%, and invest your money to get higher returns, isn't that smart?

I get this type of response EVERY time I talk about becoming debt free. 

Look, I get the math. But I also want to be DEBT FREE. And if you are a good money manager you can eliminate the mortgage and thousands and thousands of dollars in interest AND still invest AND still have enough for retirement.

I know. My husband and I are doing just that. Paying extra on our mortgage to be debt free in retirement AND we have a very robust retirement savings --both of us. AND we saved to send our children to college debt free.

Why pay off the mortgage? 

Because that's a guaranteed return. If you add taxes on your investing earnings and fees to invest and the risk of the market you aren't that much of a difference. 

But paying off your mortgage: 

You eliminate the biggest expense in your budget.

You definitely save on interest.

You sleep better knowing you don't owe a soul a thing. 

Michelle, it took two years, but I paid off my credit card ($22,000+). Thank you so much for your wisdom and guidance. Now my husband and I have fully funded retirement accounts, a 4-month emergency fund and money in our kids' college fund. As we head into what looks like some economic headwinds, I feel much more secure and know my family can survive what happens next (government shut down, layoffs . . .who knows).Thank you for this feeling of PEACE.

Why get out of debt? Pay off a mortgage? Buy a car with cash?

Freedom.

This is what this testimony is about. 

Thank you for sharing and proving my point!

On the subject of car payments, my partner and I have been having a discussion. We have a 10+ year car that recently required an over $1,000 fix (emergency fund, so no problems there!). But here comes the disagreement. Though we ended up getting the fix, my partner argues it's a waste to invest that much money in a car that at blue book value is only worth about three to four times that. I argue that the repair is still far less than getting another car would be, even if it only gets us a little more time to use it before the car becomes unfixable. But the more I thought about it, the more I realized that both our arguments never "stop" being true. The repairs will always be too high compared to the worth of the car, but less than outright getting another car. So how do you decide?

Stop looking at the value of the car. What do you care what it's worth if you are going to keep it. 

Look, I get rid of my cars when the repairs become so frequent and unpredictable that I keep getting stranded. Not a fan of sitting on the side of the road waiting for a tow truck.

BUT... if I can keep the car going even with a $1,000 repair a year, still cheaper than getting a new car or newer-to-me car.

In the end you have to decide based on your peace. If you are going to be worried about breaking down doesn't matter the math. If you have the money, upgrade. 

But don't justify the purchase based on what someone would pay for a car that isn't for sale. 

We are considering leaving Voya for Edward Jones who has a local office so we are able to have face-to-face communication. We are very nervous any thoughts for us

Hello,

I'd suggest looking up an independent, fee based CFP who won't want to sell you on their own funds/solutions. 

http://www.plannersearch.org/

If you're ok with face-to-face using video-conferencing (something many CFP's do a lot of these days) you'll have many more options to choose from. 

 

What is Dan's: Opinion On Balanced Mutual Funds In Recessionary Times? We use Vanguard Wellesley and supplement with Vanguard High Yield Bonds. Our allocation in retirement is 25% Stock / 70% Bonds / 5% Cash .... how would Dan change? We like KISS ... keep investments simple (no more than 2 managed mutual funds). Use cash as a cushion so we don't sell in a down market at a loss. George in Florida

Hi George! 

 

I'm an affirmed agnostic on market timing: stock market crashes generally happen *before* recessions (the stock market is a prediction machine), so during recessions the stock market might already be rallying/recovering. 

 

I also believe people should choose investments based on their plans, not what the market just did. Your allocation sounds reasonable to me, especially the not-selling-because-the-market crashed. Of course, you should sell *regardless* of high or low, if it's what you planned to do. The fact that the market is at a low doesn't mean it can't go higher, and being at a high doesn't mean it can't go higher (indeed, that's what it does!)

 

I deposited $5,000 into an IRA in March and still haven't invested it in any stocks. I want to, but for some reason, I find myself wavering and can't seem to pull the trigger. It is earning "nothing" in cash and yet, I'm afraid to make a mistake and buy a stock immediately before a stock market crash. Due to my investing preferences, I invest only in individual stocks and am loathe to invest in index funds, because I want the higher returns of individual stocks. How do I get over this new fear and quit wasting time? (By the way, last year, I invested fairly quickly in Microsoft and McDonald's, which both earned great returns this past year, so I think it's all the current talk of recession which has me scared this time.)

Hello, 

 

What a roller coaster of fear and greed! 

Why not set up an auto-depost schedule that would get you invested over the next 18 months or so. If the market dips - good! you're buying at lower prices! 

It's important to remember the market is always in one of two states: all time highs (scary because high), and drawdowns (scary because down). You earn higher returns by investing even though it's scary: that's why there's a premium - other people are scared away! 

I'd suggest reducing your market-news intake as much as possible to reduce stress, and just commit to a buying plan that is based on your future goals (spending), rather than what happened in markets yesterday. 

of up to $100K. The script the person on the phone was using was very odd. I think it was calibrated to make it almost sound like you were winning the lottery or some other situation in which you wouldn't have to pay it back. Anyway, I sometimes like to play with these calls, so I asked him, "Why would I want that?" He just kept saying it was my lucky day and I could do anything I wanted with the money. Again, it seemed to imply it was a prize, not a loan. He finally hung up, when I told him that I didn't want any money/no, it didn't sound good/whatever, but the script could be very confusing to a person with less proficiency in English or just iffy hearing. He only mentioned the word "loan" once (maybe twice) in the whole conversation. I don't even want to think about how a person with short term memory issues might have reacted.

Glad you avoided at best a bad deal and at worst a scam.

I just wanted to second having savings set aside for Life Happens. We have had issues with water seepage in our basement, and cheaper, exterior grading fixes are not working. So it's time for the full water membrane wrap, which is $$$$. Combine that with another large dead tree in the yard ($$), and it's a costly summer. Over $20,000. But we can handle it because not only are we fortunate to have a living wage around here, we save like demons. But I feel for people struggling to make ends meet -- this is a pricey area to live in. I don't want to hear a law partner moaning about not having funds for a bill like this (they should know and do better), but for the working stiff, the majority of people around here, what can they do? $20,000 in a life happens fund may as well be a million to a large number of folks around here. I know you suggest $1000 for a life happens to start, but honestly, after this summer, I feel like anyone who owns a house needs multiple thousands in a life happens account.

I recommend savings as much as you can with whatever extra you have. 

And yes, if you own a house always err on the side of saving more. A house can be a money pit.

I'm so sorry if we didn't get to your question or comment. But I read everything. And look out for my columns because your question or comment might end up there. 

Thanks for joining me and thanks to Dan Egan from Betterment for taking the time to answer your questions. 

See you next week. 

In This Chat
Michelle Singletary
Michelle Singletary writes the nationally syndicated personal finance column, "The Color of Money," which appears in The Post on Wednesday and Sunday and is carried in more than 120 newspapers.

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Dan Egan
Dan Egan is the Director of Behavioral Finance and Investing at Betterment. He has spent his career using behavioral finance to help people make better financial and investment decisions. He is a published author of multiple publications related to behavioral economics, and has lectured at New York University, London Business School, and the London School of Economics on the topic.
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