Written by: Kim Sawyer

All I keep hearing about is the need for the House and Senate to pass a $700 million bailout package in order to prevent our economy from going into a recession.  Okay, whatever. What I want to know is how does this current economy affect my money!  And, how will a bailout help me?  So, to help me find some understandable answers, I went to my trusted friend — Google.  As usual, my friend did not let me down.  Google brought up an article that the New York Times recently printed that addressed my concerns.  So, I thought I’d pass on to you my findings as I’m sure you’re concerned about your money too.

Q. Is any investment truly safe right now?

A. As long as you trust the United States government, sure. Plenty of banks, like HSBC Direct and Capital One are offering online savings accounts paying more than 3 percent. These accounts have all the normal Federal Deposit Insurance Corporation protections of at least $100,000. Also, the Treasury Department is currently insuring investors who had holdings in money market mutual funds as of Sept. 19, as long as the fund company pays to participate.

Q. My retirement portfolio has been wrecked by this. How should I respond?

A. Continue to save. Big losses mean you’ll need that much more time, or good news, to bring your balances back to where they need to be for you to retire comfortably. If your employer matches your contributions, this is a great time to take advantage of the largess.

As for whether you should pile into beaten down stocks, no one knows how much further the markets will fall or how long they’ll take to bounce back. But people who move their savings to ultrasafe investments and then leave them there usually miss out on the gains when the markets come back. If you need to do that to sleep at night or avoid stomach ulcers, then do what you have to do. But it may cost you in quality of life come retirement time.

Q. But what if I am about to retire? Then what?

A. Leaving the work force at a time like this creates big problems. Not only is your portfolio down, but you need to start withdrawing from it. So you are essentially locking in your losses.

If your portfolio has taken a big hit, it may be time to seriously consider delaying retirement. Working just a few years more can make a big difference. Or, a part-time job may keep you from having to dip into your portfolio before it recovers. To get a better idea of how much you can afford to withdraw, you can test different amounts with a retirement income calculator on the Web, like T. Rowe Price’s.

Q. Is it time to buy stocks?

A. Like gambling? This is a great time to make bets on the wide price swings that we’re seeing in some stocks and entire sectors of the market. Just be prepared to lose big, as plenty of professionals have done of late.

Q. What’s the next shoe to drop?

A. It seems certain that it will be harder for consumers to borrow money in the next year or two than it was earlier this decade. How much harder isn’t clear yet. It will be more difficult for people who need jumbo mortgages than for those whose lenders can simply sell off their loans to Fannie Mae or Freddie Mac. Home-equity lenders are already cutting plenty of people off, while credit card companies are lowering credit limits on others.

Q. What about more bank failures?

A. They will happen. In recent days, we’ve seen the F.D.I.C. getting out in front of troubles at big banks like Wachovia and Washington Mutual, by arranging for other banks to take over their consumer accounts. What’s less clear, however, is how many healthy institutions are left to take in other big banks that may run into trouble.

As always, stay within F.D.I.C. deposit limits, which is currently $100,000.  Then, the worst-case scenario is that it will take a couple of days to extract your funds from a failed bank.  (NOTE:  The powers-to-be in Washington and the FDIC are in talks to raise the deposit limit to $250,000).

Tags: bailout, economy, recession

This entry was posted on Wednesday, October 1st, 2008 at 12:02 am and is filed under Current Buzz. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.