Financial Security Under Attack; Keeping Your 401(k); Renting Your Home; Turning to a Higher Power
GERRI WILLIS, CNN HOST: Hello, I'm Gerri Willis and this is a special edition of OPEN HOUSE, "Financial Security Watch." It's been quite a week for your money, home sales are down, more Americans are filing for unemployment, plus President Bush and the Senate are at odds over just how much the government should help struggling homeowners. All in all, it's tough going out there for a lot of you folks. Some are struggling to pay more mortgages, some are losing their jobs and some are just drowning in credit card debt. Ask anybody these days and they'll tell you that their financial security is under attack.</s>WILLIS (voice-over): The credit crunch, the mortgage meltdown, up and down investments, uncertainty in the job market, your financial security is under assault.</s>UNIDENTIFIED MALE: There were already budget cuts I work.</s>UNIDENTIFIED MALE: I just have no money for anything apart from bare essentials at this point.</s>UNIDENTIFIED FEMALE: People are just finding a really tough time just finding a new job.</s>UNIDENTIFIED FEMALE: We're concerned about the younger generation. I think that it's going to be a little tougher for them.</s>UNIDENTIFIED MALE: People don't have discretionary income.</s>UNIDENTIFIED FEMALE: The are just so many things that impact your finances nowadays, it's not even funny.</s>WILLIS: The average American household with a credit card owed nearly $10,000 in 2007, according to cardweb.com which serves the credit card industry. Adam Levin of the consumer information Web site credit.com ...</s>ADAM LEVIN, CREDIT.COM: It's a disastrous threat and it's a threat based on the fact that the more debt that you get yourself involved in, the less income you're going to have available to pay for other things.</s>WILLIS: The nation's housing crisis doesn't help with debt problems. Even if you make your mortgage payments, the more than 400,000 foreclosures last year affect the value of your home. A Center for Responsible Lending report says nearly 41 million homes will lose value because of foreclosures in their neighborhoods. If the loss in home value wasn't enough to pinch your pocket book, the loss of value in your investments certainly could. The stock market started this year with one of the worst Januarys on record. Those declines lead to fears of recession and with recession comes the possibility of job losses.</s>JACK OTTER, DPTY EDITOR, BEST LIFE MAGAZINE: Job loss is about as big a threat to your financial security as there is. It's not terrible right now, the problem is the trend is going in the wrong directions. Jobless claims are creeping higher.</s>WILLIS: In the last U.S. recession in 2001, nearly two million people lost their jobs in mass layoffs. Mix all of these factors together, it signals a threat to your bottom line, a threat to your money.</s>WILLIS: Protecting your money and saving for your future is important. And a major part of that savings plan should be your 401(k), but how you deal with that 401(k) could make a big difference on how much money you get down the road. Doug Flynn is a certified financial planner with Flynn Zeto Capital Management in New York. Doug, great to see you.</s>DOUG FLYNN, CERTIFIED FINANCIAL PLANNER: Great to see you.</s>WILLIS: All right, so let's start with a 401(k). I'm getting all kinds of e-mails from young people who want to stop contributing to their 401(k) because of what's going on in the market. What's wrong with that picture?</s>FLYNN: Well, one thing that you don't want to is give away the free money and that's what I'm talking about in terms of the employer match. Most employers will match if you put in six percent of your salary, they'll put 50 cents on the dollar and you'll get three percent. So, you definitely don't want to give away the free money. Now, if you're contributing more than that, then I wouldn't necessarily have a problem, if you were a little tight, with cutting it down. But, try not to go below what they're matching for you because you do not want to give away that free money.</s>WILLIS: But Doug, what about the other point? Which is that yes, stocks are cheap right now, many of them are, not all of them, but this is when you want to be a buyer, not a seller, right?</s>FLYNN: Absolutely, and that's part of this. If you developed your 401(k) asset allocation in the last year and you're putting money away from retirement that's 10 or 15 or 20 years away, you want sort of a down market right now while you're accumulating and buying and adding into it, because you're picking up more shares. It's down the road when you retire that you don't want to have this happen to you. But by then, you probably would be more conservative. So right now, if you have a long-term time horizon, this is exactly what you want to have happen.</s>WILLIS: Well, let's talk about that time horizon, because I hear from young people who want to put a lot of money in bonds, which I always say not a great thing to do. As you get closer to retirement, though, you do want to change your asset allocation. As you approach that retirement date, how different should your allocation be from your when you were say, in 20s and 30s?</s>FLYNN: Well, it should be different, but not so far that you are out of the market all together. And what you are probably referring to is people, because they are scared of what's going on in the market, are thinking about cutting down on stocks, right now. But right now, we're talking about a timing situation, where you're going to try to time the market by being away from it now and then getting back into it at some point in the future. But, typically that means is that we're going to wait for things get better and that means the market get higher and then we'll be buying when things are higher, that's not what you want.</s>WILLIS: Makes no sense at all. Let me ask you another critical question of people right now who own a home, there's so many people out there, we're reading numbers, right now, that as many as 10 percent of Americans are in a situation where they owe more on the home than it is worth. What should you do?</s>FLYNN: Well, the one thing you should not do is cash money out of the 401(k). A lot of times when people take money out of their 401(k) they're assessed a 20 percent withholding and a lot of people are under the impression that that's all the tax that they owe. If you're not 59.5 years old, not only do you have to pay your ordinary federal income tax, you'll have state income tax and a 10 percent penalty. So, you could lose up to 50 percent of that money you withdraw and if you spend the difference between the 20 percent they with held and the 50 percent you owe, they're going to get a bill next April that you might not have the money for, so you definitely don't want to do that.</s>WILLIS: I know you can borrow from your 401(k) and I know it's your money, but you're best off leaving it put. But I think some folks are making more dangerous decisions right now when they're under water in their mortgage. They're tempted to walk away. Now, that has big implications for down the road. What do you make of it?</s>FLYNN: Well, if you walk away from your mortgage, obviously you're going to affect your credit rating and the possibility that it's going to hurt you later on in trying to get another home. Just because you're upside-down in your mortgage versus what you owe, and what the home is worth, if you bought a home, that's your home, that you intend to stay with for 20 or 30 years, it doesn't matter what's going on with the value of the home right now. You stay with it, you put your money in, you pay the mortgage and down the road, everything will work itself out as it always does, whether it's the stock market or the real estate market. It's going to go up and down. But you go into it with a long-term horizon. If you bought a home and you were trying to flip it or something else like that, well, then you're going to have some problems, but if it's your home that you're stay with, your primary residence, I don't think you want to walk away.</s>WILLIS: OK, well Doug Flynn, thanks for your help today, we appreciate it. Coming up on OPEN HOUSE, make extra money now, learn how to use your house to bring in extra cash. Plus, money and stress, not a good combination, we'll show you how to deal with it all and looking to a higher power to sell your house.</s>WILLIS (voice over): The FBI opened over 1,200 new mortgage fraud cases that 2007, nearly triple what it did in 2003. With mortgage fraud on the rise, it's important to protect yourself and your home. If a deal sounds too good to be home, it probably is, steer clear. Fraudsters often prey on people who are already at risk of losing their home to foreclosure. Scammers will dupe homeowners with promises of saving their home, but they deliver fees, payments and even deed transfers. If a buyer approaches you with promises to pay off your mortgage or give you a sum of money when the property is sold, it's likely a scam. Commonly called equity scammers, these fraudsters will sell your home, pay off debts and keep the equity you could have had if you sold it yourself. Property flipping is another common scam, fraudulent appraisals and doctored loan documentation allow the new buyer to sell the home at an inflated price. Be sure to choose a broker wisely. A seasoned broker should be able to help you detect fraud and protect your home.