Ask the Experts: A Real Rebound?

>> Jill Schlesinger: This is the Money Watch , whooooo, Money Watch, Ask the Experts. Oh, let's just sing maybe singing happy days are here again...GDP guys came out this morning, I'm Jill Schlesinger, editor at large, I'm joined by Ray Martin whose name is Special Contributor Czar of Money Watch Personal Finance and the unbelievably talented and adorable Jack Otter who is the...

>> Jack Otter: Executive editor.

>> Jill Schlesinger: Executive editor, which sounds very good and I'm the editrix assumed spelling at large and we are here to talk a little bit about anything that's on your mind, your questions, your concerns but hey guys we did get a good number from GDP. Last quarter we have 3 1/2 percent growth, first time we've had positive growth in a year. Jack?

>> Jack Otter: Nothing like government medication to stimulate the patient and get him up and running again.

>> Jill Schlesinger: And...

>> Jack Otter: We'll see if it lasts, I don't know.

>> Jill Schlesinger: Are you taking it for real, I mean, come on how do you feel about it?

>> Jack Otter: Well, I think the government is...did what it was suppose to do, it's stimulated, so the question is can we actually pick up and roll on our own now, I think so, I think so.

>> Jill Schlesinger: Ray does the patient still need Viagra or not?

>> Ray Martin: Yeah, I'm not going to go into Viagra laughter controversy, no this is...this is like Equal, Splenda or Sweet and Low, it's a sugar substitute.

>> Jill Schlesinger: Okay.

>> Ray Martin: I mean I think the anxiety out there is that was caused by an artificial input to the system and it has a ton of unintended consequences. You know just a simple example like ''cash for clunkers'' friends of mine that have used car lots, their business was hammered background noise and they lost jobs as a result of something that was intended to help people so you know you've got all these inputs to the system, the anxiety out there is what's really going to be the aftermath of all of this and that's what the big anxiety out there is.

>> Jill Schlesinger: And I think the big...

>> Ray Martin: And I'm not buying it, we're not back to regular recovery there.

>> Jill Schlesinger: Ray...uh, uh, no way.

>> Ray Martin: No., no.

>> Jill Schlesinger: No way Ray, is where he's going with it. Jack what do you think about the consumer in all this because we got a bunch of questions and a lot of them are based on people and how they feel, when will people start feeling better, I mean we're going to have a nice number today and the market is up a bit as we sit here and watch the numbers and all that but how are people going to feel about this?

>> Jack Otter: Well people aren't going to feel better until they start getting hired.

>> Jill Schlesinger: Um.

>> Jack otter: So I think it is a long slog till people start feeling really good and the problem is they were feeling too good for about 20 years and spending too much, they were literally spending more than they had and borrowing to do it so that's not going to come back. In fact I frankly hope it doesn't come back, we need to have a correction and we haven't fully had it yet so ahh...no way Jack I don't know I can't be completely happy either until this all sorts itself out and we have longer to go.

>> Jill Schlesinger: Jack says the recovery is whack...Ray when are the jobs coming back, come on.

>> Ray Martin: Well, let me get back to the GDP. You know in economics you learn that gross domestic product equals money supply times the velocity...

>> Jill Schlesinger: Is that what that was...

>> Ray Martin: It sounds like a huge...

>> Jill Schlesinger: Ray wait, wait, that's what they were saying in that class because I was...it was early...

>> Ray Martin: You were out playing soccer, yeah the parents were paying for inaudible

>> Jill Schlesinger: Okay, right exactly, my poor father, now inaudible

>> Ray Martin: Now the velocity of money, let's talk about that for a minute.

>> Jill Schlesinger: Okay.

>> Ray Martin: Because all this money's been stuffed into the system but individual savings rates are up, people...we've had a balance sheet recession, people are paying down their debts, not taking money and spending it recklessly or semi recklessly to buy things and buy bigger things and that kind of stuff creates jobs. . Banks aren't lending like they were so you don't have the velocity of money, the multiplier effect out there and that's a big deal here. When are the jobs coming back, you know what was it 82...80 some odd percent of companies reported earnings had better earnings than projected but 62 percent of those made it only by increasing their top line. A lot of companies decreased their expense line item. You know that's a big deal and you can't keep cutting your way to growth, you're going to eventually cut your leg of and cut the other leg off and then you're not even walking so.

>> Jill Schlesinger: Except in media where I guess you can.

>> Ray Martin: Yeah, jobs you know it's going to be a while, I mean I'm not an economist, an expert in that department but I don't see companies...big large companies putting huge hiring sprees out there right now, they're being very careful, companies are putting together 2010 budget, I'm doing one for a major Fortune 100 company, a budget for a department there and we're very careful on all the adds to staff and people that we're hiring in our budget. This is a company that has that has 360,000 employees world wide, they're not looking at adding heads broadly we're very careful about it and...

>> Jill Schlesinger: But net, net are they adding jobs for next year or not?

>> Ray Martin: Net, I'd have to say probably holding the line.

>> Jill Schlesinger: Okay.

>> Ray Martin: Adding them strategically but paring them also through breaking up divisions, through shutting down locations and doing work from home type initiatives where they are sending employees to work virtually in their home office type of thing and over the web and those kind of initiatives to save money so you know it's going to be tough, I think unemployment will linger high next year is my practical view on it. A lot of economists tend to put that forecast out and I see practical evidence supporting economist's forecast on that.

>> Jack Otter: That's they way...we'd have to change history for that to change, I mean the employment numbers always take a long time to come back up.

>> Jill Schlesinger: The lagging indicator, I always liked that, there was a lagging indicator, that should make you feel better if you're an unemployed construction worker in Detroit. I mean...

>> Ray Martin: Otter: It's a drag of an indicator, not a lag.

>> Jill Schlesinger: Exactly, the dragging indicator. Ray, that was very cute, I like that.

>> Ray Martin: Once in a while I can pull cuteness talking over each other out but not very often.

>> Jill Schlesinger: I'm going to loosen you guys up like crazy, all right so um, we have a bunch of questions...if you're listening to this and you want to ask us a question for the next episode of ''Ask the Experts'' you can go to our web site...oh, Roland hold on a second, now Roland is running the board so I have this terrible thing that I have to actually get something on the computer first so hang on, hang on, stay right there gang, okay so Roland in 5, 4, 3, 2, 1, put the...my computer screen up on the board, can you do that? Oh look at that, it's the Money Watch web site and look at this dorky girl up here...waaa...okay and look at these...

>> Jack Otter: There's me.

>> Jill Schlesinger: There's me and Jack.

>> Jack otter: Wow.

>> Jill Schlesinger: It's so much fun. So if you want, go onto the web site and you go over here and we're actually going to put a button here but you know if you go over here to my blog...Jack, how come you don't have to blog everyday?

>> Jack Otter: That's part of my contract; background noise you know there's no blogging.

>> Jill Schlesinger: So anyway check out the...anyway if you go to my blog post to my blog post here, the Financial Decoder, you can just shoot comments to me and say can you ask this on the next ''Ask the Expert'', it's like here's the last one...our first episode is very exciting. So um, send questions to us and I'll tweak that and all that stuff, okay so now we're done, there we go. Megan is like so pushy, has everyone realized that, Megan is our producer...

>> Jack Otter: Now come on.

>> Jill Schlesinger: She cannot stop being pushy right now. All right we need questions is that what you want from me...okay here we go. Here's what Megan wrote, welcome back to another episode of moneywatch.com's ''Ask the Expert's'' where we answer your questions. We also talk about whatever we think is important for you, so Jack and Ray, we got some...we do have some great questions today and it's all about saving and spending money. Okay, so here's let's get started, first JC posted this question on my blog, I'm young enough that I only remember the market doing 10 to 13 percent a year. Bless his heart...or her heart. Should I accept 2 to 3 percent for a CD or is there something else I can do with my money for a better return. Ray Martin, Ray of sunshine Martin.

>> Ray Martin: Yeah.

>> Jill Schlesinger: What can we do for JC?

>> Ray Martin: Well you know this kind of question lacks a lot of focus and specifics, I'm sorry to be critical here.

>> Jill Schlesinger: Boy you're so mean.

>> Ray Martin: Here's money what do I do with it, what do I do, how do I do better than at 2.3...or 2 or 3 percent CD. I'm not trying to be mean here on this at all.

>> Jill Schlesinger: Yeah you are.

>> Ray Martin: but what are you doing with the money, if it's for your emergency fund, that's one thing, liquidity and safety is important, if it's for buying a car in three to five years, you're probably going to look at a CD that's maturing out in that time frame so you get a better rate than on cash or money market. If it's for retirement, yeah, you're darn right there's something you can do better than a CD if you're 20 or 30 or 40 years old and you got a long term time frame and bonds and stocks will be a part of that so you know, give me some specifics here, tell me exactly what you're investing the money for, what your time frame is, what you're going to be doing with the money and then I can tell you what to do, as a financial advisor you know I could go on for hours.

>> Jill Schlesinger: Okay, JC you're going to have to write us back, all right are you ready, Jack this one's for you. Besides marrying a woman who's very wealthy.

>> Jack Otter: Oh, there's a good plan.

>> Jill Schlesinger: Brian wants to know how about saving for retirement, he wants to know is there something better than a 401K to save for retirement, do you think?

>> Jack Otter: Well, I like 401K's because I get 10 to 13 percent every year in my 401k.

>> Jill Schlesinger: Oh, you're such a jerk I can't believe you said that, you're a mean man, I like you inaudible if you have nothing nice to say come sit next to me.

>> Jack Otter: Well, first of all I...we like to bash the 401K here at money watch.com and a few people have followed us, some small institutions like Time Magazine and the New York Times, that said, the 401K is a pretty cool thing, you know it forces you to dollar cost average which is the most exciting thing in the world of money that anybody's ever invented.

>> Jill Schlesinger: Right.

>> Jack Otter: It's...you pay no taxes now, you'll probably get slammed with monster's taxes 30 years from now when we have to pay for all of these Medicare and Social Security expenses but we will put that off for a later day.

>> Jill Schlesinger: Right.

>> Jack Otter: So I wouldn't, I wouldn't just run away from your 401K and especially, and we've said it before and we'll say it again, your boss is giving you free money so if you have access to a 401K at least go up to the company match and if you have to put it in cash you know you're still getting a 50 percent return on every dollar you put in.

>> Jill Schlesinger: All right so that's a pretty good one.

>> Jack Otter: So that said yes, there are lots of alternatives, perhaps even better than a 401K is a Roth IRA because while you will pay tax on that money now when you get it, you don't get a deduction in other words for putting money in a Roth, it grows tax free and when you take it out you pay no taxes and that could be particularly wonderful given what we think are probably going be higher taxes in the coming decades as we pay for all the goodies that we've been getting...we've been borrowing for in recent decades. So I'm a big fan of the Roth IRA. If you make over...Ray, help me out here, over what salary?

>> Jill Schlesinger: Ray what's the bench mark that you have to make less than to contribute to a 401...to a Roth, I mean.

>> Ray Martin: Roth IRA contributions, married adjusted gross income of $166,000 and for single $105,000, there's a little phase out there, once you're over $176 married AGI, single AGI $120 but let me pick up on something else here. You know you don't have to...if you like the idea of Roth contributions, after tax money going in, growing tax deferred, taking the money out completely tax free down the road in retirement, you don't have to have a Roth IRA to do that, you can have a Roth 401K, many companies off you the ability to make Roth contributions to your 401K plan as well, you can do part pretax, you can do part Roth, they can be matched, you can add the catch up contributions, you know you can only put in about $5,000 in a Roth IRA or $6,000 if you're over the age of 50 but you can put in $16,500 into your...into your 401K or $22,000 if you're over the age of 50, so a combination of pretax contributions and Roth contributions to your 401K can be a good idea. And another advantage, Jack picked up on the many advantages of a Roth type contribution status, 401K or IRA, is also you don't have to take required minimum distributions out of your Roth money at age 70 1/2 and I got to tell you that's a big deal for people, people who are living in rent controlled apartments in New York and have the high income year, low income year, RMD, required minimum distributions that come out can trip you up and disqualify for your rent controlled apartment, it can cause more of your Social Security to become taxable, so having a pot of Roth money that you can, that you can...don't have to take required money distributions from in retirement gives a lot of flexibility down the road so I'm a big fan of doing part of that Roth type contributions in addition to pretax.

>> Jill Schlesinger: Now I have a question for you, do you have a rule of thumb that you like to say if you are a certain...and this is a very...this is an annoying question that financial advisors receive all the time, I've heard. Okay, Ray...I knew, but we don't like general rules of thumb but general rule of thumb.

>> Ray Martin: They help you, they help give direction.

>> Jill Schlesinger: What kid of guidance in other words should we say if you're below a certain age and you make kind of this much money then we steer you more towards the Roth than maybe a traditional 401K or traditional IRA, do you feel like...give a number in your mind?

>> Ray Martin: Yeah, I look at investment time frame because I have a client, she's 70 years old and we are going to be converting some of her IRA to a Roth IRA starting this year because a lot of her income is tax exempt and Social Security so she's under the 100,000 limit and next year starting 2010 there are no limits, AGI limits on Roth IRA conversions, you're going to see a lot of people talking to their accountants next year starting to do Roth IRA conversions from their regular pretax IRA and converting some of that over to a Roth. You know and she's in 70's right but she's saying look you know if I can do that and then I leave that Roth there and then I give it to my kids when I die, you know her time frame then is long, so it's not an age, I look at time frame, you really want to look at 10 to 12, 15 year time frame or longer to allow that real capital gain type growth to build up and become meaningful. But Jack hit another really great point you know, tax rates right now, if you look at a chart of the highest marginal income tax bracket today at you know the 35 percent rate, we are historically low and inaudible historically high and you know tax rates at one point were up to like 90 percent, I don't think we'll get there, that's during the war, okay we're not in a world war...

>> Jill Schlesinger: Thankfully.

>> Ray Martin: Are we inaudible. I could see tax rates you know, not, you know no where in 2011 we're going to 39.6, we know we are...we think we're going higher than that and a Roth can really help mitigate that kind of taxation of retirement distributions as long as Roth doesn't get taken away.

>> Jill Schlesinger: Oh, they're not going to take Roth away, are they...don't take my Roth, you know I love it so much inaudible

>> Ray Martin: I don't know about tax policy these days.

>> Jill Schlesinger: I know it's hard, it's scary.

>> Ray Martin: Yeah.

>> Jill Schlesinger: It is scary.

>> Jack Otter: Just quickly on this question it occurs to me that this person might not be working for a corporation, that's why the question about what are alternatives to 401K, um, the Roth is one option, a traditional IRA is another, and there are other's too. There is the SEP IRA.

>> Ray Martin: Or self employed 401K plan.

>> Jill Schlesinger: Yes.

>> Ray Martin: And you can make Roth contributions inaudible too.

>> Jill Schlesinger: Right, that's a good one. And the big money goes into those.

>> Ray Martin: You sure, that's just a form of Keogh plan, it works...it's just like a corporate inaudible

>> Jill Schlesinger: PSP Keogh, isn't he a show off. You know he's the man though. All right let's talk about um, let's talk a little bit more about spending money, that's...because I'm actually good at that, I'm very good at that. Now Ray you're going to hate this topic because people make you talk about it all the time but you know you were on the Early Show and you were talking about credit cards and so my friend Wilson and he's my friend says is it better to use a credit card that you pay off every month or debit card for day to day purchases, do you have an opinion about that?

>> Ray Martin: Yes, I do. I use, personally I use a credit card and I advise folks to use a credit card. The fair credit billing act of 1986 I think it is gives you federal protections against unauthorized charges on a credit card and if you're buying anything on line use a credit card, not a debit card and I've been down on that story for the last ten years and repeatedly and it's catching to a lot of folks now, oh yeah that's.

>> Jill Schlesinger: Inaudible on debit card basically.

>> Ray Martin: You know I'm okay with people saying I like a debit card because you know it doesn't let me get into debt, it takes the money right out of my checking account and I'm like that's because you need artificial constraints to keep you from getting in trouble.

>> Jill Schlesinger: He's a hard guy, am I right?

>> Jack Otter: Oh, yeah.

>> Ray Martin: If you are mature enough...if you're mature enough with your money and you're not going to spend more than you make, you're not going to spend other people's money, you're only going to spend what you have and leave a reserve, a credit card I think is a lot better tool and the trick to getting a lot of value out of a credit card are rewards programs too which you're going to find more of those available on credit cards because the business model is that people that use them irresponsively assumed spelling pay a lot in fees and that subsidizes it. The credit card gives you a big advantage, also if you want to reserve a hotel, a rental car, you need a credit card to do that, not a debit card to do that, so there are a lot of big advantages I think to using a credit card and the last biggest one is identity theft and the risk of unauthorized charges. It's the banks money going out and they have to defend it and you put it in dispute, you can't do that on a debit card, by federal statute although a lot of banks do give you a mimic like dispute process to protect you but...

>> Jill Schlesinger: And Jack you know I understand for you it would be bad because I don't think there is an American Express black debit card.

Laughter So what do you think about it?

>> Jack Otter: I'm a platinum guy.

>> Jill Schlesinger: The black card is very impressive but it's almost like dopey impressive, like oh you have to spend that much money.

>> Jack Otter: It feels kind of '90's.

>> Jill Schlesinger: It feels kind of different, gilded edge, for sure, right....okay now so Jack the credit card, debit card thing, is this country ever going to be cured of our credit card habit?

>> Jack Otter: I sure hope so, I sure hope so and I'm very torn, you know on the one hand I kind of believe in reversion to the mean and we went so far in one direction I feel it has to correct a little bit, I see a cultural shift where like we said the black card just doesn't quite feel right any more. I mean the cool car is now the Prius.

>> Jill Schlesinger: No it's not, it's not. Inaudible absolutely Ray, is the Prius the cool car right now?

>> Ray Martin: I don't have one but I think it's cool.

>> Jill Schlesinger: Bu tit's cool like objectively but you do not feel cool, you're Larry David when you drive the Prius, let's be honest.

>> Ray Martin: I test drove one, I felt pretty good in it but I didn't think of the outward...you know like standing outside looking and seeing myself sitting in it and seeing myself sitting in it and see how that...

>> Jill Schlesinger: Did you spy...

>> Ray Martin: I'm not an image guy, I really don't...I drive a Santa...a Hyundai Santa Fe and a...

>> Jill Schlesinger: did you find yourself like ecologically superior in that moment, that's what I think, I feel like...

>> Ray Martin: When I was test driving it?

>> Jill Schlesinger: Yeah.

>> Ray Martin: No money, money was going through my...how much can I save on gas if I buy this.

>> Jill Schlesinger: It's not that great a deal though.

>> Ray Martin: It's all economics with me.

>> Jill Schlesinger: It's not that great a deal, okay now let's...

>> Jack Otter: The point is perhaps if we have a cultural change then there will be less of a consumer culture which will mean less credit card debt but I don't see a massive, massive shift where people stop spending too much and then there's also, there's all these strange things like for instance here you will talk to people who have credit card debt, maybe not a lot, a couple grand and then you say well can't you take some money out of savings to pay that off...no, no, no, no I need my emergency fund, so make it 1 percent in savings and paying Visa 17 percent and things like that I think it's going to take a long time before that changes. That said I do agree with Ray almost 100 percent on the credit versus debit and he mentioned the hotel room, you not only are there the issues he raised but if you use a debit card for a hotel room they will actually lock up that money in your bank account before you even sign the thing to leave.

>> Jill Schlesinger: By the way we have a fabulous story on Money Watch, Money Watch, about this and the sneaky ways that those debit card fees can add up. So what you're saying if I may translate it to regress to the mean, is that we a basically a nation of heroine addicts and now we're just methadone addicts. So that...we're going in the right direction.

>>Jack Otter: Yes.

>> Jill Schlesinger: And we're legalizing pot so you know who knows where we end up but Ray do you feel like people are...have we learned a lesson or not?

>> Ray Martin: People, I'm speaking for all people here, I don't know if I can say...I think Americans have been so addicted on consumption waiting for the next turn in the economy so they can consume again, you know personal savings rates are up, people are paying down debt, do people finally get it, you know enrollment in community colleges is up cheers okay so maybe people are starting to say hey value for cost, you know inaudible background talking.

>> Jill Schlesinger: Instead of idiots who go to Ivy League schools.

>> Ray Martin: I'm a cynic...no I'm not saying that either but I'm just saying be responsible, buy within your means on everything, on all fronts but you know I'll wait and see, I think you know Americans are used to being the credit cards kings of the world, we have more credit cards in this country per person then the entire world combined.

>> Jill Schlesinger: What a statistic.

>> Ray Martin: And using credit lubricates the economy, it helps facilitate transactions and safely and so when I...like I say I use one but I use it responsively...I pay it off in full every month, I like the protections you get from it but charging up on your credit card and carrying a balance you know you write about that and it's amazing how many responses you get back from people saying what's wrong with that, I chose to do it, I'm okay with that and I'm like but you're paying an exorbitant amount of interest for that and then people get in trouble as we all know. That I have a problem with, I'm a real conservative you only spend what you have, you don't even spend what you have, you spend less than what you have.

>> Jill Schlesinger: So somebody, I'm going to close today by telling you that one radio host told me that I was sort of extolling the virtues of living within your means and he goes boy it just sounds like you're living in Leave it to Beaver land Jill and I said I love Leave it to Beaver, I love the Beave. Last question if I pay a credit card late by just a day or two asked Jeff will I automatically be hit with higher interest rates, yes or no, yes or no?

>>Jack Otter: No not just once.

>> Jill Schlesinger: Yeah and then would it go on your credit report Ray?

>> Ray Martin: You're going to see the 30 day late, you are like oh, I'm only 31 days late, why do they have to put a 30 day late there...hey you know what you don't get a B on the paper, you get an 87, you're going to get a C, not a B so yeah it's going to be on your credit report to have a late payment.

>> Jack Otter: Here's my trick you set up your on line banking account so that it pays some small amount, 30, 40, 50 bucks to your credit card every month a couple days before it's due, that way you never miss a payment, I mean you should be paying in full but this guy sounds like he did miss so there's a trick so you never have to...

>> Jill Schlesinger: He didn't miss, he was asking for a friend of his I'm sure.

>> Ray Martin: That is a good trick, there's another thing you can do with settling with your credit card company, if you say look I'm going to pay this off in full 100 percent can you re-age the account if I do and re-aging is where they actually turn all those late payments into currents on your report but that's a gimmick, it's a trick you can do it, it's legal you're working with your credit card company but again you're late, you're late.

>> Jill Schlesinger: Okay you're late...this is no way Ray and Jack the whack, listen guys this has been a fantastic sophomore effort here at Ask the Experts, I'm going to close with...

>> Sophomoric?

>> Jill Schlesinger: No sophomore effort...we will get into sophomoric because you hang around with me enough and you'll see, all right for everyone out there just...Roland can you put the screen shot up for me please...if you don't mind...just look at this gorgeous web site if you wouldn't mind, moneywatch.com, we have unbelievable articles, original stuff, great reporting, we're not just churning out the news that other people write, we've got really thoughtful bloggers, we've got really interesting stuff, we've got the best video on line about everything financial so check out moneywatch.com. I want to thank both Mr. Ray Martin the...I don't know I'm not even liking that title, I got to think of something better and Jack, whatever your title is, Otter.

>> Jack Otter: Executive editor.

>> Jill Schlesinger: Executive editor.

>> Ray Martin: You can call me Ray or you can call me Jay or...

>> Jill Schlesinger: That's what I like, Ray is a man is what he is and I'm Jill Schlesinger and I'm the editrix at large and this is Ask the Experts, if you've got ideas for us just shoot me an e-mail just go onto the blog onto the Financial Decoder and we'd be delighted to talk with you and we're going to keep doing this probably every other week but you know if it's this much fun it could be daily eventually, you're great. Thanks for tuning in gang.

>> Ray Martin: God help us.

Laughter

Music

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