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September 25, 2008
FINANCIAL COLLAPSE AFFECTS SENIORS
Last week, the stock market was down more 1,363 over a three day period. Although many of you may not own stocks, this still affects you.
Henry Paulson, the US Treasury Secretary has asked for $700 billion to purchase troubled mortgages to restore confidence in the stock markets. This falls on the heels of the $85 billion loan to American International Group (AIG), the bankruptcy of Lehman Brothers and the bail out of mortgage giants Fredie Mac and Fannie May.
Did the fact that the “Gorilla”, Lehman Brothers CEO Richard Fuld, received a $22 million bonus in March 2008, or AIG’s CEO receiving a multi-million dollar compensation package affect the down turn of these companies? You, as a taxpayer, are now being asked to bail out these companies.
In addition to the $700 billion bailout, the Security and Exchange Commission has stopped a practice know as short sales of 800 financial companies, to try and help end the downward trend in these financial companies. A short sale is a transaction that you enter in betting that a certain stock will go down in price. You pay a fee for the right to sell a certain stock at today’s price, even though you never own the stock.
Example: In the last year GE has dropped from $42 to $22 per share. Let’s say that when it was $42 you were sure that GE was headed for tough times because of it’s risky mortgage holdings. You call your broker and tell him you want to short 1,000 shares of GE. Later when the stock drops to $22, you decide to sell all 1,000 shares at $42. To complete the deal you have to cover your position by buying 1,000 shares at $22. This short sale results in a profit of $20,000.
Last Wednesday, something very strange happened in the financial markets. Money market account managers were dumping risky investments and buying US Treasury Bills so quickly that there was a negative return! Generally, you purchase a Treasury Bill at a discount and in 30, 60 or 90 days it matures at full value. But last Wednesday, people were paying $101 to receive $100 at maturity. Crazy, but true.
Currently, the Treasury Bills are earning .94% and the two year Treasury Notes are at 2.14%. This is better than the zero percent Treasury Bills were earning last week but not much help to seniors who rely upon interest income to supplement their social security during their retirement years.
For most people, the general rule is that as you approach retirement, you should shift from risky to stable investments. So, given the fact that last week, even money market accounts lost value, where’s the safest place to put your money?
For most seniors, keeping your funds in either a FDIC insured bank or investing in US obligations probably makes sense. Bank accounts are FDIC insured for up to $100,000. Can you have more than $100,000 protection at any one bank? Yes, joint accounts are treated as owned equally by each of the joint account holders. So, if a married couple with one child has all three names on the account, they will each have $100,000 FDIC insurance and will be protected up to $300,000. US Treasury Notes and Bills are backed by the full faith and credit of the United States and are widely regarded as safe as a bank account with FDIC insurance.
Diversification of your portfolio and accepting some amount of risk is the right thing to do for wealthy seniors and those who have not reached retirement age yet. A Certified Financial Planner can help these individuals by evaluating their tolerance for risk and selecting a portfolio of investments. Retired seniors with limited funds should stick to the safe investments, even though rates of return are at all time lows.
This article gives general information and not specific advice on individual matters. Persons wanting individualized advice on matters discussed should contact an advisor experienced in those matters. To the extent this article provides information on legal matters, it is based on law in effect in Massachusetts on the date of posting (laws in effect in other states are often quite different).
Ronald H. Surabian is a CPA and attorney who works at the Elder Law Center in Saugus, Massachusetts. He also holds Masters in accounting and a Masters in tax law. He currently serves on the board of directors of the Massachusetts Chapter of the National Academy of Elder Law Attorneys. If you have any questions please call me at the Elder Law Center, One Essex Street, Saugus, MA 01906 (781)233-4444. To view this or any prior article, please visit our web site at www.elderlawcenter.org