Questions and some answers on the aftershocks of the fiscal quake
There’s need for answers to sort out the wreckage
Wall Street is in turmoil. The stock market is gyrating wildly. Congress can’t agree on a rescue package that could cost taxpayers $700 billion or more.
All of those events seem so far removed from the Buffalo Niagara region, but the ripples from that turmoil will have a sweeping impact on consumers here, as well as on the companies that employ them. Just how will that impact be felt? Here are the answers to some of the questions that Western New Yorkers have been asking:
Q: I’m planning to retire in a year. What should I do?
A: Stocks are an important part of retirement investments, even after you stop working. Because stocks historically produce higher returns than other investments, it’s a good idea to keep a portion of your funds in stocks to reduce the risk that you’ll outlive your money.
Still, it’s wise to reduce your exposure to stocks as you approach retirement to make it less likely you’ll be blindsided by a steep drop in the market just before you plan to start tapping into your portfolio. Keep money that you expect to need in the next year or two in safer investments, such as certificates of deposit, U.S. Treasury securities or money market funds, said Richard K. Schroeder of Schroeder, Braxton & Vogt, an Amherst money management firm.
Q: I’m a long-term investor, but I don’t like to see my 401(k) drop like this. Should I sell stocks?
A: Financial advisers generally say that investors who don’t expect to need money in their retirement accounts for five to 10 years or more are better off sticking with a broadly diversified portfolio of stocks. Even with this year’s decline, investors still will have a long time to recover from the recent losses, and in hindsight, some of the best times to buy stocks in the last 25 years have been when the market is in turmoil, as it was during the 1987 crash.
The potential benefit of selling now is to protect yourself against further declines. But if you’re wrong, and the stock market goes back up, you’ll have missed out on part of the recovery. An investor who missed out on the market’s 10 best days between 1997 and 2006 would have earned an annual return of 3.4 percent, less than half of the 8.4 percent return from an investor who stayed in the market for the whole time.
Q: Is my pension safe? A: Pensions are guaranteed by the Pension Benefit Guaranty Corp., a federal agency, up to $51,750, should a pension plan become insolvent. Short of that, employer-run pension plans are likely taking a hit because of the stock market’s decline, which could force companies to increase their contributions in the coming years to keep the plan fully funded.
Q: Why is the stock market down so much?
A: Investors had been expecting Congress to approve a Wall Street bailout plan Monday. When it started to look like the package was in trouble, stocks started plunging. Part of the reason was the uncertainty over whether Congress will ultimately approve some sort of rescue package, which many experts see as essential for keeping the crisis from spiraling deeper.
The fear is that the longer the crisis goes on, credit will keep getting tighter. That will affect companies that need to borrow money to expand, to hire new workers or simply to keep the lights on. Consumers also will have a tougher time borrowing to buy homes, new cars and other expensive items. As sales fall, that could lead to job cuts, which would further cut into consumer spending.
In addition, there’s a lot of fear and uncertainty among investors over the depth of the problems and what kind of action the Senate will take when it reconvenes today, followed by the House. That’s prompting short-term investors to sell stocks and move to cash or less-volatile investments.
Q: I see banks, like IndyMac and Washington Mutual, failing and it makes me nervous. Is the money I have in the local banks safe?
A: All of the local banks are in good financial shape, so the risk of failure is minimal. Beyond that, deposits in any bank are insured by the Federal Deposit Insurance Corp. up to $100,000 per depositor for regular accounts and up to $250,000 per accountholder for deposit retirement accounts. That includes so-called money market deposit accounts, but not money market mutual funds.
Q: What will happen to my credit cards?
A: Card issuers already are tightening up their lending practices, even for customers with good credit.
More than 60 percent of card issuers are reducing the credit limits of their existing cardholders, according to a report by Javelin Strategy & Research. That will leave consumers with less borrowing power.
Card issuers also are cutting back on the new card offers that used to pack the mailboxes, and they’re also offering fewer balance- transfer promotions and more frequently limiting the terms of discounts.
Q: Will it be more difficult to obtain a car loan?
A: Frank Downing Jr., president of Towne Automotive Group, said that while his dealership’s sales slowed in September, the problem was customers’ wariness about the economy, not their inability to obtain a car loan.
Scott Bieler, president of West Herr Automotive Group, said its ability to get car loans financed is about the same as a year ago, although lending institutions are seeking more information from customers. Those institutions tell him that this region has a low rate of delinquencies. “Western New Yorkers, they pay their loans,” Bieler said. But to get the lowest rates, it will take a stronger credit score than it did not so long ago.
Q: Will student loans be tougher to obtain?
A: In some ways, yes. Nonfederal student loans have become tougher to secure as lenders impose stricter requirements and other lenders have left that market, said Kent McGowan, director of financial aid at Buffalo State College.
McGowan said that Buffalo State students have not faced a problem getting federally guaranteed student loans but that the pool of lenders in that market has shrunk. Congress recently passed legislation extending by one year a program to ensure continued availability of federally guaranteed loans.
Q: Can I still get a mortgage? A: Yes, but you’ll need solid documentation to prove your creditworthiness and face higher down-payment requirements, especially if you have a less-than-stellar credit history.
Be prepared to come up with a down payment of at least 10 percent, especially if your credit score is below 700. The days of “no money down” or “low money down” mortgages are over.
Before heading to the bank, be sure to gather copies of your 2007 tax return, W-2 statements and current pay stubs. Knowing your credit status will also improve your chances of mortgage success.
Aim for a mortgage amount that will keep your total monthly debt payments at 45 percent or less of your pretax income. If your pretax income is $10,000, calculate a home loan amount that will keep total mortgage, credit card and other loan payments at $4,500 or less.
Q: Should I have cash available? A: Financial advisers have long recommended that consumers keep an emergency fund equal to two to three months’ income in easily accessible accounts, such as a money market fund or a bank savings account. That money can be quickly tapped for unexpected expenses such as a leaky roof or a broken furnace, as well as for life-changing events such as the loss of a job.
Q: How safe is my job?
A: The crisis could leave many workers with less job security. Federal Reserve Chairman Ben S. Bernanke has warned that if the credit squeeze causes consumers to spend less, the economy could begin to shrink and fall into a recession.
If that happens, companies are more likely to stop hiring and even fire workers as their sales slip and their profits weaken. And even though the Buffalo Niagara region is far removed from most of the bad home loans and Wall Street’s woes, the local economy still would suffer because companies here sell their goods and services not only across the country, but around the world.
For instance, if the credit squeeze cuts into car sales, it may mean cutbacks at the local auto plants and their suppliers.
