Suze Orman's Action Plan (9 page)

Most troubling is the growing number of complaints that debt-consolidation firms collected their initial fee and then did nothing for the consumer. Not only were the clients out their fee, their FICO scores were hurt even more because the debt-consolidation firm told them they were taking care of the payments and the settlement. In
reality, nothing was being done, so the amount owed ballooned as interest rates were raised and penalty fees piled up.

There is no easy way out of debt. Anyone promising to magically make everything all better is either lying to you or not explaining the financial and credit costs of what they are doing.

ACTION:
Contact the National Foundation for Credit Counseling. This is a network of nonprofit agencies with trained counselors who will help you assess your situation and lay out the most logical and realistic steps for you to follow. They are not miracle workers; as we just discussed, there are no miracles to be had when it comes to your credit card debt. But the NFCC are the “good guys” you can trust. Go to
nfcc.org
or call 800-388-2227.

ACTION:
Contact the NFCC and get honest help in assessing your options. If you aren’t eligible for a debt management plan (DMP), the counselor will try to find a workable alternative to bankruptcy. Only about 10% of their clients have ended up in bankruptcy.

That said, if in fact you owe more than what you make; if you have tried every which way to pay your bills, including working a second or even a third job; if your debt keeps growing and you are being charged 32% interest and you can’t see any way out, then bankruptcy may, sadly, be an option for you. Just remember that bankruptcy will destroy your FICO credit score, but then again, if you have been behind in payments your FICO score is probably already pretty low. Bankruptcy is really a last resort when you have tried everything else. This drastic step requires the most careful consideration. You will want to find a reputable attorney who can explain the current law, the pros and cons of filing, and the different kinds of bankruptcy. For a good overview of the subject visit the
credit.com
website at:
www.credit.com/slp/chapter8/Bankruptcy.jsp
.

ACTION:
First of all, verify the debt. Debt collection agencies can pursue old debts that have never been paid off, hoping you will pay money to stop the calls. But plenty of times the debts are false—the result of identity theft, clerical errors, or credit reports that have not been updated. Sometimes a debt is so old it’s passed the time period when a debt
collector could legally sue to collect (see below). Within 30 days of being contacted, send the collector a letter (be sure to send it certified mail, return receipt requested) stating you do not owe the money, and requesting proof the debt is valid (such as a copy of the bill you supposedly owe). If the collection agency doesn’t verify the debt within 30 days, it can no longer keep contacting you and cannot list the debt on your credit report. Remember your best shot at avoiding these “zombie” debts that erroneously resurface is by staying on top of your credit report. In these credit-crunched times, no one can afford a single inaccuracy that could lower a credit score. Go to
annualcreditreport.com
to get your free credit report. Each of the three credit bureaus, Equifax, Experian, and Transunion, are required to provide you with one free report a year.

ACTION:
Check out your state’s statute of limitations on debt collection. In every state, the statue of limitations for credit card debt begins to tick from the date you failed to make a payment that was due—as long as you never made another payment on that credit card account. (You can find the list of state statutes at
www.fair-debt-collection.com/statute-limitations.html
.)
One way to prove the statute applies to your debts is to get a copy of your credit report. It will list the dates you were delinquent as reported by your creditors. So if your state’s statute of limitations on credit card debt is five years, and your last payment was due on April 12, the statute of limitations on that debt will run out five years from that April 12, assuming you haven’t made another payment. (Please note: statutes will vary for different types of debt. The statutes of limitations are different for credit card accounts than for mortgages and auto loans.) Also important to note: If you are contacted by a collection agency and you make a promise to send in a check or you actually do send in a small amount of money, it is possible that the statute of limitations starts all over again.

ACTION:
The Fair Debt Collection Practices Act (FDCPA) restricts tactics that debt collection agencies may use. They cannot call you at work if they know your employer prohibits such calls. Once you tell them this, they have to stop the calls; it’s wise to follow up with a letter. Show you know your rights by informing them that under provision 15 of the U.S. Code, section 1692b-c, the letter constitutes formal notice to stop all
future communications with you except for the reasons specifically set forth in the federal law. Collectors also cannot phone your home so often as to constitute harassment and they cannot call before 8
A.M.
or after 9
P.M.
You can learn more about your rights under the FDCPA at
www.credit.com/credit_information/credit_law/Understanding-Your-Debt-Collection-Rights.jsp#2
.

ACTION:
I want to be clear, if your family is dealing with a layoff or reduced income because of a furlough, I get that you may need to use credit cards to pay for some of your family’s needs until you get your finances back up to full power. That’s understandable. I only ask that you truly make every effort to spend carefully; what you deemed a “need” a year ago may now qualify as a “want” that your family can—and must—do without, if only until your situation stabilizes.

But if you are telling me there’s no reasonable cause—such as a layoff—but you are just stuck in a cycle where you can’t make ends meet, I need you (and your partner, if you are in a relationship) to take a serious look at how this is going to play out two or three years down the line. How big will
those unpaid balances be? (Or more likely, how fast will the credit card companies shut you down as your balances rise?) If you can’t make ends meet now, how do you expect that to change going forward? Please don’t count on promotions and pay raises, or even inheritances, for that matter. Will they materialize? Maybe, maybe not. Your predicament is similar to that of homeowners in 2004–2006 who decided to take out crazy mortgages because they were betting that in a few years their houses would increase enough in value to allow them to refinance. Instead, the bubble burst, and many of those bettors are now struggling with unaffordable mortgages or, more likely, have become part of the foreclosure wave. The point is that it is very dangerous to base spending today on what you hope will play out for you tomorrow. If life doesn’t follow your script, you are in for an unhappy ending.

When it comes to managing your credit cards, it’s time to answer honestly whether you are in a short-term rough spot or you are using your credit to live beyond your means. If it’s the latter, it’s time to make some big changes. The new normal is about being realistic about what you can afford on the income you have today. Spend as you go. What you can’t pay off, you shouldn’t pay for in the first place.

S
aving more for retirement is not merely a desirable virtue. It is an absolute necessity. The easy explanation is that you now need to save more to make up for the losses your 401(k)s and IRAs suffered during the bear market that began in 2008.

But that’s only part of the story. The fuller and more honest explanation is that long before 2008 you had fallen into a series of bad habits and faulty assumptions that are at least part of the reason why you are now wondering how you will manage to retire comfortably, let alone retire period.

Faulty assumption #1:
You could just save small sums because the stock market would post large gains. You expected the markets to do most of the
work for you. The average annual return of the S&P 500 stock index during the 1990s was 18%. At that pace your money would double every four years. That lulled you into thinking you didn’t need to set aside large sums in your 401(k) and IRAs. Modest sums were just fine as long as the markets doubled every four years. Until they didn’t.

Faulty assumption #2:
You could ride the massive rise in home prices to a comfortable retirement. From January 2000 through July 2006 the S&P/Case-Shiller index of home prices in 20 metro areas more than doubled. That fed all sorts of retirement strategies: You anticipated that you would one day be able to downsize or do a cash-out refinance, using the excess equity to live happily ever after. Or perhaps you considered tapping a home equity line of credit or reverse mortgage to pay for that dream retirement. Home sweet home, indeed.

Then that bubble burst too. As I write this in the fall of 2009, home values in many regions are down 30% or more from their inflated 2006 highs. As I explain in “Action Plan: Real Estate,” I still believe home ownership is a solid long-term investment, but as a home, not a retirement plan.

The New Rules for Retirement mean that neither the stock market nor the real estate market will magically produce the large gains that are
needed to live comfortably in retirement. Both are viable investments. Both will do just fine. But the greatest determining factor of a secure retirement is how much you will manage to save out of your paycheck. The long-term historic average annual return for the S&P 500 is about 10%, not the 18% we saw in the crazy ’90s. A 10% annualized gain translates to doubling your money every seven years or so. I happen to think 10% could be a bit optimistic for stocks going forward. Combined with the reality that some of your portfolio should also be invested in less risky bonds and cash, I think it’s more reasonable to base your assumptions on a long-term annualized average gain of 7% or so for your retirement accounts. That means it will double every 10 years. If the new normal is that your money might on average double every 10 years, rather than every four years, you can do the math for yourself: It will take more saving on your part to offset more moderate market returns.

You also need to face the fact that your retirement savings might be called on to support you for a very long time. Today a 65-year-old male has an average life expectancy to age 81, and a female to age 84—that’s a long time for your retirement funds to take care of you. The more you can manage to save now, the lower the risk that you will run out of money later.

And what you manage to save needs to be expertly
managed. Save more and save
smarter
. I have heard from so many pre-retirees who say they lost 40% or 50% or more during the depths of the bear market. The only way that could have happened is if a portfolio was 100% invested in stocks. No pre-retiree’s portfolio should have been that aggressive. But many of you also suffer from the opposite malady: You have become too conservative with your retirement money, thinking it is “safe” to put all your savings in cash or bonds. It isn’t. Your money will not keep pace with inflation, and that is a very serious long-term threat to your security. Even if you are 55 and expect to retire in the next 10 years, the reality is that you could live for another 30 years. The challenge is to understand that you need to commit to an asset allocation that mixes bonds for their safety and stocks for their ability to produce inflation-beating gains. Your comfort in retirement rests on getting your allocation strategy right today.

You might also want to rethink the “when” of retirement. If you have been slow to save for retirement, or if your portfolio took a big hit, there is indeed a way to work your way out of your retirement stress: stay on the job a few more years. Just adding three more years to your career will help you save more and delay the spend-down of your retirement portfolio. The new normal of retirement means that it takes work to pull it off.

• Make sure you have the right mix of stocks and bonds in your retirement accounts given your age.
  

• Do not make early withdrawals or take loans from retirement accounts to pay for non-retirement expenses.
  

• Convert an old 401(k) to a rollover IRA so you can invest in the best low-cost funds, ETFs, and bonds.
  

• Consider converting a rollover IRA or traditional IRA to a Roth IRA; the converted money will then be tax-free. Just be aware of the tax due at conversion.