Sunday, September 21, 2014

The Good Sister

While Fannie Mae and Freddie Mac were out trying to wreck the liquidity of the world’s money markets with their bad behavior during the subprime loan scandal, their good sister Ginnie Mae quietly went about her job guaranteeing Mortgage Backed Securities (MBS) backed by residential loans insured by Government agencies.

“The Government National Mortgage Association (GNMA), or Ginnie Mae, was established in the United States in 1968 to promote home ownership. As a wholly owned government corporation within the Department of Housing and Urban Development (HUD), Ginnie Mae’s mission is to expand affordable housing in the United States by channeling global capital into the nation’s housing finance markets.” (Wikipedia)

MBS bonds backed by Ginnie Mae are considered “full faith and credit” securities. That is the timely payment of principal and interest is guaranteed by the United States Government. Period. During the crisis of 2008, the Government came to the rescue of Fannie Mae and Freddie Mac in spite of their bad behavior and the lack of the “full faith and credit” guarantee. Fannie Mae and Freddie Mac were corporations that had been sponsored by the Federal Government, but they were owned by individual shareholders not by the Government. In September 2008, facing bankruptcy, Fannie Mae and Freddie Mac were put under Government receivership, effectively wiping out their shareholders.

Bond funds that buy and sell MBS backed by GNMA are of interest to the conservative investor looking for a bit more yield than offered by U.S. Treasuries, but something that is guaranteed by the full faith and credit of the United States. An example of these products, Vanguard GNMA Fund Investor Shares (VFIIX), currently pays about 2.5%. Nothing to brag about, but better than 0.75% for a five year certificate of deposit backed by the Federal Deposit Insurance Corporation (FDIC). As is always the case with Vanguard funds this product only carries a miniscule 0.21% expense ratio. The industry average for similar products is 0.98%.

There is some risk associated with these products. When a lot of people are paying off their loans at a rapid rate or refinancing at a lower rate, the value of your shares will decline. While the principal and interest of individual securities is ultimately guaranteed, the instantaneous value of the bonds represented by your shares rises when interest rates drop and drops when interest rates rise. Vanguard also allows the VFIIX investor the ability to write checks off their holding, effectively offering a checking account with a 2.5% interest rate.

Something to think about, but as always:

Let’s be careful out there!

Monday, September 15, 2014

The Charles Schwab Guide to Finances After Fifty

The Charles Schwab Guide to Finances after Fifty by Carrie Schwab-Pomerantz is a useful reference book to add to your collection. If you are customer of Charles Schwab you can obtain a copy for free at your local office. It is also sold in bookstores and on line. This isn’t a typical “how to” personal finance book. Although it generally covers planning for retirement, living in retirement, and preparing and dealing with death, it really isn’t the kind of book that is meant to be read cover to cover. Rather than chapters, the book answers fifty questions divided into six parts.

Part I When Retirement is at Least Ten Years Out
Part II Closer: Transitioning into Retirement
Part III Life in Retirement
Part IV Maximizing Social Security and Medicare
Part V Estate Planning
Part VI The People in My Life

Although the book is obviously aimed at people over fifty, I would recommend it to anyone over forty who wants to dig a little deeper into questions concerning finances in the second half of life.

This book assumes that you already have a basic knowledge of personal finance and an increasing net worth. Although the author reminds the reader of the basics from time to time it is really an intermediate sort of text book that answers specific questions you may face.

For example, one of the question titles is, “I’m thinking of downsizing once I retire. Will I get hit with a tax bill when I sell my house?” After covering the basics and pitfalls associated with the question, the author ends each “question” with a list titled, “Next Steps” that refers the reader to other associated “questions” such as how to invest the capital generated by your house sale or the effect of mortgage debt on retirement planning.

The author also covers “questions” that one does not generally see in books of this sort. For example, “My partner and I aren’t married. What do we need to know about managing our finances as a team, especially when it comes to planning for retirement?” The author introduces the reader to a binding Domestic Partnership Agreement that will provide legal protection to individuals in a relationship that is not covered by the laws concerning marriage, benefits that are available to everyone and not available to unmarried people (such as Social Security spousal and survivor benefits). Safeguards such as a HIPAA compliant advanced health care directive are particularly important in such relationships, as a partner could be denied access to important medical information at critical moments.

As you consider various questions confronted in the second half of life, look up the appropriate question. You will be given a good solid answer with references to the appropriate source material and that list of other associated questions.

Friday, September 12, 2014

Family Emergency (Extreme Decision Making)

I am hoping that the recent problems generated by my family emergency are sufficiently under control that I can, once again, return to normalcy. I will try to share what I have learned to the best of my abilities.

The day may come when you will find it necessary to make life or death decisions for someone you love. You will not have the technical expertise to make these decisions and you can’t expect the physicians or other professionals to give you useful statistical data. A doctor isn’t going to tell you that this course of action will produce this result 90% of the time. Living wills are often out of date or conflict with the stated desires of the author. Still, you must choose to sign or not sign permission documents.

I am basically satisfied with the decisions I have made for others over the last few months. I do not seem to be suffering from the “what if?” syndrome. Here is an attempt to deconstruct what I did in moments of crisis.

Run. Do not walk to the best experts you can find, always remembering that in a multitude of counselors you will find wisdom. Pump them for as much information as they are willing to share. It is important to learn the best outcome, the worst outcome, and the most probable outcome for a particular course of action. Often one of these three bits of information will make the decision for you.

In one of my decisions every professional with the exception of one social worker recommended a particular course of treatment. I went against the majority opinion because the worst outcome of one course of action would be equal to the best outcome of the second. This decision turned out to be excellent because the actual outcome exceeded any reasonable expectation.

When facing another decision, the worst outcome was unthinkably horrible. One course of action had little hope of success and a great probability of a ghastly failure. The second course of action had little hope of success but the probable outcome was acceptable, a natural death without suffering. The third course of action (a lack of any action) would result in certain death. I choose the second course of action, leading to the predicted result.

I won’t sit here and tell you that my heart was not a part of my decision making process. This is family. It is impossible to make completely rational decisions in such situations. Therefore it is important to provide your loved ones with as much information as possible long before the moment of crisis. Write out a living will. Make certain that the person who will hold medical power of attorney on your behalf not only has a copy of your living will, but an understanding based on open and frank conversations as to what you believe the words the lawyer put on that piece of paper actually mean to you.

Openness and honesty are important in all aspects of healthy close personal relationships. Life and death are no different than finances, as we approach the end. Unless you die suddenly, without warning, a day will come when someone else will need to pay your bills and tell the doctor how to proceed. The more tools and information at the disposal of the individual who holds medical power of attorney or durable power of attorney on you behalf, the better she can perform her job.

Let me add that I have read that doctors request much less end of life medical care than the general population. What does that tell you?