The Jacobs Financial Group

Don’t Let a Market Crash Hit You at the Finish Line

Can you make the risk of stocks go away just by owning them long enough? Many investors still think so.

“Over any 20-year period in history, in any market, an equity portfolio has outperformed a fixed-income portfolio,” one reader recently emailed me. “Warren Buffett believes in this rule as well,” he added, referring to Mr. Buffett’s bullish selling of long-term put options on the Standard & Poor’s 500-stock index in recent years. (Selling those puts will be profitable if U.S. stocks go up over the next decade or so.)

As the philosopher Bertrand Russell warned, you shouldn’t mistake wishes for facts.

Bonds have beaten stocks for as long as two decades — in the 20 years that ended this June 30, for example, as well as 1989 through 2008.

Nor does Mr. Buffett believe stocks are sure to beat all other investments over the next 20 years.

“I certainly don’t mean to say that,” Mr. Buffett told me this week. “I would say that if you hold the S&P 500 long enough, you will show some gain. I think the probability of owning equities for 25 years, and having them end up at a lower price than where you started, is probably 1 in 100.”

But what about the probability that stocks will beat everything else, including bonds and inflation? “Who knows?” Mr. Buffett said. “People say that stocks have to be better than bonds, but I’ve pointed out just the opposite: That all depends on the starting price.”

Why, then, do so many investors think stocks become safe if you simply hang on for at least 20 years?

In the past, the longer the measurement period, the less the rate of return on stocks has varied. Any given year was a crapshoot. But over decades, stocks have tended to go up at a fairly steady average annual rate of 9% to 10%. If “risk” is the chance of deviating from that average, then that kind of risk has indeed declined over very long periods.

But the risk of investing in stocks isn’t the chance that your rate of return might vary from an average; it is the possibility that stocks might wipe you out. That risk never goes away, no matter how long you hang on.

The belief that extending your holding period can eliminate the risk of stocks is simply bogus. Time might be your ally. But it also might turn out to be your enemy. While a longer horizon gives you more opportunities to recover from crashes, it also gives you more opportunities to experience them.

Look at the long-term average annual rate of return on stocks since 1926, when good data begin. From the market peak in 2007 to its trough this March, that long-term annual return fell only a smidgen, from 10.4% to 9.3%. But if you had $1 million in U.S. stocks on Sept. 30, 2007, you had only $498,300 left by March 1, 2009. If losing more than 50% of your money in a year-and-a-half isn’t risk, what is?

What if you retired into the teeth of that bear market? If, as many financial advisers recommend, you withdrew 4% of your wealth in equal monthly installments for living expenses, your $1 million would have shrunk to less than $465,000. You now needed roughly a 115% gain just to get back to where you started, and you were left in the meantime with less than half as much money to live on.

But time can turn out to be an enemy for anyone, not just retirees. A 50-year-old might have shrugged off the 38% fall in the U.S. stock market in 2000 to 2002 and told himself, “I have plenty of time to recover.” He’s now pushing 60 and, even after the market’s recent bounce, still has a 27% loss from two years ago — and is even down 14% from the beginning of 2000, according to Ibbotson Associates. He needs roughly a 38% gain just to get back to where he was in 2007. So does a 40-year-old. So does a 30-year-old.

In short, you can’t count on time alone to bail you out on your U.S. stocks. That is what bonds and foreign stocks and cash and real estate are for.

In his classic book “The Intelligent Investor,” Benjamin Graham — Mr. Buffett’s mentor — advised splitting your money equally between stocks and bonds. Graham added that your stock proportion should never go below 25% (when you think stocks are expensive and bonds are cheap) or above 75% (when stocks seem cheap).

Graham’s rule remains a good starting point even today. If time turns out to be your enemy instead of your friend, you will be very glad to have some of your money elsewhere.

Printed in The Wall Street Journal, page M11

source

Report: Majority Of Newspapers Now Purchased By Kidnappers To Prove Date

NEW YORK—According to a report published this week in American Journalism Review, 93 percent of all newspaper sales can now be attributed to kidnappers seeking to prove the day’s date in filmed ransom demands.

“Although the vast majority of Americans now get their news from the Internet or television, a small but loyal criminal element still purchases newspapers at a steady rate,” study author and Columbia journalism professor Linus Ridell said. “The sober authority of the printed word continues to hold value for those attempting to extort large sums of money from wealthy people who wish to see their loved ones alive again, and not chopped into pieces and left in steamer trunks on their doorsteps.”

“These are sick, sick individuals,” Ridell added. “God bless them for saving our industry.”

Enlarge Image A resourceful captor pieces together a ransom note after finishing the Style section.

According to a source who wished to remain anonymous, there is an ineffable quality to the printed page that kidnappers cannot get from its digital counterpart. Though there are other methods for proving the date of grainy, home-made videos, the source said that newspapers add a certain gravitas to abductions that news websites do not.

“Holding a laptop next to a kid’s head while blood is streaming from his nose just isn’t the same,” said the source, adding that printed materials remove any uncertainty about dates being altered with Photoshop or other digital manipulation software. “There’s just something about the feel of newsprint and the smell of ink coupled with the mildew odor of a windowless basement that can’t be replaced. Ultimately, I think newspapers make the whole thing more tangible and concrete for everyone involved.”

“They’re also great for wrapping up a severed ear and mailing it to the family when they don’t come through with the cash fast enough,” the source continued. “And I always enjoy reading For Better Or For Worse.”

In an effort to cater to their sole remaining customer base, many newspapers have started to run features and advertising targeted at the ruthless abductors. The Washington Post recently sold a two-page advertorial to a popular ski-mask manufacturer, while The New York Times now offers a real estate section dedicated primarily to abandoned warehouses, remote wooden sheds, and converted industrial meat freezers hidden from prying eyes.

In addition to buoying the failing newspapers, criminals are also providing a revenue stream to struggling magazines and other weekly periodicals, the report said. While most Americans have cut back on specialty publications, kidnappers still find them useful for making cut-and-paste ransom letters and death threats.

Although newsstand sales remain steady, neither newspapers nor magazines have seen much growth in terms of subscriptions, as their last existing consumers are extremely reluctant to provide permanent addresses.

“In order to reflect the purchasing habits of our most loyal customers, we will work with our distributors to ensure that these people can get newspapers at all hours of the night in inconspicuous, security-camera-free venues,” said billionaire media mogul Rupert Murdoch, who later offhandedly mentioned that his wife often takes late-evening walks all by herself. “As long as violent sociopaths continue to abduct those closest to affluent people for huge cash ransoms, the long and storied tradition of the American newspaper will be preserved.”

The newspaper industry joins several other sectors that are supported solely by kidnappers, including, most notably, voice-modulator manufacturing and sales.

Source

Planning a Cost-Effective Job Search

Whether you’ve already cleaned out your desk or are expecting your department to be next at work for cuts, in this economy, it definitely makes sense to plan a job search before you actually have to do one. Call it a response plan.

Here are some basic steps in getting that process started:

Start or build your emergency fund: Unemployment insurance won’t even come close to meeting your cash needs when you’re out of a job. Start slashing your spending and funnel that extra cash into an emergency fund that won’t be touched for anything but essentials – housing payments, food and insurance expenses. Get a head start on building an amount equal to 3-6 months of those expenses as soon as you can, first by cutting your basic spending and then possibly by paying the minimums on debt purchases until you get that fund in good shape. If you’ve still got your job after you hit your emergency fund target, then keep your tight spending in force and go back to attacking any debt that you have more forcefully.

Get advice on finances, taxes and possible legal issues: There’s nothing better than going into an exit interview with a plan to put yourself in the best situation possible when you lose your job. You might start by talking with a financial professional and a tax expert about any spending, saving or tax specifics you should focus on now as a way to blunt the damage from lost income later. And depending on the situation and your room to negotiate, it might not be a bad idea to invest in the services of a workplace attorney to make sure you know what to ask for in an exit package. Always ask if you can build unused vacation and sick days into a package and see what you can do about extending health benefits before you start having to pick up the cost via COBRA. COBRA refers to the Consolidated Omnibus Budget Reconciliation Act, which gives workers and their families who lose their health benefits the right to choose to continue them under their group plan for a limited time.

Research health coverage beforehand: The recently passed federal stimulus package provides 65 percent subsidy for COBRA premiums for up to 9 months, which is good news because COBRA can be very expensive. In any event, it makes sense to research individual, high-deductible coverage that might be an affordable alternative to staying on your employer’s health plan while you’re looking for your next job. Many quality carriers offer enrollment online, but ask around and see if friends or associates know good agents who can find coverage that fits you so you’ll be prepared if you need it.

Get personal disability coverage now: Disability coverage offered through your workplace may barely cover you if you are disabled while working, but once your job is gone, there goes your coverage. It’s always a good idea for individuals to have some personal disability coverage of your own, and you should buy it while you’re employed because you need to prove income before you can get the maximum coverage based on your current income.

Understand your unemployment benefits: Generally, it’s a good idea to file immediately for unemployment benefits, even if you’re getting severance. Check on these provisions as soon as you can. Also remember that the federal stimulus plan applies here as well. Benefits will increase by $25 per week for some 20 million jobless workers, while the first $2,400 they receive in benefits will be exempt from federal taxes. Also, if you get a job before your severance or unemployment runs out, use those funds to top off your emergency fund and then attack debt so you’re in a good position to weather any future storms.

Take advantage of any free job advice and assistance you can: If your employer is providing office space, resume-writing assistance or any other benefits to help you transition to your next job, by all means, take advantage of them. It’s particularly smart to get advice with resume writing because as industries change, the type of experience that hiring executives want to see on resumes changes as well.

Network: Make sure you’ve identified key professional groups both locally or nationally that will allow you to meet colleagues and hiring executives in your industry or the industry you hope to work in next. And plan to do little things that keep you in touch with potential employers – make sure your cell phone, e-mail and voicemail are always working, and make sure you have resumes, cover letters and an interview outfit always at the ready in case you have a sudden opportunity to interview.

April 2009 — This column is produced and provided by The Jacobs Financial Group.

Ways to Save Money on Health Care and Health Insurance in Troubled Times

Whether you buy your healthcare coverage through your employer or independently, you need to look at your coverage the same way cost-cutting entrepreneurs do. Buying coverage in the future won’t stop at finding the best price – what you pay increasingly will involve how well you personally manage your health.

According to a report last year by benefits consultant Watson Wyatt, nearly half (47 percent) of the 453 large U.S. employers currently offer a consumer-directed health plan (CDHP), a high-deductible plan offered with a personal account that can be used to pay a portion of medical expenses not covered under the plan. In the world of independently purchased health insurance, it’s the same concept as the pairing of a high deductible health plan (HDHP) with a health savings account (HSA).

Also, don’t be surprised if your employer or insurer is going to get tougher about you losing weight, quitting smoking or taking part in a monitored exercise plan.

Here are some ideas to help you take the first step in monitoring these costs:

Change your negative healthcare behavior: Lowering the number on your bathroom scale will not only have immediate health benefits, it will also make your health insurance options and potential out-of-pocket costs more affordable over time. A Stanford University and Rand Corporation study reported that lifetime medical costs related to diabetes, heart disease, high cholesterol, hypertension and stroke among the obese are $10,000 higher than among the non-obese. It added that lifetime medical costs could be reduced by $2,200 to $5,300 following a 10 percent reduction in body weight.

Know what you’re buying: Whether you buy health insurance through an agent or your employer, insist that they explain exactly what you’re getting for your premium, and where deductibles do and don’t apply. That way, you’ll have a baseline when you buy your own coverage. If you’re purchasing your own insurance policy, compare the premium savings from a higher deductible plan with your usage pattern of health services. What you save can often cover your high deductible. The California Medical Association offers a plan comparison checklist on its Web site, www.cmanet.org.

Always research and discuss the potential cost of a diagnosis: If your physician diagnoses a condition that requires tests, prescription drugs, a hospital stay or ongoing therapy, ask polite but detailed questions about what you’ll be charged, from the doctor’s bills to ongoing ancillary costs associated with treatment. Ask the doctor or his office manager if discounts can be negotiated through cash payments or other means. You also need to be careful that you’re not being charged a rate for uninsured patients when you are simply going to paying for all or part of the bill to get to your deductible. Last, consider asking doctors for generic options and samples of prescription drugs to extend your savings.

Make sure your exact spending is reducing your deductible: Keep a binder or a filing system to monitor how this year’s out-of-pocket spending is reducing your insurance deductible. Your insurer’s total may not always be accurate or up-to-date. Also, make sure you understand which procedures are offered through your plan that will be paid even though you haven’t paid up your deductible.

Check local pricing resources: In non-emergency situations, you should always compare prices on treatments. Check with local medical boards and state health officials to see if they have online databases on costs for various medical procedures. Also, if there is a support group for your condition, talk to members about what they paid locally for care.

Be smart about emergency and non-emergency health visits: Emergency-room visits tend to cost $300 to $1,000 compared with $150 at an urgent-care center and $35 to $45 at a convenience-care clinic in a drug store or some other location. First, make sure the alternatives to hospital emergency room care are acceptable for your illness. Write yourself a note at some point to check out these options in your community so you understand what they offer, what their hours of business are, and under what conditions you’d choose them. In particular, make sure the facility and the provider are in your health plan’s network so whatever you pay out-of-pocket counts toward your deductible. Also rely on your insurer’s 24-hour advice hotline for guidance on where to go for care. Either tape that call or keep a written record of it in case you have a claim denied.

Talk to a financial advisor about planning for long-term care: If you or a loved one are diagnosed with a chronic illness, that’s a financial issue that requires a plan. As tough as it may be to focus on money issues at a stressful time, make an appointment with a tax professional or financial professional to discuss affordability options that will safeguard your assets, including Medical Spending Accounts that can backstop out-of-pocket costs on high-deductible policies.

Take advantage of your company’s flexible spending account: A flexible spending account is a separate, tax-advantaged account where you deposit funds to pay for medical expenses not paid by your insurance. You need to check what your particular company’s FSA allows you to stockpile funds for, and you will need to estimate carefully because you’ll have to spend out these funds by a particular annual date or lose the remainder. It’s also good to discuss how you’re allocating those expenses with a financial adviser.

April 2009 — This column is produced and provided by The Jacobs Financial Group.

Veterans Set For a Big Benefits Upgrade in 2009

The Post- 9/11 Veterans Educational Assistance Act, which will become effective in August 2008, will position returning U.S. veterans for one of the biggest upgrades in post-military education benefits since the G.I. Bill was signed in 1944.

The act, signed by President Bush in June, pays up to the full cost of tuition and fees at the most expensive public school in the state in which a veteran enrolls. Some can get a free education if they qualify for the full amount, and it not only extends to the main four branches of the military, but also activated members of the National Guard and the Reserves. Best of all, the new program will allow returning servicemen and women with qualifying service to transfer their benefits to spouses or children if they already have a degree.

The current G.I. Bill pays only 70 percent of the cost of a public education and almost a third of the cost of a private-school education, and it currently costs vets $1,200 to enroll in the program.

Returning veterans might consider this benefits upgrade as part of an overall look at their financial status. A financial planning professional with expertise in military benefits can be a good first stop to re-start civilian life.

To qualify for the new benefits, veterans need to have served at least three months of active duty since 9/11, after which benefits are pro-rated according to months served, up to 36. For veterans who have served at least three years of active duty, they’ll qualify for 36 months worth of in-state tuition and fees, or four academic years. For those who serve 24 months, they’ll qualify for 80 percent of in-state tuition, plus 80 percent of the costs of books and housing. For those who leave the military due to a service-related disability and served at least 30 days of continuous active duty qualify for the maximum benefit. The program will cover in-state tuition and fees and give veterans a housing stipend pegged to area housing prices. It will also pay $1,000 a year toward books and up to $1,200 toward tutoring expenses as long as it’s for an in-state school. Out-of-state students will need to make up the difference between in-state and out-of-state costs.

There’s also the Yellow Ribbon G.I. Education Enhancement Program, where the federal government matches institutional grants offered by participating schools to vets who qualify for the maximum benefit.

Other things returning vets should remember:

Getting back to retirement planning: Military service counts toward vesting for all civilian retirement plans. And thanks to the Heroes Earned Retirement Opportunities (HERO) Act enacted in 2006, military and their families can actually put more money into their traditional or Roth IRA accounts. The act allows tax-free combat pay to be considered as earned income for determining the contribution amount for traditional and Roth IRAs. Before, a military person who earned only combat pay wasn’t allowed to contribute to either form of IRA.

Plan proper use of accumulated pay: For returning military receiving accumulated military pay or compensation from civilian employment, it’s tempting to take the money and blow it. It makes sense to sit down with a financial and tax adviser before a dime gets spent.

Understand tax issues: Activated and deployed military personnel receive special tax breaks at the federal and sometimes state level. Military income earned by soldiers in combat zones is tax-free and they don’t have to file taxes until 180 days after their return. Activated military personnel also are entitled to an extension on the period of time allowed for a tax break on the profits from the sale of a home. They’re also entitled to tax breaks on childcare assistance and certain travel. Nontaxable combat pay can also be considered for the Earned Income Credit.

Know your rights if problems occur: The Servicemembers Civil Relief Act of 2003 provides a variety of financial protections for active duty personnel. The act provides stays on civil litigation including bankruptcy and divorce and prevents wage attachments while military personnel are away. Coverage requires active duty confirmation from a commanding officer but expires 90 days after that status has been terminated. The law also makes it tougher – but not impossible – for landlords to evict military families for nonpayment of rent.

October 2008 — This column is produced and provided by The Jacobs Financial Group.

GETTING YOUR FINANCES READY FOR THE NEXT RAINY DAY – OR DECADE

It was Benjamin Franklin who once said, “The man who achieves makes many mistakes, but he never makes the biggest mistake of all – doing nothing.”

As the nation continues to work its way out of recession and investors begin to take stock of what looks like a lost decade in their portfolios, it might make sense to execute some simple ideas now that will give better preparation for possible tough times in the future. After all, disaster can’t be predicted, but it can be blunted by preparation. Here are a few ideas to implement as the economy recovers.

Start with expert advice: A fresh financial start should begin with some solid, up-to-the-minute advice. Consider making a trip to talk over your current finances and retirement picture – no matter what state they’re in – with your tax advisor and a financial advisor. Many people feel they’ve made mistakes that they’ll never be able to repair with their money, and the only way that might be certain is if they don’t properly assess what they’ve done and should do in the future. Getting trained, experienced advice is one way to change that.

Pay down your debt: There was once a time when mortgage debt was referred to as “good debt,” but even that perception has changed for many families in recent years. While mortgage debt has tax advantages, the relatively recent tendency for homeowners to look at their property as a piggy bank looks headed for permanent change. And with new credit card lending rules on the horizon, Americans’ relationship with plastic is bound for big changes as well. Resolve to get a better handle on existing debt and above all things, resolve to pay it off in sensible fashion, attacking the highest-rate and less tax-advantaged balances first.

Reevaluate your career plan: It’s true that many Americans will have to work longer than they planned to assure a healthy retirement given the events of the last decade. But you shouldn’t stop there in making that assessment. As the country comes out of this economic slump, you should also be considering whether your current career meets your personal as well as your financial needs. A chance to earn extra money would certainly be great, but if you’re unhappy doing what you’re doing or you see your industry going nowhere, then it might be time to retrain or research a change.

Get serious about an emergency fund: If you suddenly lost your home, your job, or were disabled with limited health or disability benefits, how would you afford a hotel, transportation or medical bills? How would you pay for all that? Credit cards? Okay, but how would you pay off those cards? An emergency fund needs to be three to six months worth of cash at a minimum kept in an easily accessible place—not as accessible as a mattress, but not in a stock fund or some other investment that might fluctuate in value and then be tough to access for a week or more. You need to treat that cash as money that isn’t there unless a disaster occurs. And try to open it with a high enough balance so you’ll keep it from being eaten away by any account maintenance fees. Write down a list of things that are potential emergencies and sign it as a personal contract with yourself. That agreement should state that you will not touch the funds except in case of some of the following:

• Loss of employment;
• Medical bills that exceed your insurance payments (if you have insurance);
• Emergency home or car repairs in excess of insurance that are required to make the home livable or the car drivable.

Insure yourself properly: Insurance exists to prevent financial devastation. You owe it to yourself to buy whatever coverage you can afford for risks that affect you directly. Not everyone needs life insurance or particular forms of liability insurance, for example. But most of us need help knowing what coverage to buy, and that’s where the help of a financial adviser might come in handy—there is no one-size-fits all insurance solution. It’s a good time to evaluate whether your coverage in any of the following types of insurance is adequate:

• Health insurance
• Life insurance
• Home or rental insurance
• Disability insurance
• Auto insurance
• Liability insurance related to a particular business or work activity.

Create a worst possible scenario: It’s not the easiest thing in the world to do, but based on your own personal circumstances, what would be the biggest potential risks you might face financially? Some examples:

• If there was hereditary evidence cancer or heart disease among your closest relatives, how would you pay for treatment if your insurance didn’t fully cover the costs?
• If you live in a flood plain, do you have adequate federal flood insurance?
• If your company has been losing money for the last year, how likely is it you might be laid off?
• Will you need additional training or education to stay in your job going forward?
• If you were disabled, how would you make up your lost salary?

August 2009 — This column is produced and provided by The Jacobs Financial Group.

How Does the Stimulus Plan Affect You? It’s Good to Get Some Advice Now

The biggest benefit from the $787.2 billion federal stimulus package will hopefully be a noticeable improvement in the nation’s economy. But on an individual level, it’s wise to check if you might be eligible for benefits in health care, education, various tax credits and housing.

A visit with a tax expert or a financial adviser can help you determine the best ways to use the following provisions that may affect you. It’s also a good idea to get a financial checkup in an uncertain economy for the following reasons:

• As much as it might hurt to look at the performance of your current retirement accounts and other investments, the economy will recover. When an upturn comes, it’s wise to position your holdings to take full advantage of the recovery.
• Your future plans with regard to spending for your home, your family and your education come into sharp focus under the stimulus plan, and making these provisions work for you in the short-term should be part of a long-term plan.
• If you fear your job might be in danger in the coming months or you might be facing pay or benefit cuts, it’s good to talk through your personal finances before your employer makes a move. The best time to prepare for a job loss is while you’re still making a salary. Not only is it a good opportunity to build an emergency fund, but it’s generally easier to look for new opportunities while you still have your current one.

Here’s a quick summary of the stimulus plan provisions that could affect your finances.

Educational provisions:

College student aid: The package awards $15.6 billion to increase maximum individual student Pell grants by $500.

American Opportunity Tax Credit: This credit temporarily provides taxpayers with a new tax credit of up to $2,500 of the cost of tuition and related expenses, though it phases out for taxpayers with adjusted gross income in excess of $80,000 ($160,000 for married couples filing jointly). Forty percent of the available credit is refundable.

529 Plans: The scope of allowable education expenses expands to include computers and computer technology.

Tax credit provisions:

One more cap for the Alternative Minimum Tax (AMT): Lawmakers put one more patch on the AMT to protect a wider number of people from getting hit. This latest break for potential AMT targets increases the exemption amounts to $46,700 ($70,950 for married couples). The bill would also exclude interest on all private activity bonds issued in 2009 and 2010 from the AMT.

“Making Work Pay” Tax Credits: This is the refundable tax credit of up to $400 for individuals and $800 for families for 2009 and 2010 that would phase out for taxpayers with adjusted gross income in excess of $75,000 ($150,000 for married couples). This isn’t a lump sum payment, but instead is reflected in reduced payroll taxes.

Car Buyers Tax Credit: This allows a deduction for state and local sales and excise taxes paid on the purchase of a new vehicle through 2009. This deduction is phased out for taxpayers with adjusted gross income in excess of $125,000 ($250,000 in the case of a joint return).

Expanded Child Credit: This increases the eligibility for the refundable child tax credit in 2009 and 2010 by reducing the minimum income for eligibility to $3,000.

Earned Income Tax Credit: This provision will create a temporary tax credit increase for working families with three or more children.

Housing provisions:

Refundable First-Time Homebuyer Credit: First-time buyers can claim a credit worth $8,000 – or 10 percent of the home’s value, whichever is less – on their 2008 or 2009 taxes. The added bonus is that the credit is refundable, which means that filers will see a refund of the full $8,000 even if their total tax bill was less than that amount.

Unemployment and healthcare-related benefits:

Extension of Unemployment Benefits: The package provides 33 weeks of extended benefits through Dec. 31, 2009.

Unemployment Compensation: The first $2,400 a person receives in unemployment compensation benefits in 2009 won’t be taxed.

Short-Term COBRA Subsidy for Involuntarily Terminated Workers: This provides a 65 percent subsidy for COBRA premiums for up to 9 months, which will put a dent in the considerable cost of COBRA health benefits for the unemployed.

April 2009 — This column is produced and provided by The Jacobs Financial Group.

Why Maintaining Your Credit Score Becomes Even More Important During the Continuing Credit Crunch

It’s always a good idea to be vigilant about your credit score, but even if borrowing loosens up a bit in 2009, you still need to do everything necessary to keep your credit score high.

Fair Isaac, the company that created the FICO score, has been working on a new version of its landmark credit scoring method that might have serious consequences for you if you’re planning on borrowing for a home or establishing any other new credit in 2009.

The new version of FICO is going to be particularly focused on your balances, not only on your on-time payment records.

Your top priority under this new system: Get balances down.

Reports say that the new FICO revision will actually allow a bit of lenience on late payment – something that might affect more than a few consumers with the downturn in the economy. Obviously, this won’t mean that someone can chronically pay late, but once or twice won’t make the same impact as in earlier FICO versions.

Yet credit utilization – essentially the amount of credit you’re actually using relative to your credit limit – is a much bigger deal simply because high balances are so prevalent right now. From the lender’s perspective, high balances mixed with a tough economy means a higher risk of default among customers.

So what’s a good target utilization rate for all your revolving credit accounts? No more than 50 percent of your credit limit, and if you can get it significantly lower than that over time, that’s a good plan. So, the lower your credit utilization, the better your score.

What does that mean for ordinary Americans who don’t meet that under-50 percent goal? It means you shouldn’t be applying for new credit or refinancing for awhile. But because most lending institutions may continue their strict lending requirements, you might as well defer borrowing goals in favor of reforming your credit behavior.

So instead of bemoaning your tougher chances of getting a loan for a home or a car, why not use the current environment to launch a credit makeover that will position you for a better shot six months to a year from now? Some ideas:

You’ll need at least a 740 score for the best rates: You’ll often hear that credit scores of 700 and up will get you best customer status with lenders. You should aim higher. For the lowest rates and best terms, you need to get your credit score above 740 (the top credit score, by the way, is 850), so keep that target in mind.

Budget: If you’ve never reviewed your spending and picked out areas where you can cut, you’ve never done a budget. Start tracking your spending either on paper or with financial planning software and start pinpointing what spending you can shift over to paying off debt.

One more time — get those balances down: Get all your non-deductible debt under 50 percent of your credit line in each account. Go after your balances with the highest interest rates first, and once you hit 50 percent…keep trying and get those balances down further.

Get some advice: It might not be a bad time to sit down with a tax professional or a financial adviser to talk about the way you’re going to manage your debt going forward.

Keep an eye on your credit reports: Remember that you have the right to get all three of your credit reports — from Experian, TransUnion and Equifax — once a year for free. You can do so by ordering them at www.annualcreditreport.com. Don’t order all three of them at the same time, though. By staggering receipt of each of your credit reports, you’ll get a continuous picture of how your credit picture looks because the three bureaus feed each other the latest information. You’ll also be able to clean up errors as you find them — errors can drag down a credit score – and you’ll also keep an eye out for identity theft. Oh, and by the way, keep in mind that all “free” credit report sites are not free – if they ask you for a credit card number, remember they’re doing that because they want to charge you. Just go to the site above and you’ll be fine.

Get on time and pay more than the minimum: Yes, we indicated above that you might get a bit of a break on late payments with the new FICO system, but that’s a break you should consider only in a dire emergency. Electronic bill payment will allow you to save on postage while guaranteeing on-time postage, and the budgeting advice mentioned above will allow you to put a few more bucks toward getting that loan or credit card bill paid off.

Once you’re paid off, don’t close the account: In the world of credit scoring, closing accounts (even those that have not had balances for years) is a lousy idea. Lenders want to see a long record of credit management, and longtime accounts that you haven’t touched in years may actually help your score because it shows you have some restraint.

April 2009 — This column is produced and provided by The Jacobs Financial Group.

What if Your Employer Wants You to Retire Slowly or Come Back From Retirement? Be Ready with a Plan

Roughly 25 percent of the U.S. workforce is nearing retirement age, according to a recent survey by Hewitt Associates. This has important ramifications for the retirement many Americans will have in the future.

The consulting firm reported that out of 140 mid-size and large employers, 55 percent already had evaluated the impact that potential retirements could have on their organization, and 61 percent have developed or will develop special programs to retain targeted, near-retirement employees. Only one in five said that phased retirement is critical to their company’s human resources strategy today, that number more than triples to 61 percent when employers look ahead 5 years.

What’s phased retirement? Conventionally, it’s the process of allowing employees who have reached 59 ½ to cut their hours while voluntarily receiving a pro-rata portion of their pension annuities. The company gets to keep its intellectual capital in place a little longer while the worker gets to segue into retirement gradually while accessing some of their retirement assets along the way. Provisions in the Pension Protection Act of 2006 made it easier for companies to create phased retirement strategies.

Hewitt said that in addition to retaining current employees, employers are reconsidering their policies toward rehiring retirees. While 45 percent indicated they currently have policies in place that limit the ability to rehire retirees, 46 percent said they were likely to review their rehiring policies in the future.

What kind of consideration process should you undertake if your employer offers this option? A good first step is to consult a financial planner to talk through the possibilities:

Envision how a phased retirement or return to your workplace would affect your life: If you’re reviewing your retirement planning at any age, it makes sense to ask yourself under what conditions you’d leave the workplace or return to it. If you were offered phased retirement, how would you deal with the cutback in responsibility and hours? Some people thrive on work relationships and might not know what to do with significant time outside the office. You obviously need to know based on current projections how much money you’re likely to gather from savings and other retirement resources. Then you need to consider how much money you’d be satisfied making in your post-retirement working life and for how many years you’ll earn that income.

Check what returning to work will do to your total retirement income: You obviously need to know based on current projections how much money you’re likely to gather from savings and other retirement resources. Then you need to consider how much money you’d be satisfied making in your post-retirement working life and for how many years you’ll earn that income. Early retirement transitions can have some adverse effects particularly where pensions are involved. But, if the place where you spent your career comes calling, you might get some attractive pension incentives to get people to come back. Talk these options over with both financial and tax experts.

Can you negotiate for benefits? If you’re investigating post-retirement employers, including your own, see what benefits you’ll qualify for, and take a close look at educational benefits that may allow you to upgrade your skills for free. If your company will pay you to go to school and give you the time to actually work on a degree, that might be a very nice incentive indeed.

Consider insurance issues: If you are a retiree returning to the workforce and you’re already receiving Medicare or covered by a “Medigap” policy, you may be able to lower your costs or improve your coverage by accepting group coverage as primary underwriter of their medical expenses. Since people over age 55 are generally the greatest users of the healthcare system, coverage issues are particularly important to run by a financial expert.

Keep saving: If you return to the workplace, see what you can do to take advantage of any new wrinkles in your employer’s 401(k) plan or any other tax-advantaged retirement savings benefits, particularly if they match your contribution. Don’t miss a chance to enhance your retirement savings, even if you’ve already retired once.

December 2008 — This column is produced and provided by The Jacobs Financial Group.