Most-asked questions of financial planners

Your Money

September 05, 2004|By Eileen Ambrose

MANY PEOPLE have the same financial questions, whether they are executives earning a generous six figures or grade-school teachers making a fraction of that, financial planners say.

What size mortgage can I afford? Do I need long-term-care insurance? Should I buy or lease a car? And this year, people are bombarding advisers with questions about how to become a real estate investor or whether the outcome of the presidential election will affect their investments.

"There are a certain number of questions that we go over and over and over again," said Sheryl Garrett, a Kansas financial planner and author of Just Give Me The Answer$. Her recently published book compiles more than 130 frequently asked questions with answers from dozens of financial planners.

The answers aren't the same for everyone. Consumers may face the same issues, but the right course for them often depends on income, age, goals, investment temperament and sometimes even medical history.

Here are some of the frequent questions planners get and some factors to consider:

How much mortgage can I afford?

"The Realtor and the mortgage company have all the motive in the world to have you buy as much house as you want," Garrett said. But "what you qualify for and what you can afford is not the same thing."

Homebuyers might qualify for a mortgage many times their gross salary, but they are at risk of foreclosure if they suffer a slight financial setback, she said. For an affordable mortgage, stick to a loan that is about 2 1/2 times gross pay, she said.

Buy or lease a car?

If you're the kind of person who keeps a car five to eight years, you're better off buying, said Steve Athanassie, a financial planner in New Port Richey, Fla.

But if you're the type who gets a new car every two years, leasing is for you, Athanassie said. Leasing is an even better deal for business owners who are able to deduct a portion of their lease payment on their federal tax return, he added.

How much life insurance does one need?

"Life insurance is only necessary if you have a financial obligation that, if you died, would be a burden that you would not want to be there for your loved ones," said Mary Malgoire, a Bethesda planner.

For example, you might want insurance to pay estate taxes, the mortgage or children's college tuition, she said. Even stay-at-home parents need insurance to cover the cost of child care if they die, experts said.

"You don't want to have too little, but you don't want to have too much. It's expensive," Malgoire said.

As a general rule, Garrett recommends at least $250,000 of term insurance coverage for a stay-at-home parent and 10 times gross salary for a breadwinner with children. That latter coverage should be enough for the family to financially adjust, such as having a surviving spouse return to school for job training or paying for college for children, she said.

Will the November election affect investments?

This is of particular concern to those nearing retirement who wonder if they will be paying a higher income tax rate on money from retirement plans if the Democrats capture the White House or Congress, said Laura Barry, a Milwaukee planner. She advises clients to count on change no matter what happens in November.

"We try to make the point that we will have ... several tax law changes and different programs in the course of the next five or 10 years regardless of who is in office," Barry said. "We don't know what it will be, but we know it won't be the same."

Should I invest in real estate?

Watching home values rise faster than stocks, many wonder whether they should buy a vacation home or condominium and become landlords. The assumption is that property values will continue to skyrocket and rent collected from tenants will pay the mortgage.

"Everybody has made money in real estate over the last few years. It's not that they're smart, it's just what the market has done," said Ted Toal, an Annapolis financial planner.

Planners warn that the real estate market can cool, and speculators can get burned. Still, if investors want to buy real estate, they should research the properties and all the costs and inconveniences of being a landlord, experts said.

"Understand there will be times where you won't be able to rent [the property] and you'll have to pay that mortgage yourself, so you'll need a cash cushion," Toal said.

Do I need long-term-care insurance?

This is a question for those whose income is too high to qualify for Medicaid, but not substantial enough to pay for nursing home care on their own if they should ever need it.

Policies aren't cheap - costing about $2,000 to $2,500 annually for those in their mid-60s - and the price gets steeper the longer someone puts off the decision, experts said.

Garrett advises those who can afford a policy - especially singles or those whose families won't be able to care for them - to start shopping for a policy at age 50.

Choose an insurer that will likely still be in the long-term-care business decades from now when you might need to make a claim, experts said.

Should a parent borrow from a 401(k) to pay for college?

"It always worries me when people touch retirement accounts," Athanassie said.

Besides, parents can be hit by taxes and a penalty if they lose their job and can't repay the 401(k) loan. He advises families to apply for financial aid, even those who think their income is too high. And students should take advantage of low-rate loans, even if they are not subsidized by Uncle Sam. "It's a good idea to use someone else's money at better rates," Athanassie said.

Parents can always help pay off the loans later if they don't want new graduates saddled with debt, he added.

To suggest a topic, contact Eileen Ambrose at 410-332-6984 or by e-mail at eileen.ambrose @baltsun.com.

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