October 16th, 2008 
Vijaianand The financial crisis sweeping Wall Street and global banking and financial institutions has understandably raised alarms among consumers on the risks to their savings, retirement and brokerage accounts. Here are some pointers on navigating the financial minefields. How does this crisis affect you?
Many individuals who close to retirement have all their eggs in retirement baskets comprising mutual funds and stocks, which have seen their values drained one-third of their capital. It is a big blow for them and many will suffer consequences for years to come as the withdrawals can’t meet their needs.
People who are saving up for their kids college education also have sustained major losses, but many of them still have time on their side as market conditions improve. Families who put their money in savings accounts and CD’s, are weighted by the dismally low interesting earnings on these accounts.
Products and services from distressed companies will also likely suffer and employees in these companies are at risk of losing their jobs. Cumulatively, this economic meltdown is likely to have a huge impact and it will likely stay for long time to come.
What you can do to avoid losing your money?
There is no silver bullet solution. But there are a number of things you can do to secure your savings. If you are already invested in the financial market directly as a stock investor or indirectly through your mutual fund portfolios, just stay put and don’t do anything. This turmoil will eventually end and your portfolio might emerge better in few years. If you cash out now, you might take a bit hit. You can’t withdraw your funds from your retirement and 529 accounts anyways, although you can alter the distribution of your portfolio. For that you should seed advice from your financial advisor or fund counselor. Don’t follow the herd. You need someone to analyze your particular portfolio. If you have more than $100,000 in a one or more accounts in one bank, try to split it up and put it in different banks or financial institution.
You are only covered by FDIC (Federal Deposit Insurance Corporation, an independent federal agency) insurance or NCUA (National Credit Union Administration, another federal agency) insurance as one person for all your accounts in one bank. If you have a joint account, you are covered up to $200,000 in that particular bank or credit union. Many people lost their money during the IndyMac bank failure as they had more than $100,000 in that bank. Don’t make that mistake.
With the recent legislation changes, $100,000 amount for each individual has been increased to $250,000 till Dec 2009. Don’t know whether it will be made permanent.
What bank to open an account?
No one really knows which bank is safe or at risk at this time. Even the CEO’s of the financial institutions are unsure. But you don’t have to worry about the institution. Whether it’s a local bank or a national brand bank or a credit union, so long as it is FDIC or NCUA insured, you are covered up to $100,000 in that bank in the past. Right now, you are covered $250,000 till Dec 2009 according to the new bill passed 2 weeks ago.
What is the guarantee for my funds in bank and brokerage accounts from the government?
Let’s split these questions. Your bank or financial bank accounts, like savings, checking and CD’s are covered under FDIC or NCUA. Even your money market account is covered under these insurances only up to $100,000 per person. It is a common misconception that each account is covered for $100,000. In fact, the total amount in all your accounts in a single bank is covered up to $100,000. The $100,000 is been increased to $250,000 recently to help tackle the situation and losing consumer confidence. It is only till Dec 2009 and may be made as permanent measure. Also President announced Oct 15, 2008, there will be a full insurance coverage for money in non-interest bearning accounts for business accounts. No formal announcements about it yet.
Retirement accounts like IRA or Roth IRA in banks or credit unions are covered separately. After recent legislative changes, insurance coverage on certain retirement accounts, such as IRAs and Keoghs, is extended for up to $250,000 in both banks and credit unions covered by FDIC and NCUA. No Change made in his policy.
Next let’s get to your regular investments in a brokerage account or 401k. What happens if your brokerage firm fails? Hold onto your stocks and bonds; they are most likely safe. SIPC, the Securities Investor Protection Corporation, a nonprofit, membership corporation, funded by its member securities broker-dealers, seeks to restore funds to investors with assets in the hands of bankrupt and otherwise financially troubled brokerage firms.
Of course, there is no insurance against market losses. However, as long as your securities are registered in your name, or are in the process of being registered, you own them, no matter what happens to the brokerage. You just need your statements to prove ownership of the securities to receive your refund. The SIPC covers customer up to a maximum of $500,000, including a maximum of $100,000 on claims for cash.
Conclusion
We are under a deep economic downturn. Eventually, however, the clouds will dissipate. We are already started seeing some signs, like slowing down in the decline in home sales, which is an indication that housing market could pick up. It is important because when the housing market stabilizes the economic conditions will improve. Be hopeful, be patient. That may be hard to do, but there is little else you can do but sit back and watch the market roller caster play out.
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