Planning For The Perfect Retirement

How are you planning to spend your retirement? Sailing in the Greek isles? Learning to cook while living in a Tuscan villa? Perfecting your golf game in Scotland? Skiing in the Swiss Alps? Or maybe just lying on the beach in Bali?

If your dreams include these or any other exotic adventures, you can't afford to wait until retirement to start exploring the world. It's time to pack your bags now--at least as far as your portfolio is concerned.

When your grandparents started saving for retirement, international investing wasn't much of an option. Their choices--if any--were limited to a handful of international mutual funds and big global companies with shares trading in New York. And back then, brokers and other financial advisers didn't have decades of academic research to draw upon or fancy Powerpoint presentations to illustrate the case for going global.

International investing has come a long way in recent years. In 1985, there were fewer than 50 global mutual funds to choose from, with combined assets of about $8 billion, according to the Investment Company Institute. Now there are more than 800 funds, representing closer to $1 trillion.

Your grandfather's plain-vanilla global mutual fund has been replaced by a dizzying array of exchange-traded funds, American depositary receipts, closed-end funds and specialized regional or single-country mutual funds. Getting exposure to global markets from Stockholm to Shanghai is as easy as buying shares of IBM (nyse: IBM - news - people ), and as time goes by even more offerings are sure to be on the way. Discount brokers such as E-Trade, for example, are already experimenting with ways to trade stocks listed on foreign exchanges directly from your laptop.

Trouble is, even though the current generation of investors is spoiled for choice when it comes to international markets, most folks still keep the vast majority of their money at home, just like Grandma and Grandpa did.

Sure, lots of Americans have dabbled in foreign stocks or funds, but how many have actually built truly global portfolios? It's hard to say, but based on some data that I've seen and tons of anecdotal evidence, my guess is very few. And during a market panic like the one we've seen this summer, I wouldn't be surprised to see more investors cutting back on international exposure, especially when it comes to "serious money" like 401(k) plans and other retirement accounts.

There are a few problems with this view. For starters, most Americans are already way too dependent on the U.S. economy. We own homes here and we work for companies that are based here. Before we invest a single dime of our savings, we are 100% exposed to the U.S. market. So if you only had 10% or 15% of your stock portfolio invested overseas before the subprime mess started to unfold and you start cutting back now, chances are you'll end up with almost negligible international exposure in a holistic sense.

So how much is enough? The answer will vary depending on your circumstances, but I think you need at least 20% in international stocks to even begin making a difference.

Consider the following example. Say your net worth is $1 million, half of which is a home (no mortgage) and the other half is an investment portfolio. And let's say the portfolio has 60% in stocks and 40% in bonds, cash and other investments.

That leaves you with $300,000 to put to work in stocks. If you're only investing 10% of that amount internationally, you're down to $30,000 to play with overseas. So you've really only diversified a mere 3% of your net worth outside the U.S.

Jeremy Siegel, a professor of finance at the Wharton School, argues that at least 40% of your stock portfolio should be allocated overseas. I think you can go as high as 50% if you're not planning to retire for another 20 years or more.

Sound too risky?

It's not as far-fetched as it may seem. The U.S. represents about half of the world's market capitalization, so by that measure, a 50% allocation overseas would be just about right. And it's hardly a new concept. European investors in Switzerland, the Netherlands and other smaller markets have long taken a global approach to investing. Try asking someone from Sweden or Belgium if they think global investing is "risky." Warning: They might look at you like you're from outer space.

Part of the problem is that somewhere along the line we learned to associate "foreign" with "risky." Sure, Nigerian small-cap stocks might not be the best place to park your 401(k). But you can also lose your shirt investing in shares of a penny stock that's located in your hometown. The real risk is keeping too much of your money at home.

Don't get me wrong. I'm not one of those gloom and doom conspiracy theorists who think America is about to go the way of the Roman Empire. But when I look overseas, I see too many opportunities to ignore.

International stocks have performed well in recent years, but they still offer one of the best combinations of value and growth that you can find in any asset class. U.S. stocks are trading at 16 times 2007 estimated earnings, with expected earnings growth in the 7% neighborhood. Compare this with emerging markets, where stocks trade for about 14 times earnings and offer 15% growth. Even stodgy old Europe is on course to deliver better earnings growth than the U.S.--and it's cheaper too, at 14 times earnings.

Planning for retirement involves making a lot of assumptions about the future. It's tough enough predicting what the economy and markets will do next quarter, let alone several decades from now.

But there's one thing I can almost guarantee. The forces of globalization will continue to boost the importance of international markets, particularly emerging economic powers like China and India. Now is the time to make sure your retirement portfolio has a meaningful stake in these markets of the future.

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Wachovia's "Problems", A Warning Sign?

Wachovia's new chief executive is slashing his way through that bank's problems, but some argue he's not being aggressive enough.

The Charlotte, N.C., bank's second-quarter loss of $8.9 billion far eclipsed its gloomy forecast earlier this month when it announced it had hired Treasury Undersecretary and ex-Goldman Sachs investment banker Robert Steel to take over as its chief executive.

Steel has an ugly task ahead of him, and an unexpected $6 billion goodwill impairment charge in the second quarter--related to commercial banking, corporate lending and investment banking--could be one sign he is trying to make a break with Wachovia's recent troubles.

"We're serious about getting on top of these issues quickly," he said on a conference call Tuesday.

But many were surprised that Steel has focused on preserving capital rather than on raising more. He didn't eliminate Wachovia's dividend entirely, cutting it to a nickel a share, which saves $2.8 billion a year.

Wachovia is closing down its wholesale mortgage origination business, firing more than 6,000 workers and leaving another 4,400 open jobs unfilled, as well as selling loans and other non-core assets. It is also cutting off commercial borrowers who only look to the bank for loans.

Still, the results don't assuage concerns about the company's ability to survive as an independent entity, though Wachovia says it intends to do so even with mounting pressures from its large exposure to real estate. Wachovia set aside another $4.2 billion for future loan losses--an amount more than twice that of its competitors--as it faces far worse conditions in Florida and California.

"The market was expecting an update of a direct capital raising plan rather than capital conservation," says Richard Ramsden of Goldman Sachs.

Some think Wachovia could raise a substantial amount of capital by selling its retail brokerage operation, now with 14,000 financial advisers and $1.1 trillion in customer assets. Last year, Wachovia bought St. Louis-based AG Edwards for $6.8 billion and merged it into Wachovia Securities. That division is valued around $22 billion, though Prudential Financial owns one-quarter of it.

Then there's the possibility that Wachovia itself could be taken over, something that has been speculated for several months. But Steel would have to do a lot of window dressing to attract potential buyers. Wachovia has the among the highest non-performing asset ratios in the industry (2.4%), and it is bound to go higher.

Without the impairment charge in the quarter, the loss would have been $2.6 billion, approximately what Wachovia had pre-announced.

Moody's Investors Service and Standard & Poor's Corp. downgraded Wachovia, citing much higher-than-expected losses in its adjustable rate mortgage portfolio, which makes up 25% of Wachovia's assets. Moody's said losses are expected to be $16 billion for the $122 billion portfolio, twice as much as previously expected. There is a possibility, Moody's said, "that Wachovia could report losses into 2009."

The view is not much better for Washington Mutual, which is not expected to return to profitability until late next year as well. Analysts at Lehman Brothers project losses of $26 billion for the largest U.S. thrift, $21 billion of that tied to mortgages.

Wamu lived up to fears. It had a second-quarter loss of $3.3 billion after taking a $5.9 billion provision for loan losses, including $2.2 billion of charge-offs. "The company now expects the remaining cumulative losses in its residential mortgage portfolios to be toward the upper end of the range it disclosed in April," the bank said. The loss was $3.34 a share, much higher than the $1.05 a share expected loss.

The Wachovia numbers tossed water on hopes that the worst was behind the bank sector. Last week, big banks like JPMorgan Chase and Citigroup had better than expected results, which is to say they didn't do as terribly as feared.

But it's going to get a lot worse.

Loan losses and delinquencies are mounting and aren't expected to crest until later this year. That'll force banks to set aside billions of more dollars in extra reserves. Meanwhile, companies like Citigroup and JPMorgan are still writing down asset values, and many other banks will be forced to raise more capital by cutting or eliminating dividends, selling new shares or reducing their leverage.

Oppenheimer analyst Meredith Whitney, one of the most bearish of bank analysts, sees Wachovia as having the "greatest reckoning" of all banks in the coming quarters. "We are hard-pressed to find examples of financial companies that have successfully shrunk their businesses," Whitney said last week.

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How Much Can FDIC Do For Banks And Their Depositors

Shelly Banjo

The failure of IndyMac Bank has depositors worrying about what funds are insured by the Federal Deposit Insurance Commission. Here are answers to some commonly asked questions:

Question: If a bank fails, like IndyMac did last week, what protects customers' deposits?

Answer: The Federal Deposit Insurance Corp. covers individual accounts up to $100,000 per deposit per bank or $250,000 for most retirement accounts (and that includes any accrued interest). The agency may increase the coverage, but that can't happen by law until 2011.

The FDIC doesn't insure money invested in stocks, bonds, mutual funds, life-insurance policies, annuities or municipal securities, even if these investments were bought from an insured bank.

But sometimes deposits sneak north of $100,000 because the customer isn't paying attention. "Regardless of the health of your bank or condition of the overall economy ... returns are never high enough to justify the exposure of uninsured deposits," says Greg McBride, senior financial analyst at

Question: What do depositors do if they have more than $100,000 they need to put in the bank?

Answer: One way to protect the money is to hold accounts under that sum at a few separate banks. For those wanting to keep money at the same institution, perhaps for convenience's sake, a sound strategy is to open different accounts.

For instance, a married couple could each open an individual account (up to $100,000 in each), a joint account (up to $200,000), two separate individual retirement accounts ($250,000 each) and two revocable trust accounts, payable on death, naming each other as beneficiaries ($100,000 each). Together that is more than $1 million of insured deposits.

Also, they could set up additional revocable trusts insured up to $100,000 for other qualified beneficiaries such as parents, siblings, children and grandchildren.

Question: Are there any pitfalls to this multiple-account, single-bank approach?

Answer: Depositors should make sure their accounts are properly titled at the bank. Bank employees may not always know the correct distinctions.

Because of misinformation from Countrywide Financial Corp., "I had $100,000 in funds uninsured for a considerable amount of time," says Scott Marberblatt of Swampscott, Mass. He held $100,000 in a certificate of deposit and put $100,000 in a savings account with two beneficiaries. But the bank did not properly title the savings account with the words "In Trust For," so the second $100,000 went uninsured.

If Countrywide had failed -- it ended up being acquired by much stronger Bank of America Corp. -- then he would have had a problem.

To verify all accounts are FDIC-insured, contact the FDIC consumer hot line at 1-877-275-3342 or use the deposit insurance calculator at

Question: Should a bank go under, are depositors with more than $100,000 in one account out of luck?

Answer: Not entirely. Amounts over $100,000 can be partially reimbursed after some time and hassle, with the money coming from sales of the failed bank's assets. This resembles how creditors are paid in bankruptcies. The schedule varies, according to FDIC dictates.

In IndyMac's case, depositors will have access to half of their uninsured deposits Monday via an FDIC advance on asset-sale proceeds. They can withdraw that money, but the FDIC says they don't need to do so. In general, depositors eventually get 70% to 80% of their funds returned.

Question: Is it possible to get warning that a bank will go under?

Answer: No. The FDIC says it works aggressively behind the scenes with what the agency deems "problem banks." It doesn't want to set off a panic, where customers pull out their deposits. "We cannot alert customers directly before we close a bank," said Andrew Gray, FDIC spokesman. For the time being, IndyMac continues to operate, but under regulators' management.

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FDIC Establishes IndyMac Federal Bank, FSB as Successor to IndyMac Bank

Ari Levy and David Mildenberg
IndyMac Bancorp Inc. became the second- biggest federally insured financial company to be seized by U.S. regulators after a run by depositors left the California mortgage lender short on cash.

The Federal Deposit Insurance Corp. will run a successor institution, IndyMac Federal Bank FSB, starting next week, the Office of Thrift Supervision said in an e-mail yesterday. The regulator blamed U.S. Senator Charles Schumer for creating a ``liquidity crisis'' after a letter on June 26, in which he expressed concern that the bank may fail.

The Pasadena, California-based lender specialized in so-called Alt-A mortgages, which didn't require borrowers to provide documentation on their incomes. The demise adds to the crisis caused by the subprime collapse and may mean regulators will have to raise more money to support the federal deposit insurance program that repays customers when a bank fails.

``IndyMac is the vanguard, the precursor of more stuff coming,'' said Christopher Whalen, managing director of Institutional Risk Analytics, a market research company in Torrance, California. ``It's not surprising to see IndyMac resolved. What you have to ask is what's coming next. It's going to be a wave of medium to bigger-than-medium institutions.''

IndyMac's home state, where Countrywide Financial Corp. was also located before it was bought last week, has been among the hardest hit by foreclosures. California ranked second among U.S. states, with one foreclosure filing for every 192 households in June, 2.6 times the national average.

IndyMac's Losses

The lender racked up almost $900 million in losses as home prices tumbled and foreclosures climbed to a record. IndyMac becomes the largest OTS-regulated savings and loan to fail, according to the FDIC.

Mortgages serviced by IndyMac will be turned over to the FDIC and the regulator will be reaching out to customers immediately, Chairman Sheila Bair said on a conference call yesterday. Customers will have access to funds this weekend via automated teller machines and electronically and by phone starting next week.

The FDIC intends to sell IndyMac within 90 days, preferably as a single entity, Bair said. If that doesn't work, the lender will be sold off in pieces, she said.

After peaking at $50.11 on May 8, 2006, IndyMac shares lost 87 percent of their value in 2007 and another 95 percent this year. The stock fell 3 cents to 28 cents yesterday.

Schumer's Comments

IndyMac came under fire last month from Schumer, the Democrat from New York, who said lax lending standards and deposits purchased from third parties left it on the brink of failure. During the 11 business days after Schumer explained his concerns in a June 26 letter, depositors withdrew more than $1.3 billion, the OTS said.

``This institution failed due to a liquidity crisis,'' OTS Director John Reich said in the statement. ``Although this institution was already in distress, I am troubled by any interference in the regulatory process.''

Schumer blamed IndyMac's own actions and regulatory failures for the bank's seizure.

``If OTS had done its job as regulator and not let IndyMac's poor and loose lending practices continue, we wouldn't be where we are today,'' Schumer, a New York Democrat, said in an e-mail yesterday. ``Instead of pointing false fingers of blame, OTS should start doing its job to prevent future IndyMacs.''

The failure will cost the federal deposit insurance program about $4 billion to $8 billion, the FDIC said. Some $1 billion of uninsured deposits are held by about 10,000 customers, the FDIC said. Those depositors will get an ``advance dividend'' equal to half the uninsured amount, according to the statement.

Firing Workers

The FDIC insures $100,000 per depositor per insured bank, according to the agency's Web site. Customers may qualify for more coverage depending on the type of accounts they own, and some retirement accounts have a $250,000 limit.

IndyMac announced on July 7 that it was firing half its employees. The lender agreed to sell most of its retail mortgage branches to Prospect Mortgage, giving the Northbrook, Illinois based-company more than 60 branch offices with 750 employees. IndyMac also has a retail bank network with 33 branches and $18 billion in deposits, mostly insured by the FDIC.

The company was started in 1985 by Countrywide founders Angelo Mozilo and David Loeb under the name Countrywide Mortgage Investments. In 1999, it converted into a bank from a real estate investment trust. That year, Michael Perry replaced Mozilo as chief executive officer.

Under Perry's leadership, profit more than doubled from $118 million in 2000 to $343 million in 2006 amid the housing boom. The stock more than tripled over that stretch.

Perry will not be continuing with the new FDIC-controlled institution, while other executives will be retained, Bair said. The FDIC's John Bovenzi will assume the CEO role.

In a release by the FDIC, it states that insured depositors and borrowers will automatically become customers of IndyMac Federal, FSB and will continue to have uninterrupted customer service and access to their funds by ATM, debit cards and writing checks in the same manner as before. Depositors of IndyMac Federal Bank, FSB will have no access to on-line and phone banking services this weekend. These services will be operational again on Monday. Loan customers should continue making loan payments as usual.

Beginning on Monday, July 14, IndyMac Federal Bank, FSB's 33 branches will observe normal operating hours and will continue to offer full banking services, including on-line banking. For additional information, the FDIC has established a toll-free number for customers of IndyMac Federal Bank, FSB. The toll-free number is 1-866-806-5919 and will operate today from 3:00 p.m. to 9:00 p.m. (PDT), and then daily from 8:00 a.m. to 8:00 p.m. thereafter, except Sunday, July 13, when the hours will be 8:00 a.m. to 6:00 p.m. Customers also may visit the FDIC's Web site at for further information.

At the time of closing, IndyMac Bank, F.S.B. had about $1 billion of potentially uninsured deposits held by approximately 10,000 depositors. The FDIC will begin contacting customers with uninsured deposits to arrange an appointment with an FDIC claims agent by Monday. Customers can contact the FDIC for an appointment using the toll-free number above. The FDIC will pay uninsured depositors an advance dividend equal to 50 percent of the uninsured amount.

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