The Bogleheads' Guide to Retirement Planning (50 page)

General unsecured debt is not entitled to priority. To understand why this is the case, you need to learn how creditors will act if you don’t pay them. If you miss a credit card payment, within a few days you will receive a polite call inquiring whether you forgot to pay. Missing a second payment prompts another call inquiring if you forgot to pay again. About two weeks after that second call, you will receive another call informing you that the account will be turned over to the creditor’s in-house collection department if you continue to remain in default. About the time your third payment is due, the credit card company will cancel your card and send your file to the credit collection team.

For approximately nine months, the hardball team will call you and seek to harass, bluff, or terrorize you into making payments. Only after this time has elapsed will the creditor consider suing you. If you do not pay an unsecured debt for up to a year, all that is going to happen is your phone is going to ring. You do not have to answer it. When your financial crisis ends, call your credit card company and make them an offer. A typical settlement is a third to half of the amount owed on debt a year old.

Now contrast what will happen if you stop paying on your car loan. You usually receive two polite calls about the time the first payment and then the second comes due. About the time the third payment is due, the car will be repossessed while parked outside your home or workplace.

It is not a good idea to neglect to pay the IRS. Even if you do not have the money to pay, always file your tax return on time. If you do this, you will still owe interest but will not be assessed penalties for failure to file. Within 30 days, the IRS will send you a letter saying they received your return but could not find the check. At this point, it is wise to fill out the form that will be with their letter and propose payment in installments. It is best if you propose to complete payments before the next April. If you do not respond to this letter, the IRS will send you notices that, if ignored, will allow them to start levying (seizing property). The IRS does not have to sue you before they can levy on your property. They can mail a letter to your bank, and the bank will send them everything in your account, which will cause any outstanding checks to bounce. They can also garnish all but $570 of your monthly pay. Can you live on the $570?

Prioritize your debts based on making a full payment to priority creditors rather than making partial payments to a larger number of creditors. Your credit will be affected whenever you miss payments. However, some debts will show as current if you prioritize the debts. This will have less effect on your credit than if you make partial payments to all, which causes all accounts to show you as delinquent.

If your budget simply won’t work or if circumstances deteriorate further, there are few financial problems that are not solved with a bankruptcy filing. You do not lose everything if you file bankruptcy. General unsecured debts go away. However, certain priority debts are not affected by the bankruptcy, including child and spousal support, debts for recent taxes, and student loans. These generally survive bankruptcy.

You have already learned that in most places all retirement plans are exempt from the claims of creditors. In a minority of states, only an IRA is at risk of loss in a bankruptcy. Most states also allow keeping a retirement annuity, even if it is not covered by ERISA. State exemption laws usually allow you to keep equity in your home and a car, as well as your clothes and furnishings. Check with your state to know how assets and liabilities are treated.

Most people experiencing a financial crisis do not know where to turn for financial advice. There are two groups of professionals skilled in giving advice to people with financial difficulties.

The first group, credit counselors, are certified either by the U.S. Department of Housing and Urban Development or the trade group National Federation of Credit Counselors. Their Web pages are listed at the end of this chapter. The Department of Justice (also listed later) certifies credit counselors for prebankruptcy counseling. Most reputable credit counselors will be on these lists.

The second group of skilled counselors are consumer bankruptcy lawyers. State bar associations maintain referral lists. Bar associations usually post their referral numbers at the beginning of the attorney section of the yellow pages. Also, many bankruptcy lawyers are members of the National Association of Consumer Bankruptcy Attorneys and are listed on its web page,
www.nacba.org
.

Credit counselors advertised on cable TV channels promising to settle with your creditors for pennies on the dollar are usually scams that become apparent only after you have paid a large nonrefundable fee. Don’t go there. Also, the creditors who call you on the phone are not a good source of financial advice. Avoid asking them for it.

When bad things happen to good people, it does not have to result in financial ruin. Understand what happens under different circumstances, and you will more easily move through the crisis in a way that maintains your sanity and finances.

Your retirement will be divided if your marriage fails, and a special type of court order is needed to secure a share of a retirement plan awarded in a divorce. Some assets are exempt under prenuptial agreements and accounts intentionally separated from joint assets.

In a financial crisis, if you cannot pay those you owe, most retirement funds are exempt from the claims of creditors. Various common types of creditors will use a variety of methods to collect from you if you don’t pay them. Prioritize debts to minimize the financial disaster. Seek competent professional help from people who will give you the right answers.

Boglehead is the name adopted by investors who follow the beliefs of a remarkable man, John C. Bogle, founder and former CEO of the Vanguard Group of mutual funds. In this final chapter, we will share with you a bit about John C. (Jack) Bogle so that you might understand why we’re so proud to be called Bogleheads. You’ll learn a bit about what went on behind the scenes of our forums, starting with the original Morningstar Vanguard Diehards Forum and then later at the larger Bogleheads .org forum. The growth and acceptance of these forums have been unparalleled.

The Bogleheads Wiki is a recent addition to the Bogleheads community. It is a valuable reference resource providing in-depth coverage of many of the subjects that are constantly mentioned on the forums. The community extends beyond the Internet into books and nationwide meetings. The Bogleheads’ Guide series of books has had phenomenal success, and our annual reunions and local chapter meetings are very well attended. Perhaps you’ll join us at one of our meetings?

John Clifton Bogle is our distinguished mentor and friend. Jack (as he likes to be called) was born in Montclair, New Jersey, into a genteel, prosperous, and loving family in May 1929, just a few months before the worst depression and bear market in U.S. history. Jack’s father enjoyed spending on the good life. Unfortunately, he lost his job, and the family savings rapidly disappeared. Jack began his business career at the age of 10 by selling newspapers and magazines to help out with his family’s finances. Some of his later jobs included ice cream dipper, bowling alley pinsetter, waiter, ticket seller, mail clerk, cub reporter, and brokerage house runner.

Jack obtained a working scholarship to Blair Academy in New Jersey with his uncle’s help. He graduated cum laude, and Blair Academy would later name Bogle Hall in his honor. Jack’s academic record at Blair earned him yet another scholarship that enabled him to attend Princeton University. At Princeton, Jack decided to make mutual funds the subject of his senior thesis. It was a subject that interested him because of the potential for growth. At that time, there were fewer than 70 U.S. open-end mutual funds, held by about 1 percent of families. Today there are more than 8,000 U.S. mutual funds, held by more than 50 percent of U.S. families.

Jack’s Princeton thesis included the philosophy that he later implemented at Vanguard: serving investors with efficiency, honesty, and candor; being innovative in developing new funds; opening institutional markets; curtailing advertising abuses; and focusing on costs.

After graduating from Princeton magna cum laude with highest honors in 1951, Jack obtained an interview with the Wellington Fund, a large mutual fund company. Walter Morgan, the head of the fund, had read Jack’s 128-page senior thesis. Morgan hired Jack in a clerical position but told associates: “Bogle knows more about the mutual fund business than we do.” Jack rose rapidly within the organization. In 1967, at the age of 38, Jack became president and CEO of Wellington.

Jack was fired from Wellington in 1974 after a series of disagreements with the board of directors. He decided to start a new company and organized it like no other mutual fund company ever was. His small upstart company would be owned by the mutual funds’ shareholders themselves and operated solely for their benefit. He named his new company Vanguard after Lord Nelson’s flagship at the Battle of the Nile, where the British defeated the much larger French fleet.

In 1975, Jack started the first retail index mutual fund, benchmarked to the S&P 500 Index: First Investors Trust. Competitors called the fund “Bogle’s Folly” and even “unAmerican.” But Jack had the last laugh when his now titled Vanguard 500 Index Fund became the world’s largest equity mutual fund by the turn of the century. Vanguard would go on to become the largest mutual fund company in the United States with more than a trillion dollars in assets. As an interesting note, a $10,000 investment in Bogle’s Folly at inception was worth $252,684 on December 31, 2008.

Jack worked for the benefit of his investors for many years, despite having the first of his six major heart attacks in 1960. Jack’s heart finally gave out in 1996. After 128 days in the hospital and a successful heart transplant. Jack returned to Vanguard as senior chairman. Jack left the board at the end of 1999 and launched the Bogle Financial Markets Research Center, sponsored by Vanguard. The center’s mission is to “give ordinary investors a fair shake.” Visit
www.johncbogle.com
for more information.

Jack has had many accomplishments and awards. Here are just a few:

Irwin is also the publisher of
John Bogle and the Vanguard Experiment: One Man’s Quest to Transform the Mutual Fund Industry
, by Robert Slater (1996).

Jack Bogle resides in Bryn Mawr, Pennsylvania, with his wife, Eve. They are the parents of 6 children and the grandparents of 12. Jack still works full-time helping individual investors.

Jack Bogle isn’t just the namesake of our group. He is an active member who posts messages on the forums from time to time. He has written about the Bogleheads, and here in Jack’s own words is what he had to say in his foreword to
The Bogleheads’ Guide to Investing
(John Wiley & Sons, 2006):