Gimme Shelter: For now, money-market funds may be as safe as bank accounts
Illustration: Mark Matcho for Newsweek

If you’re scared, you have reason. We’re BATTLING a financial collapse in the teeth of a spreading recession, not only in the United States but in the other industrialized countries, too. The risks fall especially hard on workers in their 50s and 60s who are hoping to retire (or fearing it, if their companies are pushing them out). But anyone trying to defend a paycheck or personal investments will be facing tougher times. Amid the rubble, only a few things are safe.

• Your insured bank account is safe. Some of the customers of struggling Washington Mutual are moving their money to other banks. That’s a waste of time. Deposits up to $100,000 are totally safe—insured by the Federal Deposit Insurance Corp. Odds are that WaMu won’t fail; it will be sold with government help. In cases of failure, the FDIC arrives on Friday night and moves the accounts to a new bank, which opens for business as usual Monday morning. Over the weekend, you can even use debit cards and ATMs. If there’s no buyer, the FDIC liquidates the bank, mailing out checks for insured deposits immediately. They will always be paid off. By contrast, uninsured deposits are at risk. If you have more than, say, $95,000 in your account, move the excess money to another bank so it, too, can be insured. No sense tempting fate. More than $100,000 can be insured in a single bank if you have different types of accounts—details at www.fdic.gov.
  
• Your money-market mutual fund is safer than it was last week. Money funds serve as checking or savings accounts that pay higher interest rates than you’d get at a bank. Your money is supposed to be safe. For every dollar you put in, you expect to get a dollar back, plus interest, any time you want. These funds aren’t FDIC-insured, but, in their 37 years of life, they’ve never lost a penny for individuals.
  
• That is, until last week. On Wednesday, the Reserve Fund group’s giant Primary Fund—owned by Bruce Bent, the man who invented the business—got stuck with $785 million in worthless commercial paper from the failed investment bank Lehman Brothers. The fund “broke the buck,” meaning that each dollar dropped in value to 97 cents. Redemptions were frozen for seven days, but not before $27.3 billion—more than 40 percent of Primary’s assets—flew out the door, according to Peter Crane, publisher of Money Fund Intelligence. The Primary Fund didn’t return calls.
  
  The shock precipitated a run on other money-market funds, not by individuals but by professional investors. Putnam Investments’ Prime Money Market Fund closed, with fears of more to come. That presented a serious risk to the system: corporations rely on these funds to help finance their short-term debt. The government, with a gun to its head, announced, overnight, a one-year, $50 billion program to insure money-market funds against breaking the buck.
  
  You have a second source of protection: the size and profitability of your money fund’s sponsor. Over the past 13 months, 20 other funds have suffered potential write-downs linked to bad investments, but they all were owned by large, diversified banks or brokerage firms that rushed enough money into the breach to make investors whole. The privately held Reserve group couldn’t come up with enough cash.
  
  If you use a money fund, check its Web site. It should have a statement disclosing whether it’s exposed to any troubled companies. Vanguard and Schwab say they’re clean. Two T. Rowe Price funds sold Lehman securities at a discount but didn’t break the buck. Fidelity has some exposure to two subsidiaries of AIG, the insurance holding company now in federal hands, and Merrill Lynch, which is being purchased by Bank of America. It says it expects those investments to pay.
  
  For a supersafe money-market fund, choose one that invests in Treasuries and other government debt. Their 12-month yield came to 2.2 percent, not much less than the 2.98 percent paid by funds that buy corporate securities. Tax-free money funds, at 2.2 percent, have been good buys for people in higher brackets, although there will be some muni casualties, too. Jefferson County, Ala., for example, is currently near bankruptcy, due primarily to a bad choice of investments.
  
  The new money-fund insurance program may tempt some managers to make riskier investments. If they win, their bonuses rise; if they lose, the government pays. Stay away from them. That’s the kind of thinking that brought the financial system to its knees. Your eyes, laserlike, should focus on safety first.
  
• Your AIG insurance policies and annuities are safe. The American International Group is the world’s largest insurance company. A shiver passed through customers, globally, when AIG had to be saved by the Federal Reserve with an $85 billion loan. But only the holding company failed, not its 71 insurance-company subsidiaries, which are solvent and regulated by the states. The firms that rate companies for financial strength downgraded the subsidiaries by one to three notches, but they’re still in solid investment territory, says Joseph Belth, an insurance expert and editor of the newsletter The Insurance Forum. If you’re holding an AIG policy or annuity, don’t replace it. You’ll pay fees to leave and more fees to buy coverage somewhere else. These insurers will be sold to help repay the government for its loan. Policyholders won’t get hurt.
  
  If you’re shopping for new insurance, however, don’t entangle yourself with AIG. Look for top-rated companies with no recent downgrade on their records. After all, you’re counting on some kid not yet born to cut checks for you or your survivor 40 or 50 years from now.
  
• Your brokerage accounts are safe. Lehman Brothers failed, but Barclay’s is buying its brokerage arm and your account along with it. Merrill Lynch found a home in Bank of America, again with its customer accounts intact. The Securities Investor Protection Corp. insures your brokerage account for up to $500,000 ($100,000 in cash) if your broker has to be liquidated and securities are missing, but neither of these firms has failed. However tattered, your account is still in place.
  
• Your mutual fund is safe. SIPC doesn’t cover mutual funds, but the Investment Company Act of 1940 does. When you invest, your money goes directly to a bank custodian. The fund manager directs the investments but never holds the securities. So they’re perfectly safe, even if the fund management company fails. For this reason, you don’t have to bother splitting your mutual-fund money among several firms. Diversify among types of funds, but it’s safe to stay within a single fund group.
  
• You can make yourself safer by delaying your retirement when stocks are going down. Prudent retirees plan to draw 4 percent a year, plus an inflation adjustment, out of their retirement funds to help pay their bills. Under such a plan, their money should last for life. But the early years are critical, says Christine Fahlund, senior financial planner for T. Rowe Price. You’re likely to run out of money in older age if stocks rise by an average of less than 5 percent a year over the first five years after you retire. Moral: in poor markets, hang on to your job (and your health insurance!) if you can. If you’re given the golden boot, look for part-time work. Just $20,000 in earnings is the equivalent of having an extra $500,000 in your investment fund, Fahlund says.
  
• There’s no time like the present for deciding how much risk you want to take. It’s a little late to bail out of stocks. “Investors who reacted to Black Monday in 1987 locked in substantial losses that would have been reversed had they remained invested,” says Jay Hutchins of Comprehensive Planning Associates in Lebanon, N.H.
  
  On the other hand, you need an intelligent balance between stocks and bonds (bonds have outperformed U.S. stocks since 2000, when the market bubble burst). Here’s a rule of thumb: subtract your age from 110 and use that number as the percentage of assets you should keep in stock-owning mutual funds. After that, just keep making contributions—murmuring to yourself, “I’m buying stocks cheap.” Retirees who are living on their savings should cut back on spending and take the minimum from their accounts. Don’t increase your withdrawals until your investments are even again. Andrew Orr of OrrGroup in Orlando, Fla., puts his budgeting clients into finicity.com—a great tool for spending control, he says.
  
• Don’t retire until you pay off your consumer debt. “If you have debt, you’re living beyond your means,” says Jeff Kostis of JK Financial Planning in Vernon Hills, Ill. “It’s hard enough to make sure your money will last for the next 30 years. Why make it harder by continuing to pay for things you bought five years ago?” Bankruptcies are soaring among people 55 and up, says Harvard Law School professor Elizabeth Warren. They’re entering retirement with more debt and less medical insurance—a toxic combination.
  
• Resign yourself to an economic storm. With tax cuts fading, consumers are running out of borrowing power, says Martin Barnes, managing editor of the Bank Credit Analyst in Montreal. He expects the economy to deteriorate significantly in next six months or so.
  
  Typically, the Federal Reserve fights recessions by cutting interest rates, which helps consumers buy homes and cars. “But so far, that hasn’t worked,” says Lakshman Achuthan, managing director of the Economic Cycle Research Institute. Mortgage rates dropped but the banks won’t lend, the automakers cut back on leases, and credit-card lines are being chopped. Will a vast new bailout start the system up again? It’s devoutly—devoutly—to be wished.
  
• One last thing that’s safe: your Social Security. With only small changes in benefits and taxes, this vital income-support program will see the boomers through old age. A few years ago, the dream was to put it in stocks and let folks take their chance. For your sake—or your mom’s sake—aren’t you glad we didn’t?

Reporter Associate: Temma Ehrenfeld