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6 Smart Moves to Make in a Scary Economy

Think long, think strategically to tame your debt and restore financial security

3. Then pay off your debts. In fact, you may have already started. The one bright spot in the Federal Reserve report is that average credit card debt fell 8 percent from $7,300 to $7,100 in the 2007-2010 period. (Though that's still too high.)

If you decide to transfer your balances, use the low (or zero) interest rate period that some cards offer as a window to supercharge your repayment plan. Do the same if you refinance your car loan or mortgage. Don't extend the term of your loan or take money out. Use the interest rate break as a means to get out from under the lender's thumb in less time.

4. Develop — and fund — an "income ladder." One of the most frightening things about the current economy is the volatility in the markets.  If you're retired (or will be within a few years), you need to take precautions so you won't have to sell investments to cover regular expenses when the market takes a nasty tumble. 

Tennessee-based financial adviser Jim Brogan suggests doing this with an income plan and corresponding income ladder. The idea is that you figure out how much you'll need to live on each year, then stash four to five years worth of that money in safe investments that mature in a staggered sequence to fund your expenses.

What qualifies as safe? "Any product that has a fixed term and pays a fixed rate," he says. So: CDs, fixed-rate annuities, individual bonds or preferably a mix of those. How about cash? You have to be careful not to underestimate the long-term impact of inflation, says Brogan. "You can't just bury the money under the mattress" and get no return from it.

5. Diversify your tax loads. Since World War II, taxes in general have come down. Today a number of experts believe that with the country's debt crunch, they've got to go up.  What that means, explains Bachrach, is that if you've been putting all of your retirement assets into an IRA or 401(k) thinking you'll pull the money out when your tax rate drops in retirement, you might be in trouble.

"Now would be a good time to start saying, 'I'll put as much in my 401(k) as I need to do to get my match, then I'm going to fund a Roth IRA.'" Roth money goes in after it's been taxed, at today's rates. The account's earnings are tax-free.  

6. Rethink your life insurance needs. The conventional wisdom on life insurance has long been that you'll likely want to pare it back as you accumulate enough assets to take care of yourself and your spouse. Unfortunately, notes Brogan, many people forget that when one spouse dies, pension income can fall, perhaps significantly.

"Ask, 'how much am I losing and should I consider life insurance to replace that income?'" he suggests.  "Most people underestimate the need for that in retirement."

Finally, as you go forward in the next few months and years, keep in mind that there will still be times when the economy shakes you up a bit.  When it does, go right back to step #1.  Revisit that road map of yours.  That's the best way of all to stay on the right track.

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