Friday, March 28, 2008

Retirement Planning and the Fate of Social Security

Everyone it seems wants to kill Social Security. Those that don't, are rehashing old ideas that have not sold well in previous attempts.

I was thinking of another way to save the program from the defeatists and those lacking originality.

It is widely considered fact, that the recent actions of the Fed, stepping in before Bear Stearns could collapse is a good thing if, and this is a very big IF, they can hold the securities they guaranteed until maturity. I am not defending what the Fed did by any means and have been on the record as critical of most of their actions. But the guarantees they offered on the questionably valued securities might offer a glimpse into how Social Security could be saved.

Mortgage backed Securities, for those who may not know are bundled home loans that make money available to those who sold the loans in the first place to lend again. The problems began when the product was offered for sale. Since few had been sold, no one knew what they were worth and unfortunately, no one was willing to hold onto them until they matured. Because of this "thin" activity and the unfolding mortgage crisis, values plummeted. When the Fed stepped in, they secured these securities and created a value for them.

My proposal to save Social Security is this: Could these types of securities, which can be bought on the cheap, be a way to fund SS without buying Treasuries?

If the surplus in SS is be used to purchase mortgage backed securities and, if the program held them long enough, would be highly profitable. This type of purchase would remove the surplus from the hands of lawmakers with several certain side effects. The securities would attain a stable value relative to the underlying security, the home that backs the loan would be worth keeping (interest rates could be frozen on these loans once the new value of the security was established)and the economy would get the needed boost of stability.

Future MBS's could be peddled to the program and would further stimulate the economy. Folks stay in their homes and the future of Social Security would be cemented in the American Dream.

Wednesday, March 26, 2008

Retirement Planning and the False Hope of Reverse Mortgages, Part two

As fate would have it, there was a front page story in the New York Times today suggested counseling for a mortgage holder who had fallen behind in his payments on a new row house in East Baltimore. Only the mortgage holder in question was 75.

According to the article, this 75 year old man and his wife had purchased the home in 1988 for $55,000 and refinanced it in 2006 with an adjustable rate mortgage that, like many of these sad tales tell, raised the payment to untenable levels. They missed a couple of payments as a result.

Now what does this have to do with reverse mortgages? And, who lends to a 75 year old man?

Yesterday, in response to an entry about reverse mortgages, Cory Matelli a reverse mortgage specialist took me to task. His comments basically focused on my lack of facts and figures and politely asking me to not make blanket statements about an industry that is his livelihood.

He wrote the following, with my comments at the end.

"Thank you for your article. While I don't agree with entire presentation quoted in the article you featured in your post, I also take exception to some of what you wrote, as well.

"You make a blanket statement that people don't use the proceeds from their reverse mortgage for maintenance or home improvement. How do you know this? Each borrower and their needs are different. There is no way you can make such a statement without knowing the individual borrower.

"You make another blanket statement that equity "should not be used" for day-to-day living expenses. I would agree with you if you're talking about someone in their 30s, 40s or even 50s, but when you're talking about retired seniors in their 60s on up, it very well may be the perfect avenue to help them with those very things.

"In most cases, seniors have lived in their homes for decades and have built an enormous amount of equity. Today, the senior homeowners throughout the United States combine for over 2 trillion dollars in home equity. When a senior has chosen to age in place, meaning they desire and intend to live the rest of their lives in their home, the infusion of cash generated by a reverse mortgage can be the very ticket to financial independence.

"It's easy for people to press the panic button and compare something they don't understand to something which is notably troubled, such as the sub-prime mess. For a variety of factual reasons, there is no comparison.


"You make an issue about reverse mortgages not "advertising" interest rates and fees. I don't know about your marketing knowledge, but most effective advertising you see plays up the positive aspects of a product. I've never seen a conventional mortgage advertisement that broke down the fees, either. The fact is, current interest rates can be found under 5%. Fees by the lender are comparable to conventional mortgages. The key is that HUD charges 2% for mortgage insurance which can double the up front cost. All of these details are disclosed and given to prospective borrowers.

"Ok, I've gone quite long in my reply. In closing, I want to say that I can see you are interested in the best interest of seniors, as am I. I have seen, first hand, the incredible positive impact seniors have enjoyed in obtaining a reverse mortgage. 93% of seniors surveyed by AARP indicated that their reverse mortgage had a positive affect on their lives.

"Just be careful when making blanket statements. As with all loans, reverse mortgages are not for everyone. But for whom they are appropriate, they are a godsend.

"Have a great day."

Thank you Mr. Matelli but that is not what I was questioning. So I replied, "True, each borrower is different. But you do not offer any statistics on who gets these types of loans or how they can attain financial freedom! Living in place has a warm and fuzzy tone but the truth is, no lender will give you what you think you deserve.

"Consider the following calculations done using my zip code on a $400,000 with no mortgage and no liens. The most available as cash is $171,280 through FHA and $62,289 from Fannie Mae. Monthly payments amount to $887 and $510 respectively.

"True, no other lender advertises the closing costs but neither do reverse mortgage lenders talk about the MIP (Mortgage Insurance Premium) at 2% (of the appraised value of the home - not the loan) or 0.5% limit on the premium. Some of the upfront fees have totaled $14,000 or more. Banks charge upfront fees of 2% or more on the home's value (in addition to HUD) and levy annual servicing fees. Nowhere have I seen a 5% rate as you suggested.

"Even though I used a $400k figure, this exceeds the limits currently available (FHA loan limit varies from $200,160 for rural areas to $362,790 for high-cost areas).

"You say there are a variety of factual reasons why this does not compare to the sub-prime mess that I suggest this could become but you offer no facts. Each year, the amount of reverse mortgages has climbed with the latest figures available showing more than 85,639 homeowners taking advantage of these types of loans in 2006. That's nearly double the amount from the previous year. That is due to aggressive promotions done by an industry fixated on making money.

"The average age of those seeking reverse mortgages is 73.62 with the primary purpose was to increase income: 73.2%, create an emergency Fund: 18.3% cover medical costs: 6% or fund a pending home project: 3%.

"There is no doubt that this is good for some who have no mortgage - which must be paid off before any money can begin to be dispersed.

"With your back against the wall because you have made bad financial decisions does not justify making yet another potentially harmful one. Taxes, insurance and upkeep do not go away either. What happens when HUD determines the home has not been kept up to their standards. How often will these appraisals be done?

"The sub-prime mess would never had happened had lenders offered detailed counseling to borrowers who could ill-afford a home in the first place. Disclosure was done then to uneducated first time buyers and, as many of us have found, did no good. Lenders are not the type to suddenly become beneficent just because grandma needs a few extra dollars to get by. There is money to be made with those gray hairs and they know it.

"Those blanket statements are generalizations and I hesitate to suggest, may also be predictive. Can you say, in all honesty, that reverse mortgages are the best option or is there some other less capitalistic method of helping seniors?"

Although the industry closely guards who applies for these types of loans/liens, the vast majority who consider reverse mortgages want to keep their homes, spending their last days in-place. But, and yes, here comes another blanket statement, they come with mortgages they should not have in the first place.

If the industry was truly focused on keeping these seniors where they want to be, wouldn't so many fees be unwarranted? You secure the property. You charge them interest. You use the actuarial tables to predict their expected life.

My problem you see is not with the borrowers, it is with the lenders.

Tuesday, March 25, 2008

Retirement Planning and the False Hope of Reverse Mortgages

The post I stumbled upon suggesting that seniors - because they are the only ones eligible for such a program look at the possibility of reverse mortgages as part of their retirement income went something like this:

(My comments follow)

"Life after retirement is never easy, especially if you are facing a financial crunch. It is a very well known fact that after retirement the monthly flow of income stops and this can have ad5ACverse impact on the life of the senior citizen. It goes without saying that money plays a very important part in the life of an individual and no matter whether you are retired or working you need to have a constant flow of money to take care of all your needs. Reverse mortgage is something which can help out the senior citizens who are looking for a constant flow of money even after retirement. It becomes very difficult for an individual to lead a life of dignity and honor if there is lack of money and this can set this just right for you. Reverse mortgage is something that citizens residing in and around California can use for their benefit.

"To be eligible to get money through this, the person must be the owner of a house. "The California reverse mortgage loan is available to any senior citizen above the age of 62 years who owns a house on the equity of the house. The person who takes the reverse mortgage loan will not have to repay the loan amount till the time he decides to sell the house, move out of the house or the borrower passes away. One of the main advantages of this is that this will never be passed on to the heirs if and when that person who takes the loan passes away. The loan amount will be automatically paid off as the person who provides the reverse mortgage loan will become the owner of the house after the house owner passes away. The loan amount will vary based on the equity of the home.

"To be eligible for any reverse mortgage loan in California a person must fulfill certain eligibility criteria. First the person must be a senior citizen, which means that he must be more than 62 years of age. The other primary requirement to get a reverse mortgage loan is that the loan seeker must in possession of a home. Therefore, if you want to take a loan from a broker, you must make sure that you know about the various things that are associated with taking the loan amount. Since you want to take a loan, it will be best for you to be informed about these aspects, so that you do not fall prey to any fraud loan brokers.

"Life is full of both pleasant and unpleasant surprises and that is why we need to be prepared to deal with any eventualities at any time. Taking a California reverse mortgage loan is one way to deal with the financial aspect of any emergence that you may face in your life and especially if you are retired you need the money form this loan to take care of all your day to day needs. You can take the loan money either in lump sum amount or in monthly installments based on your needs.

"Antonio Redford is a legal expert. He gives advice to clients who are looking for expert counsel on reverse mortgage. For more queries about reverse mortgages loan, American reverse mortgage, California reverse mortgage and California reverse mortgage visit"

Which is all fine and good with the following exceptions.

I wrote in reply to this "I am increasingly worried that this will be the new sub-prime. I see folks reaching for cash from their equity that has been appraised much lower than market value because the home is technically not saleable. The current resident, if they are considering a reverse mortgage just to stay in the house, is not going to use the money for maintenance or improvements but for day-to-day living expenses, which is not what equity should be used for. Lenders will use actuarial tables to determine the worth of the home against the length of life left in the borrower.

"Once the borrower hits the “dire straights” that forces them to consider this option, they often forget that they are indeed entering a loan, that the fees and interest rate are never advertised and are often not competitive with home refinancing or even second mortgages and that the contract will impact what they may have wished to do with the home in the future. The word “lien” is often played down.

"Reverse mortgages are an option of last resort and should only be entered into with legal, financial, and tax counsel and, if at all possible, the help of the homeowner’s family."

Monday, March 24, 2008

Retirement Planning and Cash Positions

Retirement Planning and Cash Positions

As many of us, future retirees and current ones watch in horror as the stock market gyrates on almost any news, as we watch the Fed struggle with the credit crunch, sub-prime defaults and any number of financial missteps, some of which have yet to come to light, we worry that our long-term investments are in jeopardy. And we would be fully justified to do so.

Your mutual fund managers are doing something about it. In an article posted on Bloomberg recently, fund managers are shifting away from buying stocks to selling them and holding on to the cash. The key here is to let them do it and not do it yourself.

Mutual funds do not have the luxury of taking inordinate risks such as their more volatile brethren in the hedge fund world might. Because, not only do they deal with individual investors, mutual fund managers must look at pensions and insurance company investors and make their plans based on a much longer horizon than you might think.

You will do more harm than good by panicking. Your fellow investors will feel the pinch from your redemptions – when you sell shares, the fund must sell stock to cover your exit leaving those left behind in a little worse shape than before. This also creates tax problems for not only those redeeming their shares but for those left behind as well.

As Eric Martin and Alexis Xydias write: “Forty-three percent of managers surveyed this month by Merrill Lynch & Co. moved more money into cash than their funds stipulated, the highest percentage since the New York-based firm began compiling the data in April 2001. Their cash relative to total assets also rose to a five-year high as managers found fewer stocks to purchase and anticipated redemptions.

Stay put. Even increase your pre-tax contributions and let the fund managers do what you pay them to do.

Wednesday, March 19, 2008

Retirement Planning and Staying Put

A recent study done by the Royal Bank of Canada has uncovered the difference between thinking about life after a work and the actual place where that life will be lived.

It has been generally assumed that when the current wave of retirees leaves the workforce in the coming years, they will change the landscape. But surveys like the one listed here, offer another look at what may happen.

The majority it seems will be staying put, even remodeling their homes to make them more comfortable. Some of renovations will be major but in general, those changes will not be geared toward accommodating grown children.

These soon-to-be seniors are not necessarily looking for neighborhoods with populations of similarly aged cohorts. Instead, they amenities they seek – closeness to nature and perhaps even a water feature, proximity to activities and entertainment – preferably within walking distance and the emotional well-being that mixed neighborhoods provide in terms of vibrancy and security seem to be what the vast majority of future retirees will seek.

Sure, there are those who want to travel and even purchase second homes in their favorite spots, but the return to a home base seems to be growing. Not surprising, these “boomers” will also be eyeing a lifestyle that may exist on one floor and have the ability to entertain in house. The vast majority have also erred on the side of caution, hoping to have easy access to the necessary services associated with advanced age.

Thursday, March 13, 2008

Retirement Planning and Advertising

I have always marveled at the ingenuity employed by companies looking for your retirement dollars. They have portrayed it as a nest egg, picturing people wheeling around giant replicas of what they have amassed to secure their future. Although between you and me, retirement planning is more about the nest you build than the contents of what you put in it. Yet the image definitely has a certain stickiness to it.

Now the Dutch banking giant ING Groep has entered into the fray with their latest advertisement picturing a wide variety of people carrying around dollar based numbers. This new guilt trip offers a speculative look at how much money you will need in retirement. The bank’s message is designed to prompt everyone who has yet to save a nickel for retirement to take action.

The idea that some “hypothetical” number will prod you into saving more is not anything new. The advertising world has been very active in formulating the right spin on the topic. But I wonder if the costs of such campaigns, which are passed on to you in the form of fees, produce better investors.

I have spent a great deal of time talking about the high costs of investing in your future. My current book, the inspiration for this blog and the soon-to-be-launched website that accompanies it, looks at the numerous ways each step forward is taxed. Not in the sense the federal government taxes you but by the very companies that seek to make you rich – but not before they themselves take a cut of the action.

With mutual fund advertising, the 12b-1 fees offer a relatively straightforward assessment of what you will be charged by the fund company. You can pick among funds that charge their shareholders for campaigns to attract new investors by choosing the companies that charge little to nothing.

But once those funds get tucked inside of corporate sponsored retirement plans, the fee structure becomes more opaque. You should always ask: “why does the mutual fund offered in my 401(k) still charge a 12b-1 fee?”

Each fraction of a percentage point levied against your retirement savings means that, to achieve a target like ING suggests, you will need to save more. But saving more is only part of the equation. As I mention in the book, it takes a great deal of financial coordination to get where you think you should be (which I take the time to break down, one by one).

There are numerous forces at work chipping away at the effort and the fees, which ING does not mention in the ad – and why would they, are just a part of it. Beware the dangling carrot. It offers you the opportunity to chase what may never be yours.

Wednesday, March 12, 2008

Retirement Planning and Divorce, part two

It is commonly assumed, based on Census Bureau statistics, the about half of all marriages will end in divorce. Even more shocking, 60% of those divorces will take place in the first ten years of marriage. How those couples part with what they have accumulated, even in a brief time is no easy task. Even those that choose to part on good terms, often overlook numerous financial implications.

In the short-term, couples look at what they have accumulated in terms of what they can see. Dividing a house and similar possessions of value require only a simple appraisal and the decision of how to liquidate the property or to provide the ex-spouse with an adequate reimbursement.

But there are several things that should be considered when it comes to retirement planning that are often overlooked – even in the short-term.

The possibility that there are not only insurance policies but also retirement plans with designated beneficiaries can come as a surprise. That surprise accompanies, in many instances, an unexpected financial shock. If you have negotiated survivor’s benefits during a divorce, be sure that your attorney has filed the requisite Qualified Domestic Relations Order or QRDO. Just because you have legal claim over benefits due on pension plans, profit-sharing, annuities, or 401(k)s, without the QRDO, the state may make a distinction between the surviving spouse and the surviving ex-spouse.

While the splitting of property in the shorter marriage is relatively straightforward, how the division is done for longer-term marriages is not so easy. Consider the equity in your home. Generally, this is not taxable (up to the first $250,000 for a single person) whereas, the proceeds from a 401(k) are fully taxable. Only the principle of a Roth IRA or Roth 401(k) is not but any interest gained is.

Any negotiated benefits, such as receiving half of what the pension or 401(k) is worth should be checked and double-checked. Payments from a defined benefit plan, such as a pension, are usually made based on actuarial tables. These guesstimates normally assume that a woman will live longer than a man. This calculation will make what a woman has due seem like less than her ex-spouse might receive. These types of payments may also be subject to human error.

The immediate financial ramifications and emotional toll of divorce can be difficult. But making sure that your future is not jeopardized as a result is doubly important.

Part one can be found here

Monday, March 10, 2008

Retirement Planning and a Social Security Disability Claim

Life may come at you fast, but when you file a claim against a government agency such as Social Security, the idea that something will happen sooner rather than later is only wishful thinking.

There are many of us who feel as though health of Social Security as a retirement plan should take center stage in every conversation. But there is an increasing chance that you will be exposed to the other side of what the agency does before you reach retirement age. The chances that you will have to make a disability claim rise each year and the process does not come with any sort of speedy solution.

The patience it takes to get a judgment from the agency on your case has little to do with the quality of the lawyer you hire. In many instances, the time between the initial claim and your actual hearing can span almost three years, sometimes longer. But the process does require you to make some specific assumptions not only about whom you hire to represent you but how they are paid.

First, the myth of “dire need” no longer dictates who gets heard by the agency or how soon. Determining who needs more faster no longer is considered. No attorney worth her or his salt will make the suggestion that their services will get you a quicker hearing.

Second: the speed of those cases has little to do with the SSA itself. The sheer number of cases being brought to court has doubled over the last decade, making the process of reviewing each individual claim much more difficult. But ultimately, the claim must be brought to a judge. Depending on where you live, the process can take much longer. While it is true that nationwide, the number of judges hearing disability claims has dropped 10%, your state might have a larger backlog of cases than your neighboring state. While that is no consolation, it is also no reason to blame your attorney.

Third: attorneys do not get paid until the case is settled. According to Atlanta based attorney Jonathan Ginsberg “The first method is called a fee agreement process and the second is called the fee petition process. The fee agreement process is simple - if you and your lawyer enter into a contingency contract based on past due benefits that calls for payment of 25% or less of past due benefits, with a cap of $5,300, Social Security will automatically withhold and pay the lawyer 25% of past due benefits up to $5,300 without any need for the lawyer to file a detailed time and billing statement.

“On the other hand, if the fee contract does not provide for a contingency or if there are more than one lawyer claiming a fee, then any lawyer claiming a fee will have to file a detailed fee petition, setting out time records, expenses claimed and other billable time.”

Mr. Ginsberg also suggests sticking with your attorney through the whole process. If for some reason you are considering firing your original attorney, the SSA regardless of the previous attorney’s position in the case will satisfy the fees due at settlement.

He also warns that you should make your choice wisely and be patient. “Law school professors and our malpractice carriers advise us to avoid clients who have fired prior counsel because those clients are the ones who are most likely to be unhappy with a lawyer's work, regardless of the outcome,” Mr. Ginsberg writes.

“Therefore, unless your lawyer is clearly incompetent, ill or dead,” it would be best to stick with your present counsel.

Monday, March 3, 2008

Social Security and Sovereign Wealth Funds

Now that Retirement Planning for the Utterly Confused is widely available and I have completed the footnotes and explained the references that I made throughout the book – something my wife refers to as a “mindbreak from the complexities”, it is time to offer some insights into the world of retirement and associated issues.

Recently, on the Nightly Business Report, a PBS mainstay for almost thirty years, Allan Sloan, Sr. Editor at Large for Fortune offered his comments on fixing the future under funding of Social Security.

He suggested that the United States should “set up a sovereign wealth fund to invest Social Security's cash surpluses. That way, when Social Security takes in less cash than it spends about 10 years from now, we'll have a way to cover the shortfall. Sovereign wealth funds,” he goes on to explain, “are owned by countries, are a very big deal these days as I'm sure you know. They've put about $50 billion into big Wall Street firms that needed capital. They own maybe $3 trillion worth of various stuff but our country doesn't have one.”

To clarify what a sovereign wealth fund is, according to Simon Johnson of the International Monetary Fund, a way for countries running a surplus to invest that money. Surpluses are, in case you have forgotten from the days when our country also had one, is extra cash that the country does not need for immediate purposes.

There are about twenty sovereign funds in existence now, investing about $3 trillion dollars. Alaska and Canada have one, investing oil money for the future of their citizens. Russia, China and numerous Asia-Pacific nations use money they do not need to invest in places needing a cash infusion. Lately, that has been us.

Mr. Johnson says not to worry though, the amount of money being used in these funds is only a small portion of the global value of trade securities.

Mr. Sloan continues, “So Social Security's cash surplus -- about $90 billion this year -- goes into Treasury securities. Its trust fund owns more than $2 trillion of them, but they're not wealth. Because when Social Security takes in less cash that it spends, the funds won't make it any easier for the government to cover the checks than if there were no fund.”

A sovereign wealth fund could do so much more by purchasing, “high-rated corporate bonds, home mortgages of credit-worthy borrowers or anything solid” meaning anything carrying a high credit rating that could generate significant interest wealth over the long-term.

“Then,” he continues, “when Social Security needs cash, the fund would have real wealth. Now, I don't think for a minute that anyone in Washington has the nerve to do this, because it would involve admitting the trust fund is useless. So, we'll keep doing what were doing. Instead of building a Social Security sovereign wealth fund, we're running an impoverishment fund and our children and grandchildren will get to pay for it.”