Challenging Taxes

What, you may ask, do property taxes have to do with a retirement plan? Other than exerting a negative force on the available cash in your plan, once you do decide to begin distributions, they also have a positive influence on the quality of the community you live in. So if your taxes are excessively high, should you try to get them lower? If so, define excessive.

Are you paying too much?
In many parts of the country, homes are worth less than they were two years ago. But what often does not follow those changes in valuations are the taxes assessed. For those lucky enough to still have a job, have maintained their salaries and have seen a minimal decline in the value of their house, challenging the property taxes you are currently paying might be counterintuitive and not worth the effort. While a reassessment of your home does not take into consideration your ability to pay, it might be worth considering if the information the assessor has on your home is not correct.

More on the effect of property taxes on your retirement plan can be found here.

Retirement Planning and Deficiency Judgments

Retirement is tricky enough without having to carry bad decisions into the future.  It is my greatest hope, particularly for those close to retirement, that your house is secure, with any luck close if not already paid for and there is no chance of foreclosure in your future.  But things happen and fates change.

Last Friday, on MomsMakingaMillion radio with Gina and Kat, the topic of deficiency judgments was discussed in the MoneyTips section of the show.  I know something about foreclosures and wondered if what was being discussed could be prevented and how.

In a previous article here, we looked at the possibility of walking away from your home. The obligation, we argued is one that involves two parties: lender and the borrower.  Every financial contract, we all know comes with obligations.  But exactly how those obligations are applied can vary from state to state.

Gina, who resides in Nevada, gave fair warning to the homeowners in her state about the pitfalls of owing money long after you have been foreclosed.  Called a deficiency judgment (the only states that have no right for the lender on the books are Massachusetts, Mississippi, West Virginia and Delaware), this action theoretically allows the lender to pursue you for the balance of the loan due after the house has been foreclosed, .  While on the surface, this seems like an additional blow to your already decimated financial world, but there are steps that must be taken and certain rules that protect you.

Do you know about deficiency judgments?


Paul Petillo is the Managing Editor of Target2025.com

The Walk-Away Investment

Seems that there isn't a day goes past that I am not asked about the concept of buying a house.  These questions usually come from younger workers who may be barely into their thirties.  And the answer I offer them is not what they want to hear.  In fact, it flies in the face of everything they have ever heard about home buying, much of it now like the retirements of our parents: not something we can count on for us.

But what about you or someone you know who might find themselves underwater in their homes? Can you walk away?  Will you know why?


For more on this topic, visit Target2025.com: Is Owning a Home No Longer Smart Money Management?

Paul Petillo is the Managing Editor of Target2025.com

Retirement Planning and the Advice of Professional Money and Investment Planners

In a recent column in the San Diego Union Tribune, a financial planner was enlisted to offer a reader a financial make-over. The goal was to retire at 55, after a divorce, after a recent home purchase, and after racking up a five figure debt with credit cards.

The planner suggested:

"Use emergency savings to pay off debt.

"Decrease monthly retirement contributions from $500 to $300; use the extra $200 to rebuild emergency fund.

"To retire at 55, work part time for 10 years (with a minimum salary of $20,000) and consider selling home and buying a smaller property outright to eliminate a mortgage during retirement.

"Establish a budget to manage current spending habits.

"Revise W-4 form with employer to account for mortgage and property tax deductions; doing so will increase income by $400.

"Take on more risk and diversify asset allocations to maximize returns for the next few years before retirement.

"Look into the purchase of a $1 million umbrella policy as well as disability insurance.

"Have a coordinated will and trust drawn up along with applicable medical directives and powers of attorney."

And because the article allowed for comments, I added the following: "Sounds like her planner needs to suggest the harsh realities. Let's start with her inability to come up with or budget for those property taxes. With a current liability (mortgage payment, which seems to me was adjusted at some point) and a $5,000 a year property tax bill (something that is guaranteed never to decline), Ms. Ventura will not even come close to enough to live on with her pension. If she were to retire right now, with the assets she has, she would have about $300 a week for all of her other incidentals.

"Her planner," I wrote, "wants her to decrease her retirement contribution by 30%, add more insurance, not really retire (work part-time for earning least $20,000 a year - doing what?) and rearrange her asset allocation to get 10.68% a year return (even without the use of index funds, no short term or intermediate bond investment coupled with large-cap and international exposure could hope to get those kinds of returns which so far over the last ten-years hasn't and projecting even optimistically out over the next ten years will).

"And after all of that, he wants her to sell her home.

Why not just keep working until she is 65, put away the credit cards (while continuing to pay them down - which if she took her current personal savings to do would allow her to redirect that $450 to rebuilding that account - which would still have, according to the numbers listed above, well over $13,000 in checking and savings) and budget in another $300 towards the mortgage payments bringing the overall life of the loan down to around fifteen years. This will leave her living tight - like the rest of us - but will also increase the chance that she will have her home when she retires (meaning when she stops working) and might be able to pay for the taxes on the property.

I see no mention of health insurance in Mr. Phelps plan short of a disability policy or an employer sponsored long-term care arrangement. That 403(b) and 457 plan will begin to cover that but if a recent estimate by Fidelity suggests, her savings for insurance in a post-work life will fall short by $850,000.

True, Ms. Ventura is doing better than most but she is going to need to rethink those post-divorce goals. And this is true for many of us.

When we calculate how much we will need, we tend to gloss over numerous factors in an attempt to tailor our dreams to fit. Her financial make-over would have cost her $1,200 and she would not really be any closer to the truth about her future than had she just faced the facts.

One: Divorce changes the whole retirement picture. Ms. Ventura is no exception, she will have to recover much more financially than had she remained married.

Two: The cost of retirement is rising every day, just like everything else. Plan on a 15% increase in those costs, year-over-year. Can she handle that and still retire at 55? Not likely.

Three: There are no guarantees. That employer sponsored pension may falter. Those investments may weaken. That house may be worth less as the taxes on it rise.

The best base calculation she can make: Can she live on half of what she is making now? Because that, for an increasing number of us, is the reality of retirement.

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.

"None.

"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.

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.

Retirement Planning and Your Home’s Net Worth

While I discuss the importance on factoring your home out of the equation as you make your retirement plan, the value of your house is nonetheless important. But its importance is limited to present financial considerations and not what you might consider wealth.

During the research for the book, I was curious as to the worth of my home, how the process works at many of these sites offering an e-appraisal, and whether the estimate they provided was close to what I considered the actual market value. I contacted HouseValues.com, a website that uses readily available information from a variety of sources: taxes, Multiple Listing Services, and recent sales in the neighborhood.



As I made my way through the site, answering the questions on each page, I could see where this was headed. The appraisal would only lead to an actual contact with a real person, possibly a realtor, and because I was not in the market to sell my home, I wanted to avoid the interaction. They can be, given enough information, as annoying as insurance agents. By the time I got to the page that prompted me for my phone number and the best time to contact me, I had had enough. I simply closed the window and ended the experience.

At least I thought so.

Robert B. was in his office at Prudential Properties, logged on to HouseValues.com as well. He was – get this – literally following each keystroke entry I was making. As an agent, his registration with the site provides him with a valuable tool to potential sellers in the neighborhood he calls his home district.

Because there were certain criteria about the house entered to determine the worth, he had enough information available to put together a bound introduction packet. This “blind analysis” came with helpful hints on pricing, prepping, and marketing my home, and a newsletter published by RMLS, a regional version the MLS service. On a page title “Final Notes”, Robert B. suggested that the figure he was providing was + or – 7% of the actual value of the home. He would be able to get much closer to a real estimate once inside to see the property for himself.

Also included were comparables, tax and county records, an aerial view of the house (which looked pretty good on the MS Virtual Earth shot in color), some notes suggesting that perhaps I had inflated the actual square footage, and a price range, which, without touring the property was uncannily close to what we assumed it was worth – emotional attachment notwithstanding.

As I said previously, I had backed out of the site and left the house to do some errands. Two hours later I received a cellphone call from my wife. Robert B. it seems was on my doorstep, hand delivering the packet I just described. Surreal possibly; creepy definitely.

Here are some things to consider if you are attempting the same kind of estimating. Personal information need not be given to get an estimate. Use a free email service because you will be contacted.

Be aware that you may live in a nondisclosure state such as Texas. Any estimates on homes that were sold in your neighborhood or one that you are looking to buy into are based on loan information in those states and it comes mostly from affiliate banks and lenders.

The key to getting the best estimate lays with what is known as “available home stock”. This is reference to similar homes that are available for sale or that have recently sold. If activity has been low in your area, the homes are older (which means either there has been little done to the existing home or it has been remodeled extensively and without a peek inside at the work, the estimate could be far from realistic) or the houses are very dissimilar, the estimate could be far below or well above reality.

There are times when an appraiser is necessary without the attachment of a broker. Often, in heavily active markets, tax assessments can swing widely and you may be forced to challenge a bill. In that case, the $200 - $500 fee charger by a certified appraiser could be worthwhile.



These folks, according to The Appraisal Institute offer inspections based on economic principles. They will provide you with some cost analysis on improvements, how those changes will relate to the current value and price of the surrounding homes, and whether the improvement is needed.

This feasibility study can help you determine the price before the realtor tours the property. She or he will determine the price that will sell the house quickly; not the price that the house may be worth. The appraiser can also uncover repairs that a home inspector may report to potential buyers who will be hoping to use the information as a negotiating tool.

The Appraisal Institute suggests the following to homeowners toying with the idea of selling their home (and for those who are willing to spend the money to determine their home’s worth).

Prior to making any upgrades to your home, do your research. This includes:

• Knowing who’s buying in your neighborhood
  
• Going to home fairs and open houses to see local trends
  
• Understanding which improvements have the greatest influence on property value
  
• Market researching through the help of an Appraisal Institute designated appraiser

To increase the marketability of your home consider the following tips:

• Avoid overimprovement by sticking to what’s standard in your neighborhood
  
• Projects that add square footage to bring a house up to—but not beyond—community norms generally pay off the most
  
• Consider adding a bathroom, which is an appealing feature for home buyers
  
• Invest in basic upgrades, such as fresh paint (use neutral colors) and new fixtures
  
• Clean your house (focus on baseboards, light fixtures, ceiling fans and carpeting)
  
• Improve basic curb appeal (clean gutters, pull out dead plants, touch up chipped paint)
  
• Remove clutter

Retirement Planning, Aristotle and Your Home

I begin chapter six with a look at Aristotle (384 BCE - 322 BCE>. This Greek philosopher, schooled by Plato and who later taught Alexander the Great, was refuted to have known everything there was to know during his time. That task would be much harder to achieve today.



He did however leave us with some very basic logic, some of which has been proved wrong – I will get to that in a minute – but much of which can be still used to make good arguments about certain subjects.

According to the Philosophy Pages, he made major contributions in the field of Physics with his determination of the four causes. They are listed below as the material cause, simply is the basic stuff out of which a thing is made. The formal cause {Gk. eidos [eidos]}, which is the pattern or essence in conformity with which these materials are assembled, the efficient cause is the agent or force immediately responsible for bringing this matter and that form together in the production of the thing, and lastly, the final cause {Gk. teloV [télos]} or the end or purpose for which a thing exists.



"The material cause of a house, for example, would include the wood, metal, glass, and other building materials used in its construction. All of these things belong in an explanation of the house because it could not exist unless they were present in its composition.

"Thus, the formal cause of our exemplary house would be the sort of thing that is represented on a blueprint of its design. This, too, is part of the explanation of the house, since its materials would be only a pile of rubble (or a different house) if they were not put together in this way.

"Thus, the efficient cause of the house would include the carpenters, masons, plumbers, and other workers who used these materials to build the house in accordance with the blueprint for its construction. Clearly the house would not be what it is without their contribution.

"So the final cause of our house would be to provide shelter for human beings. This is part of the explanation of the house's existence because it would never have been built unless someone needed it as a place to live.”

The reason I bring up this early philosopher at the beginning of the discussion on how we view homes in relation to retirement planning is rather straightforward. We believe that our houses are the center of our universe. Aristotle believed that the earth was the center of the known universe. Consider this passage: "... the natural motion of the earth as a whole, like that of its parts, is towards the center of the Universe: that is the reason why it is now lying at the center. ...



“From these considerations it is clear that the earth does not move, neither does it lie anywhere but at the center. In addition the reason for its immobility is clear from our discussions. If it is inherent in the nature of earth to move from all sides to the center (as observation shows), and of fire to move away from the center towards the extremity, it is impossible for any portion of earth to move from the center except under constraint. ... If then any particular portion is incapable of moving from the center, it is clear that the earth itself as a whole is still more incapable, since it is natural for the whole to be in the place towards which the part has a natural motion. ..." (Aristotle, On the Heavens (W.K.C. Guthrie's translation), Loeb Classical Library, 243-7 [296b8-297a1])

Fifteen hundred years later, Polish astronomer Copernicus would prove him wrong. Religion, in the time between had adapted this center of the universe idea and held on to it firmly, even after Nicolas Copernicus (1473-1543), who refused to reveal his thinking until a deathbed confession to a close friend.

Copernicus, by dispelling the notion that the earth was indeed at the center of the known universe, an erroneous observation that could have been made by anyone looking towards the heavens, dashed the ego of man. Ego is a sense of worth and there is no easier way to outwardly display that ego than the place you call home. The more opulent the house, the greater the ego that resides in it.

And as is often the case, you consider your house to be at the center of your financial universe. Only you would be wrong in doing so (an argument I make in detail in the book). Recent developments in the housing market, namely the current mortgage meltdown due to egotistically reaching for more home than a person could afford – abetted by lenders willing to take a risk, have left many people pondering their future and their net worth in a new light – one that is not so appealing.

Making the leap from thinking about your home as an investment to one where you seek shelter or raise a family could be difficult for some. Consider this quote from Nancy Reagan: "…homes are really no more than the people who live in them."

Now consider Warren Buffet's home.