Archive for January, 2008

Who Should Fund The Boomer’s Retirement?

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So, my Mom met with her accountant last week. She is getting a life insurance policy to cover her business partner’s expenses if something were to happen. Her accountant suggested putting a Long Term Care Insurance rider on the life insurance policy.

Great idea, right?

Yes, the Long Term Care rider might be a great idea. The costs of Long Term Care are an expense that most retirees have not planned for and not having long term care insurance can completely devastate your finances. Please review information on the need for long term care insurance here

http://www.newretirement.com/Planning101/Serious_Medical_Crisis.aspx .

But, here comes the shocking part of the recommendation: The accountant suggested that that my mother ask my brother and I (her children) to fund the monthly premium on the rider since we would end up paying for Long Term Care expenses if she hadn’t taken care of them herself.

Indeed, Long Term Care insurance payments are likely less expensive than the ultimate cost of Long Term Care, but why should we, her children, pay for either. We would of course fund her needs — or make arrangements for her to move in with us — if necessary, but why is the general population and a financial expert recommending that it is indeed our responsibility to fund these things?

Social Security, Medicare, Long Term Care Insurance and More — Who Should Pay for It All? Boomers? Children of Boomers? Grandchildren of Boomers?

We children of boomers are already going to have to fund Social Security and Medicare. The baby boomers are retiring with these programs being unfunded. We will be paying our taxes to fund our parents (and grandparents) retirement.

What’s worse, the under- or un-funding of these programs is not even factored into the known and mounting deficit that we are inheriting.

We children of Boomers have an incredible financial burden to bear.

Retiring Boomers Should Consider Who Should Fund These Costs

Please boomers and those advising boomers, please think about the sanity of putting these costs on your children and grandchildren. Is this what you want your legacy to be?

Retirement should be earned. Barring severe health issues, there is no logical reason to retire before you have saved enough money to cover your costs.

Senate Moves to Add Senior Benefits to Economic Stimulus Package! Senior Outrage Gets Results

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Seniors have successfully expressed their outrage at being excluded from benefiting from the Economic Stimulus package proposed by the House.

Congratulations! Congratulations?

Senate Democrats announced today that they will add $150 billion in rebates for senior citizens living off Social Security. This move will likely cause a clash with the White House and House leaders who sponsored the narrower package that excluded seniors from receiving funds in the stimulus package.

Whether or not the plan will save the economy from a recession is still in question. However, including seniors in the stimulus plan insures that financial help could be delivered to those most arguably in need — our nations retired who live on a fixed income.

Although, adding senior benefits would likely mean shrinking the size of payments to those earmarked earlier.

  • Who do you think most “deserves” stimulus package benefits?
  • Will the stimulus package save economy from recession?
  • Does anyone actually need these benefits?

Economic Stimulus Plan Offers Nothing to Retirees

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Retirees in particular should be outraged at the federal government’s economic stimulus plan: http://news.yahoo.com/s/ap/20080124/ap_on_go_co/economy_stimulus

House leaders and the White House announced today — Thursday Jan. 24, 2008 — a tentative agreement on an economic stimulus package of roughly $150 billion that would pay stipends of $300 to $1,200 per family and provide tax incentives for businesses to encourage spending. A stipend of at least $300 would be paid to all workers receiving a paycheck, even those who did not earn enough to pay taxes last year.

The plan does not extend low income programs like unemployment benefits or food stamps. And, most critically it does not offer anything to seniors not receiving a paycheck (Social Security checks do not count.) Retirees who do not “earn a paycheck” but pay taxes do not benefit at all by this “stimulus” package.

Retirees need to think about the following questions and issues:

  • Do you believe that this plan will prevent a recession or delay it?
  • What long term problem does $300 per family solve?
  • Will inflation continue to increase and, if so, how are you going to protect yourself from inflationary pressure?

The current economic crisis is not about liquidity, it’s about solvency. A cash injection might keep the children and grandchildren of retirees spending on HDTVs and Xbox 360s, but it is not going to pay off anyone’s bad mortgage. It will just end up inflating the economy and depleting what’s left of the U.S. dollar.

Most alarming is that the cost of food, health care, and energy have risen at a rate far faster than wages have increased for the average American. Some cash is not going to loosen wallets tightened by the rising prices of these core goods.

Retirees earn a fixed income and are the group who are most hurt by inflation. The value of your existing savings and income are greatly diminished. (Read more here about how inflation can devestate a good retirement plan: http://www.newretirement.com/Planning101/Inflation.aspx)

So, this economic stimulus plan does not offer any short term relief to retirees and could potentially hurt them even more in the long run because it does nothing to cure the fundamental economic ills we are facing.

Reverse Mortgages: Will they help some seniors avoid foreclosure? Perhaps

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As I’m sure you’re aware there is a rising tide of foreclosures that is threatening up to 2 Million households. This is affecting all age groups and unfortunately it doesn’t look like the Hope Now plan to freeze some mortgage rates will bail out many people. However, some housing advocates and legal-aid attorneys are suggesting a new alternative for senior households: taking out a reverse mortgage and using the proceeds to settle current distressed mortgages.

Reverse mortgages are mortgages whereby the payment streams of traditional mortgages are reversed. Instead of the bank lending you a sum of money to finance a new house and you paying the loan back over time (a forward mortgage), a reverse mortgage is structured such that the bank either makes monthly payments to you, gives you a lump sum or issues you a line of credit (all based on your home equity) and the loan is repaid with interest when you either sell your home or die. The big difference with a reverse mortgage is that it is a non-recourse loan – the amount due on the loan can never exceed the value of your house (which is good for the borrower). The lending bank takes the risk that the loan amount won’t grow faster than the equity in your home.

The major drawback of a reverse mortgage is that you will lose some or all of the equity you have built up in your home when you move or pass away. But if you are struggling to make high interest payments and face foreclosure, taking out a reverse mortgage may be an option to prevent the loss of your house. The major qualification for a reverse mortgage is that you have built up enough equity in your home and that you and your spouse are both 62 years old – there are no credit or income requirements.

It used to be difficult to find lenders willing to issue reverse mortgages and buy products other than the plain vanilla government-backed HECM (Home Equity Conversion Mortgage), especially at reasonable costs. Now, more than a dozen large banks and mortgage lenders, the largest issuers being Wells Fargo and Financial Freedom, offer a variety of reverse mortgage products, and there are thousands of smaller lenders throughout the nation. Costs have gone down – although they are still high, with fees typically more than 5% of the home value – and some issuers have reduced the minimum age requirement to take out a reverse mortgage to below 62. It has also given people more flexibility. For example, government-backed mortgages are subject to government rules, one of which prevents homeowners from cashing out above a certain limit (borrowing limits are capped based on where the homeowner lives). But private lenders who have stepped into the reverse mortgage business, such as Banc of America Corp., allow homeowners to borrow more than the limit on HECMs.

As competition in the market increases – expect to see lower fees and more innovation in the reverse mortgage market. Large lenders have become interested in creating a secondary market for securities backed by reverse mortgages; they have started to buy these products and plan to securitize them and sell them to investors on Wall Street. This means more available credit for reverse mortgages, which will decrease the costs of these products.

But more choices, especially with the increased availability of proprietary products offered by private lenders, result in more homework for the consumer. It is essential that distressed homeowners who are looking to purchase a reverse mortgage investigate the options available. It is important for the client not to blindly follow a salesperson’s recommendations, and that appropriate and challenging questions are asked to ensure suitability. Don’t fall into the trap of predatory lenders; this is hopefully one of the lessons learned from the subprime mortgage crisis.

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