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Are You Rich?

Posted on March 20, 2008 by Jason

Barron’s Online, March 18th, 2008

How much of a nest egg do you need to join the true elite? The
tool-and-die man figured he was retiring rich. After selling an Arizona
business that he’d built up over 30 years, he retreated to a 30-acre
spread on the coast of Oregon and handed a $10 million investment portfolio to a big, New York-based
private-banking outfit. The bank, however, seemed less than impressed.
Over three years, he says, he received nary a phone call from the reps
in the local office. “There was no ‘How are you doing?’ or ‘Maybe you
should buy this’ or ‘How about some concert tickets in Portland?’ There was nothing at all.” The retiree eventually reached an inescapable conclusion: “I was considered insignificant.

Yes, it takes more than $10 million to be seen as rich these days.
It takes more like $25 million. Not only is that the minimum for the red-carpet treatment
at a growing number of banks, it is also, in the view of many experts,
the sum needed for a truly cushy retirement, one free of financial
worry.

“With $25 million, you can fund college and grad school
for the kids, take care of your own parents, travel, start a backyard
vineyard and, well, “do whatever you want,” says Maria Elena
Lagomasino, of GenSpring, which helps some 600 wealthy families manage
their money. After all, if you simply stashed the $25 million in
municipal bonds, you’d have tax-free income of well over $1 million a
year.

Exactly how much money you need to retire in a time of
constantly increasing life expectancies has been a hot topic of late.
The Internet is teeming with calculators to help answer the question,
and some of them are quite useful. But if you want to know what you’ll
need to really feel rich in your golden years — rather that what
you’ll need to make ends meet mathematically — just take a good look
around

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More to reverse mortgage warning?

Posted on March 17, 2008 by Jason

InvestmentNews, March 17th, 2008

In the wake of Finra’s strong warning to investors last week about the
dangers of reverse mortgages, advisers are wondering whether the
Financial Industry Regulatory Authority Inc. has more up its sleeve.

The New York- and Washington-based regulator of the securities
industry urged older homeowners to weigh all their options carefully
before tapping their home equity, noting that reverse mortgages can
“jeopardize” retirement security.

The regulator’s investor
alert, titled, “Reverse Mortgages: Avoiding a Reversal of Fortune,”
warns investors to be aware of financial professionals who recommend
reverse mortgages “in order to fund a particular investment.”

“We believe these [reverse mortgages] are being promoted more and
more to investment professionals, and investors need to understand what
they’re purchasing,” said John Gannon, Finra’s senior vice president
for investor education in Washington.

But in issuing its alert, Finra may have had more on its mind than educating investors, some speculated.

Finra’s
warning is “clearly a response” to an article, “Tapping into homes can
be pitfall for the elderly,” published in The New York Times on March
2, said Peter Bell, president of the National Reverse Mortgage Lenders
Association in Washington.

“The article left the perception
that the sale of a reverse mortgage followed by [the sale of] an
annuity is standard operating procedure when, in fact, it is the
exception and not the norm,” he added.

While he declined to
elaborate, Mr. Gannon said Finra jumped on the reverse mortgage issue
at this time for a variety of reasons.

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Rescue Me: A Fed Bailout Crosses a Line

Posted on March 16, 2008 by Jason

The New York Times, March 16th, 2008

WHAT are the consequences of a world in which regulators rescue even
the financial institutions whose recklessness and greed helped create
the titanic credit mess we are in? Will the consequences be an even
weaker currency, rampant inflation, a continuation of the slow bleed
that we have witnessed at banks and brokerage firms for the past year?

Or all of the above?

Stick around, because we’ll soon find out. And it’s not going to be pretty.

Agreeing to guarantee a 28-day credit line to Bear Stearns, by way of JPMorgan Chase, the Federal Reserve Bank of New York
conceded last Friday that no sizable firm with a book of mortgage
securities or loans out to mortgage issuers could be allowed to fail
right now. It was the most explicit sign yet of the Fed’s “Rescues ‘R’
Us” doctrine that already helped to force the marriage of Bank of America and Countrywide.

But why save Bear Stearns? The beneficiary of this bailout,
remember, has often operated in the gray areas of Wall Street and with
an aggressive, brass-knuckles approach. Until regulators came along in
1996, Bear Stearns was happy to provide its balance sheet and
imprimatur to bucket-shop brokerages like Stratton Oakmont and A. R.
Baron, clearing dubious stock trades.

And as one of the biggest players in the mortgage securities
business on Wall Street, Bear provided munificent lines of credit to
public-spirited subprime lenders like New Century (now bankrupt). It is
also the owner of EMC Mortgage Servicing, one of the most aggressive
subprime mortgage servicers out there.

Bear’s default rates on so-called Alt-A mortgages that it underwrote
also indicates that its lending practices were especially lax during
the real estate boom. As of February, according to Bloomberg data, 15
percent of these loans in its underwritten securities were delinquent
by more than 60 days or in foreclosure. That compares with an industry
average of 8.4 percent.

Let’s not forget that Bear Stearns lost billions for its clients
last summer, when two hedge funds investing heavily in mortgage
securities collapsed. And the firm tried to dump toxic mortgage
securities it held in its own vaults onto the public last summer in an
initial public offering of a financial company called Everquest
Financial. Thankfully, that deal never got done.

Recall, too, that back in 1998, when the Long Term Capital
Management hedge fund required a Fed-arranged bailout, Bear Stearns
refused to join the rescue effort. Jimmy Cayne, then chief executive at
the firm, told the Fed to take a hike.

And so, Bear Stearns, a firm that some say is this decade’s version
of Drexel Burnham Lambert, the anything-goes, 1980s junk-bond shop
dominated by Michael Milken, is rescued. Almost two decades ago, Drexel was left to die.

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Are the Grandkids Worth the Money?

Posted on March 14, 2008 by Jason

The New York Times, March 14th, 2008

Arresting global warming won’t come cheap. Europe and Japan are
already spending billions to meet the modest carbon emission cuts that
they agreed to in Kyoto 10 years ago. And according to a recent United
Nations report, switching to cleaner energy sources would require
investments of up to $20 trillion over the next two decades. Add to
that other economic costs, such as the rise in food prices attributable
to the world’s embrace of renewable fuels.

This is money that might be spent to address other pressing social
problems, like world hunger, lack of access to clean water in poor
countries, malaria, AIDS. Is that a good trade-off? How much should the
world be willing to sacrifice today to avert the future costs of global
warming?

The scientists are clear that there is not a lot of time for this
or any other debate. Climate change could start causing irreparable
damage in the not-too-distant future. And there is a seemingly
clear-cut ethical position to guide us: people’s rights should not
depend on when they were born.

Assuming our grandchildren’s welfare is just as valuable as our own
provides a metric to measure the value of investments for the future:
devoting X percent of the current generation’s income to forestall
global warming would be a good deal if it produced a benefit amounting
to more than X percent of that future generation’s income.

Such notions of intergenerational equity underpin the 2006 Stern
Review on the Economics of Climate Change, a British study that marked
a turning point in the debate, stressing the enormous cost of delaying
preventive action. It projected that avoiding large-scale environmental
damage, starting in the second half of this century, justified starting
to spend immediately 1 percent of the world’s income — about $700
billion this year — to cut carbon emissions.

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A reverse mortgage requires sound advice

Posted on March 11, 2008 by Jason

Baltimore Sun, March 2nd, 2008

Foreclosures are up, and it looks like they won’t be coming down anytime soon.

Troubled homeowners have a few options to stave off foreclosure, and
Congress is looking at creating others. But older homeowners, age 62
and up, for years have had a tool that’s sometimes overlooked: a
reverse mortgage.

This allows you to take out a loan against your home to pay off your
existing mortgage and remain in the house as long as you want. You
don’t have to repay the reverse mortgage until you move out or die. At
that time, the house is sold and the lender repaid.

Reverse mortgages can be an expensive form of borrowing, and you must
have some equity built up in the house to get one. But for older,
cash-strapped homeowners headed toward foreclosure, the reverse
mortgage can be the answer.

“It’s one of the best uses of reverse mortgages,” says Donald Redfoot,
strategic policy adviser for AARP Public Policy Institute.

Lucy Hull of Overland Park, Kan., says a reverse mortgage saved the house she has lived in for 30 years.

Hull, 68, refinanced last year to get money to remodel her house. She
went from a fixed-rate to an adjustable-rate mortgage. It wasn’t long
before the widow, living on Social Security and a pension, fell behind
on mortgage payments. Her lender told her it planned to foreclose.

That’s when Hull saw a TV commercial on reverse mortgages. She called.

The amount you can borrow with a reverse mortgage depends on your age
and the house’s value. The proceeds of the reverse mortgage go first
toward paying off any existing mortgage, and what’s left is paid to you.

Hull’s house appraised at $122,000, and she owed nearly $74,000 on it,
says Eric Bachman, chief executive of Golden Gateway Finance, a reverse
mortgage broker that helped Hull get her loan. The largest reverse
mortgage loan the broker could find for her was about $71,000 – or
$3,000 shy of what she owed on the existing mortgage debt.

Faced with possibly having to spend thousands more than that to
foreclose and put the home up for sale, Hull’s lender agreed to eat the
shortfall, Bachman says. Other lenders might not be so forgiving, of
course. But now Hull no longer has to worry about monthly mortgage
payments.

“It gave me peace of mind,” she says. “I plan on staying here until I die.”

Reverse mortgages are complicated. So much so, that would-be borrowers
are required to undergo counseling before taking one out that’s backed
up by federal insurance.

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About Reverse Mortgages:  Learn all about reverse mortgages at NewRetirement.com

Retiree couple needs $225K for medical

Posted on March 11, 2008 by Jason

Yahoo News, March 5th, 2008

A couple retiring this year will need about $225,000 in savings to
cover medical costs in retirement, according to a study released
Wednesday by Fidelity Investments.

The figure, calculated for a couple age 65, is up 4.7 percent from the $215,000 estimate for 2007, the Boston-based financial services company said.

And it is similar to other projections for health care costs in
retirement — daunting figures given that longer life spans also are
requiring workers to increase retirement nest eggs.

A separate study released last month by the Center for Retirement Research at Boston College
estimated that an individual needs to go into retirement with some
$102,000 earmarked just for health care coverage, while a couple needs
about $206,000.

Given current levels of retirement savings, the center said, six in
10 older workers are “at risk” of being unable to maintain their
standard of living in retirement.

The Fidelity study, which has been conducted annually since 2002, assumes workers do not have employer-sponsored retiree health care
coverage. It includes expenses associated with Medicare premium
payments as well as co-payments and deductibles, plus out-of-pocket
prescription drug costs.

“With health care costs continuing to outpace wage increases and companies trimming retiree health benefits, financing health care
has to be central to retirement planning,” Brad Kimler, executive vice
president of Fidelity’s benefits consulting group, said in a statement
accompanying the report.

Fidelity’s first study in 2002 found that a couple needed $160,000
in savings to fund medical costs in retirement, and that total has
risen an average of 5.8 percent a year.

The study blamed the rising health care costs this year on higher
unit costs, for example the cost of a doctor’s visit; higher
utilization rates for health care services; rising costs associated
with new technologies; and increased incidence of some chronic conditions, like diabetes.

Caught unaware: Five not-so-common retirement planning traps/tips

Posted on March 11, 2008 by Jason

Marketwatch, March 6th, 2008

Many a financial firm would have
you consolidate all of your IRAs into one account with one firm.
Trouble is, there’ is a big trap waiting for those who want to roll
over their IRA from one place to another.

Uncle Sam will penalize IRA owners who make more than one rollover — a
transfer of IRA money via a check — per year. In fact, the IRS will
tax the additional rollovers as a distribution (at ordinary income
rates) and then — for those under age 591/2 — slap a 10% penalty on
the distribution as well.

That, according to attorney Brad Dewan, is just one of
the little-known traps waiting for unwary preretirees and retirees who
are simply trying to make the most of their money by reducing fees and
simplifying their lives.
The good news is that
IRA owners can avoid that trap by transferring and consolidating IRAs
by using a trustee-to-trustee transfer, said Dewan, who recently penned
an article about such things for Steve Leimberg’s Employee Benefits and
Retirement Planning newsletter. “My bottom line advice to people is to
never take the cash (check),” said Dewan, an attorney with Miller,
Monson, Peshel, Polacek & Hoshaw in San Diego.
Here are four other
little-known or sometimes forgotten steps Americans can take to protect
their hard-earned nest eggs from similar traps:

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Going to the Company Elders for Help

Posted on March 11, 2008 by Jason

The New York Times, March 10th, 2008

On a recent Saturday afternoon, John Toppel, a retired Hewlett-Packard
sales manager, did not spend his leisure time golfing or mowing the
lawn. He spent it at a local electronics store extolling the virtues of
H.P. laptop computers to customers.

He was not paid by the store or by Hewlett-Packard, for that matter.
Mr. Toppel, 62, left the technology company four years ago, but he
remains a volunteer cheerleader for H.P., one of thousands of its
retirees whom the company is trying to galvanize into an auxiliary army
of senior marketers, good-will ambassadors and volunteer sales people.
None of them get paid; they do it, they say, because of their affection
for the company.

“I feel like I have two marriages: a wonderful marriage at home for
36 years and a wonderful marriage at H.P.,” Mr. Toppel said. “I guess
that’s now a former marriage, but I still have strong feelings for it.”

Across the country, companies are making use of retirees as
part-time or temporary workers. They are taking advantage of not only
their expertise, but also their desire to stay involved and engaged
with the world through work.

Hewlett-Packard’s twist is particularly unusual in Silicon Valley,
where long-term company loyalty is as rare as a pinstripe suit. Here,
people switch jobs and companies on Internet time, chasing the latest
technology developments and the chance to cash in stock options or
catch an initial public offering.

But Hewlett-Packard, founded in 1939 before there even was a Silicon
Valley, has tens of thousands of alumni, many who spent decades at the
company, based in Palo Alto, Calif. Old-timers express a familial
loyalty, telling stories of eating meals and drinking coffee with the
founders, David Packard and William Hewlett, or receiving a baby
blanket from Mr. Packard’s wife, Lucile, on the birth of a child.

In a move it says reflects a renewed emphasis on grass-roots
marketing in the Internet era, Hewlett-Packard is seeking to turn its
retirees into a valuable asset that other, younger tech companies lack.

“We’re moving forward with an effort to capitalize on the fact we
have these great brand stewards,” said Michael Mendenhall, chief
marketing office of Hewlett-Packard. “When you look at the importance
of great word of mouth and great third-party endorsement — who better
to do that than your own employees?”

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Buffett’s State of the World: There’s Folly in Wonderland

Posted on March 5, 2008 by Jason

The New York Times, March 1, 2008

The billionaire investor Warren E. Buffett disclosed Friday that he had earned profits for shareholders of Berkshire Hathaway by speculating in the Brazilian currency, the real, and by buying a large stake in a French pharmaceutical company, Sanofi-Aventis.

He also complained that many other companies were overstating
earnings, and he expressed puzzlement that their auditors let them get
away with it.

Mr. Buffett’s annual letter to shareholders, which was released
Friday, has become something of a business institution, with the
certainty that he will offer caustic comments and the hope that he will
shed light on his investments.

This year, his scorn was aimed at the “financial folly” of lenders
who financed the housing boom, since vanished, and at companies that
use rosy assumptions of investment success to raise reported profits.

The comments, which were released after the market closed, came as
Berkshire reported that fourth-quarter profit fell 18 percent, in part
because of falling insurance rates. Net income decreased to $2.95
billion, or $1,904 a share, from $3.58 billion, or $2,323, a year
earlier.

Mr. Buffett offered no commentary on Berkshire’s foray into the
municipal bond insurance business, and no explanation of why he spent
$1.5 billion to buy a 1.3 percent stake in Sanofi-Aventis.

But he was willing to say, in effect, “I told you so,” in recalling
his warning a year ago about “weakened lending practices” in the
mortgage market.

“Just about all Americans came to believe that house prices would
forever rise,” he wrote. “That conviction made a borrower’s income and
cash equity seem unimportant to lenders, who shoveled out money,
confident that H.P.A. — house price appreciation — would cure all
problems. Today, our country is experiencing widespread pain because of
that erroneous belief. As house prices fall, a huge amount of financial
folly is being exposed. You only learn who has been swimming naked when
the tide goes out — and what we are witnessing at some of our largest
financial institutions is an ugly sight.”

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Despite Costs, More People Raid 401(k)s for Cash

Posted on March 5, 2008 by Jason

The Wall Street Journal, February 28th, 2008

Financially stretched workers are increasingly breaking into their retirement accounts to get cash.

Over the past couple of decades, the 401(k) account and its brethren
have become the main retirement savings vehicles for millions of
Americans. But as the credit crunch and declining home values limit
many types of consumer loans, a growing number of workers are tapping
into these accounts as if they were piggy banks.

Eighteen percent of
workers had a loan outstanding from their retirement plan in 2007, up
from 11% in 2006, according to a survey to be released today by the
Transamerica Center for Retirement Studies, a nonprofit corporation
funded by Aegon NV’s Transamerica Life Insurance Co.

Major retirement-plan providers are reporting a similar trend. The
number of participants taking a loan from their 401(k) plans rose by 7%
at the end of last year from six months earlier, according to J.P.
Morgan Chase & Co.’s analysis of 350 plans nationwide that cover 1.3 million
people. Those results followed a period from January 2005 through June
2007 when loans from these 401(k) plans fell by 15%.

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