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For many over 55, debt defers dreams

Posted on October 25, 2010 by Jason

USA Today, October 24th, 2010

A growing number of Americans age 55 and older
have put their retirement dreams on hold as they face a dismal financial
reality: The recession has forced many into unemployment, stripped away
years of their savings or dramatically reduced incomes during what they
had hoped would be their final high-earning years.

“My generation thought that we were on easy street,” says Irene Froehlich, 61, who lives in the Chicago area. “All of a sudden, we have been hit hard.”

Froehlich, who works at home as an advertising
sales contractor for two magazines, saw her income drop 75% at the
beginning of 2009 because of declining ad sales. With less money, she
relied more on her credit cards, and the amount she owed jumped by 25%.
She filed for bankruptcy in May.

“I was backed into a corner, and I couldn’t pay
the bills any more,” Froehlich says. “It was not the way that I was
raised. I felt that I was a terrible person. But the economy has caused
this, and we’re paying the price.”

Even before the recession, older Americans were
piling on debt. From 2000 to 2008, the average debt for households
headed by people 55 or older nearly doubled to $66,000, according to
Strategic Business Insights, a consumer behavior research firm.

The ranks of older bankruptcy filers also have
been swelling rapidly. From 1991 to 2007, bankruptcy filings by those 65
and older increased by 150%, while filings in the 75-to-84 age group
soared 433%, according to the Consumer Bankruptcy Project.

Older Americans are staggering under debt because
of a variety of problems — from unexpected job losses late in life and
underemployment to overwhelming medical bills and providing financial
help to their children and grandchildren, analysts say. Making the issue
even more serious: They have little time to climb out of debt, says
Matthew Beatman, bankruptcy lawyer at Zeisler & Zeisler in Bridgeport, Conn.

Read more of this article

Dealing with Debt:  Debt can sink retirement, but there are ways to manage it, even if you are already of retirement age.  Consider the various options available to you at NewRetirement.com

New rule cracks down on debt settlement industry

Posted on July 29, 2010 by Jason

Yahoo News, July 27th, 2010

Companies that promise to reduce or eliminate credit card balances
and other debt for customers will no longer be allowed to charge an
upfront fee.

The Federal Trade Commission said Thursday that the
new restrictions are a crack down on the debt settlement industry, which
flourished during the economic downturn as borrowers struggled to pay
bills.

Debt settlement companies will now only be able to charge a
fee once a customer’s debt has been reduced, settled or renegotiated.
The rule goes into effect Oct. 27.

Since the start of the
recession, the Better Business Bureau has received more than 3,500
complaints about debt settlement companies. Customers complained that
they ended up deeper in debt or were sued by creditors after failing to
make payments. The bureau did not separately track complaints against
the industry prior to the recession.

Debt settlement companies
often charge an upfront fee, typically a percentage of the customer’s
outstanding balance. In exchange, the company promises to negotiate with
creditors to reduce or eliminate the debt, sometimes by as much as
half.

The new FTC regulations also require debt settlement
companies to disclose to customers how long it will take to get results,
how much it will cost, and any negative consequences that could arise
from the process.

For example, customers can go deeper into debt when they hire a debt settlement company.

This is because customers stop making payments on their loans, and late fees and interest charges continue piling up.

Customers
are also often required to start setting aside money in a separate
account maintained by the debt settlement company. This money is
intended to eventually pay off any remaining debt.

Under the new
rule, however, companies will only be able to require such an account if
it’s maintained at an independent financial institution under a
customer’s name.

Read more of this article.

79 million baby boomers enter retirement: What it could mean for the market

Posted on July 7, 2010 by Jason

Christian Science Monitor, July 6th, 2010

My friends and colleagues in the investment management business should
realize that the most important determinant of their success over the
next decade is the type of mousetrap they have to offer the retiring
Baby Boomer generation.

According to USA Today, there are approximately 79 million
boomers in the American populace and the first wave of them turn 65 in
the next year.

Wealth managers, brokers, investment advisors,
financial planners, and family office guys will all feel the effects of
this retirement onslaught, but nowhere on The Street will it be felt
more than in the mutual fund complex. John Waggoner writes:

The
Baby Boom began in 1946 and stretched through 1964. The mutual fund
industry has grown up with Boomers. In 1971, when the first Boomers
turned 25 and began to enter the workforce, the fund industry had $55
billion in assets. It’s now a $10.7 trillion behemoth, $4.1 trillion of
which is in retirement accounts, according to the Investment Company
Institute, the funds’ trade group. About 42% of mutual fund IRA money is
invested in U.S. stock funds, as are 46% of assets in mutual fund
defined-contribution plans such as 401(k)s.

Will the boomers be
content to “stay the course” and just count on actively managed mutual
funds or low-cost indexing options as they have for decades? Something
tells me that another decade for stocks like the one we’ve just had will
make these traditional options much less “default” than they’ve been in
the past.

The ten year treasury is now yielding less than most
blue chip stocks and many of these stocks are trading at historically
low price-to-earnings ratios…will the boomers opt for the (perceived)
additional risk of the 3.5%-yielding blue chip equity mutual fund? Or
will bonds remain the focal point for those staring their last years of
working in the face?

Read more of this article.

Retirement Calculator:  What’s your specific plan for retirement?  Will you be investing in a bond-heavy portfolio, or taking more risk to maximize return.  Our Retirement Calculator can help you figure out where to begin if you haven’t made those decisions.

FHA to make reverse mortgage less forgiving for seniors late on taxes

Posted on June 23, 2010 by Jason

The Washington Post, June 19th, 2010

Here’s a sobering message for anyone who has a federally insured reverse
mortgage or plans to apply for one: If you don’t pay your local
property taxes or hazard-insurance premiums, the risk of losing your
house to foreclosure is about to increase.

Although the Federal Housing Administration, which runs the dominant
reverse-mortgage program, often has been lenient and forgiving in the
past about tax and insurance delinquencies by seniors, the agency is
likely to take a more disciplined approach in new guidelines due this
summer.

The FHA is essentially under the budgetary gun to do so: Its
reverse-mortgage program ran into a $798 million estimated budget
shortfall in the last fiscal year — its first loss ever — in part
because of widespread declines in the value of homes that secure its
insured loans. It has cut maximum borrowing amounts available to seniors
by 10 percent already and is looking for other ways to bring the
program back into profitability in an era of low home-appreciation
rates. The agency has asked Congress for a $250 million subsidy, but so
far it has not been funded.

Fannie Mae, the District-based mortgage giant, also has begun
instructing the companies who service its large portfolio of FHA reverse
mortgages to toughen up on tax and insurance delinquencies, saying they
should move toward starting foreclosure proceedings when borrowers have
not paid their bills for extended periods and expose the company to
losses.

Read more of this article.

Peddling Relief, Firms Put Debtors in Deeper Hole

Posted on June 21, 2010 by Jason

The New York Times, June 17th, 2010

Editor’s Note:  Caveat Emptor, as always…

For the companies that promise relief to Americans confronting swelling
credit card balances, these are days of lucrative opportunity.

So lucrative, that an industry trade association, the United States
Organizations for Bankruptcy Alternatives, recently convened here, in
the oceanfront confines of the Four Seasons Resort, to forge deals and
plot strategy.

At a well-lubricated evening reception, a steel drum band played Bob Marley
songs as hostesses in skimpy dresses draped leis around the necks of
arriving entrepreneurs, some with deep tans.

The debt settlement industry can afford some extravagance. The long recession
has delivered an abundance of customers — debt-saturated Americans,
suffering lost jobs and income, sliding toward bankruptcy. The
settlement companies typically harvest fees reaching 15 to 20 percent of
the credit card balances carried by their customers, and they tend to
collect upfront, regardless of whether a customer’s debt is actually
reduced.

State attorneys general from New York to California and consumer
watchdogs like the Better Business Bureau say the industry’s proceeds
come at the direct expense of financially troubled Americans who are
being fleeced of their last dollars with dubious promises.

Consumers rarely emerge from debt settlement programs with their credit
card balances eliminated, these critics say, and many wind up worse off,
with severely damaged credit, ceaseless threats from collection agents
and lawsuits from creditors.

In the Kansas City area, Linda Robertson, 58, rues the day she bought
the pitch from a debt settlement company advertising on the radio,
promising to spare her from bankruptcy and eliminate her debts. She
wound up sending nearly $4,000 into a special account established under
the company’s guidance before a credit card company sued her, prompting
her to drop out of the program.

By then, her account had only $1,470 remaining: The debt settlement
company had collected the rest in fees. She is now filing for
bankruptcy.

“They take advantage of vulnerable people,” she said. “When you’re
desperate and you’re trying to get out of debt, they take advantage of
you.” Debt settlement has swollen to some 2,000 firms, from a niche of
perhaps a dozen companies a decade ago, according to trade associations
and the Federal Trade Commission, which is completing Read more of this article.

How the Finance Bill Affects Consumers

Posted on May 25, 2010 by Jason

The New York Times, May 21st, 2010

For consumers trying to figure out what the financial overhaul bill
means for them, the legislation the Senate passed Thursday offers some
tantalizing possibilities.

Merchants might offer more discounts to people who pay cash. You could
get a free credit score every time a lender or landlord penalizes you
with a high interest rate or rejects your application because your score
is not up to snuff. Many mortgage
prepayment penalties would go away. And there will be a consumer
financial protection agency, despite many efforts to kill it off.

But some of the measures that could have the most impact on consumers
are not in the House version of the bill that passed in
December. So we will not know which new rules will exist in what
form until the two sides haggle in conference and produce a final bill.

One last-minute Senate addition would lower the fees that merchants pay
to process many debit card transactions. If banks lose revenue as a result, they could
make up for it by adding fees to checking accounts or cutting back on
rewards programs. Retailers say that once card costs fall, they will
hire more workers and hold the line on prices. There is a fair bit of
disagreement about who has the better argument.

It will not be clear until there is a final bill — and perhaps not for
years afterward — how much money the measures will put in your pocket
or whether they will keep it from being picked. But the basic outlines
are clear, so here are the areas to watch as a final bill emerges.

DEBIT AND CREDIT CARDS The Senate bill contains an
amendment with provisions that could affect how you use your credit
card. You have probably encountered those irritating handwritten signs
that forbid card use unless you’re spending more than $10 or so, even
though stores are generally not supposed to do this. The bill would
allow such minimums, as long as stores were not setting minimums for,
say, Bank
of America’s credit card but not Chase’s. Merchants would also not
be allowed to set different credit card spending minimums for, say, a Visa and MasterCard.

Read more of this article.

In Greek Debt Crisis, Some See Parallels to U.S.

Posted on May 13, 2010 by Jason

The New York Times, May 11th, 2010

It’s easy to look at the protesters and the politicians in Greece
— and at the other European countries with huge debts — and wonder
why they don’t get it. They have been enjoying more generous government
benefits than they can afford. No mass rally and no bailout fund will
change that. Only benefit cuts or tax increases can.

Yet in the back of your mind comes a nagging question: how different,
really, is the United States?

The numbers on our federal debt are becoming frighteningly familiar. The
debt is projected
to equal 140 percent of gross domestic product within two decades.
Add in the budget troubles of state governments, and the true shortfall
grows even larger. Greece’s debt, by comparison, equals about 115
percent of its G.D.P. today.

The United States will probably not face the same kind of crisis as
Greece, for all sorts of reasons. But the basic problem is the same.
Both countries have a bigger government than they’re paying for. And
politicians, spendthrift as some may be, are not the main source of
the problem.

We, the people, are.

We have not figured out the kind of government we want. We’re in favor
of Medicare, Social
Security, good schools, wide highways, a strong military — and low
taxes. Dealing with this disconnect will be the central economic issue
of the next decade, in Europe, Japan and this country.

Many people, including some who claim to be outraged by the deficit,
still haven’t acknowledged the disconnect. Just last weekend, Tea Party members Robert
Bennett, the Utah Republican, his party’s nomination for his
re-election campaign, in part because he had co-sponsored a health reform plan with a Democratic senator.
Economists generally think the plan
would have done more to reduce Medicare spending than the bill that
passed. So, whatever its intentions, the Tea Party effectively punished
Mr. Bennett for not being a big enough fan of big government.

Or consider the different fates of two parts of President
Obama’s agenda. Mr. Obama has unrealistically said that taxes do not
need to rise on households making less than $250,000, and this
position has come to be seen as an ironclad vow. He has also called
for billions of dollars in sensible cuts to agribusiness subsidies,
tax loopholes and the like. The news media and Congress have largely
ignored these proposals.

The message seems clear: woe unto the politician — in Washington,
Athens or London — who tries to go beyond platitudes and show some
actual fiscal restraint.

This situation obviously can’t continue, as Robert Greenstein,
perhaps the leading liberal budget expert, points out. Mr. Greenstein’s
politics make him sympathetic to the worry that all the deficit talk
will become an excuse to pull back on stimulus spending while
unemployment remains high or to gut social programs. But he also knows
the numbers well enough to understand that our Greece moment, whether
it takes the form of a crisis or not, is coming.

Read more of this article.

Solving the deficit problem requires an open mind, common sense and courage

Posted on May 12, 2010 by Jason

The Washington Post, May 12th, 2010

Now that we’ve watched a fiscal crisis that began in Greece engulf all
of Europe, maybe we should start considering the possibility that the
same thing could happen to us if we don’t get serious about our
government’s ballooning debt.

In recent months, think tanks have published a lot of scary studies
showing that the long-term budget prospects are even worse than we
thought — that even after the economy recovers and unemployment begins
to return to more normal levels, debt service and demographic trends
will quickly push federal deficits back into the danger zone.

What’s still lacking, however, is a framework for tackling the budget
challenge in a way that is economically coherent and politically viable.
Without such a framework, it’s impossible for the public to seize the
discussion from the partisan ideologues and special interests whose
hard-line positions have brought us to this stalemate. So let me try to
start the conversation with a blueprint, using round numbers and
incorporating some of the best ideas of the left and the right.

The federal government is on path to raise about 19 percent of U.S.
gross domestic product in taxes while spending 26 percent. Given our
wealth and growth potential, it is not necessary to balance the budget
– if we shrink spending quickly, we can safely run a deficit of 2
percent of GDP. That suggests a “hole” to fill of about 5 percent of
GDP. When you factor in much-needed infrastructure investment, that hole
widens to about 6 percent of GDP, or about $500 billion a year.

As a matter of economics, it is simply not possible to close that gap
entirely with tax increases on the rich, as Democratic liberals want so
desperately to believe. At the same time, political reality dictates
that it is impossible to close that gap entirely with spending cuts, as
Republicans would like despite decades of being unable to identify the
cuts they have in mind. The compromise I propose is a 50-50 split
between tax increases and spending cuts in the medium run, rising to 60
percent spending cuts as limits to entitlement spending start to
compound.

Read more of this article.

Retiring free and clear of mortgage debt

Posted on May 3, 2010 by Jason

Bankrate.com, April 30th, 2010

Should you continue to make mortgage payments after you retire?
Or should you pay off the house before quitting your job for good?

Financial experts are divided on this issue.

Reasons you may not pay it off

Bankrate’s own Dr.
Don says it makes sense to compare the after-tax return on
investments against the mortgage rate. “If you can earn more after-tax
on your investments than the effective (after-tax) rate on your
mortgage, you’re better off investing,” he says. 

But if, for example, your mortgage rate is 4.6 percent and you’re
earning 3.1 percent on your investments after taxes, you’re better off
paying down the mortgage, Dr. Don says.

Certified Financial Planner Bill Losey writes in his Retirement
Intelligence newsletter that “while owning a home free and clear may
seem like the obvious best scenario, there are valid reasons not to pay
off your mortgage.” A couple reasons he offers:

  1. You’d lose a valuable tax break in the mortgage interest deduction.
  2. If you bought your home 20 years ago and it appreciated a lot since
    then, inflation will have eroded the impact of a house payment to your
    pocketbook. ”Think of it this way: If 20 years ago you bought your house
    for $200,000 and today it is valued at $500,000, then today it’s as if
    you’re paying 40 cents on the dollar,” he says.

Reasons you should pay it off

Other experts say it’s a no-brainer to pay off your mortgage early.
Roy Williams, CEO of Prestige Wealth Management Group in Flemington,
N.J., says paying off the mortgage is “very important. Retirees are more
vulnerable to volatility in the market. If individuals enter retirement
mortgage-free, there is much less pressure on the portfolio during
potentially volatile times.”

The fewer demands placed on your portfolio, the more time it has to
recover from market malaise.

Read more of this article

Retirement Calculator:  Most Retirement professionals recommend that you do not carry major debt into retirement if at all possible.  However, as this article explains, there are cases wherein the usual rules don’t apply.  Consider using the NewRetirement Retirement Calculator to determine what best suits your situation.

Tap retirement savings early without penalty

Posted on April 28, 2010 by Jason

Marketwatch, April 28th, 2010

For many older workers the recession has been
especially tough. Salaries and benefits have been cut, insurance costs
have risen. That slimmer paycheck isn’t going as far as it once did.

But there is one little known, if troublesome, way that some older
workers might be able to make up some of the shortfall: You can tap into
your nest egg a bit early.

The law dictating when you can use your retirement money is
straightforward: Funds withdrawn from an individual retirement account
before age 59 1/2 are subject to a 10% hit. But the Internal Revenue
Service permits a loophole, part of Section 72(t) of the federal tax
code, where the penalty does not apply if the money is paid out in set
amounts over time.

Be careful. Using this exemption isn’t so straightforward — it does
reduce savings you will need for many years to come.

To qualify, you must take what the IRS calls a series of “substantially
equal periodic payments,” or SEPP, from your traditional IRA. (Roth IRA
withdrawals aren’t penalized.)

This is where the simple part ends.

No one-time payouts

“Periodic payments” means taking installments at least annually for a
minimum of five years or until age 59 1/2, whichever is longer. So if
you’re 50 years old, the SEPP will be in effect for almost a decade
before you can stop. Someone who is 57 years old will be bound to the
plan until age 62, well past the time when the 10% penalty would no
longer have applied.

“Substantially equal” means the periodic payments must adhere to one of
three formulas: a required minimum distribution method; an amortization
method, or the annuitization method.

What’s the difference? The size of the payments can be substantial.
Minimum distribution gives the lowest payment but fluctuates with the
value of your account, whereas the other two options supply higher,
fixed, payments.

These calculations are based on savings, age, life expectancy and a
government-supplied “reasonable” interest rate. You don’t have to do the
math — many financial-planning Web sites have handy 72(t) calculators.
Check out Bankrate.com or, for a comprehensive guide, go to 72t on the
Net (72t.net).

Read more of this article.

Editor’s Note:  No link this time, just a careful warning.  While this article does describe accurately the mechanics, upsides, and downsides to performing this type of operation, it is fraught with danger.  The very concept of drawing upon retirement savings to fund existing costs, even necessary ones, places many people in the gravest of trouble.  Unless there is a desperate need, even if you fully intend to pay the money back, NewRetirement strongly encourages would-be retirees to very very carefully consider this course of action, no matter how sure or necessary it may appear.

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