Tuesday, August 18, 2009

The Retirement Dilemna: Mortgage or Not?



The real estate roller coaster has caused a bit of a dilemma for many individuals approaching retirement. Namely - should I pay off the mortgage before retiring?

Tough question. Let's look @ some recent government statistics before tackling this one


  • 18% of Americans age 65-74 had mortgages in 1992.



  • 32% of Americans age 65-74 had mortgages in 2004.



  • 43 % of Americans age 65-74 had mortgages in 2007.



  • Average housing debt in 1992 = $24,000.



  • Average housing debt in 2007 = $69,000.

This is very disheartening. Not only are more Americans taking on debt at older ages, they are borrowing more money as well. As a Financial Advisor, I value the concept, "less debt = less stress."

As you approach retirement, you should strive to reduce monthly expenses. Some retirees may increase their lifestyle(s) through years good planning and disciplined spending. Others will try to do more with less. Curbing expenses is a great place to start. Eliminating your mortgage is probably the single biggest expense in a household.

Some of this discomfort is the result of a turbulent housing market. Individuals who purchased new homes in recent years not only paid higher prices, but borrowed more money as the statistics indicate. These home owners may now find their properties under water (mortgage is higher than the appraised value).

If you had a sizable down payment at the time of your purchase, refinancing may be an option. Rates are currently very low and a fixed rate is a great consideration should it allow you to lower your monthly obligation. However, banks are once again very careful in lending money and the days of easy loans are gone.

Paying off mortgage balances with non-qualified money is a good idea. If you are sitting on CD's, savings account and/or money market accounts, utilizing these funds to pay off existing mortgages makes sense. It is only when clients ask to use retirement assets do I wince. Using retirement funds creates a tax liability and will reduce your income stream in retirement. This may seem like a good idea, but the economics of such a move don't make financial sense.

Tightening your budget or adding extra income to the mix is a better alternative for paying down your mortgage. "Some individuals will simply have to work longer to get themselves in a better financial position to retire, " says Financial Advisor/Accountant Glover Davis of Bronx, NY. "Being realistic about your financial situation is very important."



Wednesday, August 5, 2009

The NEW Retirement...



As my friend Colleen use to say to her young daughter each morning, "It's a brand new day." Waking her child with a warm and a loving spirit put both of them in a good state of mind. Each day truly is a new adventure - especially for the young.

When it comes to retirement planning, I wish I could call clients and simply say the same thing. Unfortunately, it won't have the same effect. Even if I had my best smiling voice in overdrive, it won't erase the frustrations investors experienced in 2008. Unless you are truly young, retirement planning is going to take some extra work and/or compromise after last year.

Over the last three (3) decades, Corporate America has changed the rules. Common to our parents and perhaps, grandparents, pensions were a reliable source of retirement income. Not only were they guaranteed for life, companies like GE, Verizon & Wyeth were considered pillars of stability. Couple this with social security and you were all set.

This is no longer the case. I believe recent statistics show only 25% of corporations now offering a pension plan and the numbers are getting smaller every year. With people living longer than ever before, the longevity costs to a corporation are staggering. Some would argue this led to the demise of General Motors as we know it. Thus, corporations are shifting the burden of retirement planning to the individual via 401k or 403b plans.

Once you are near retirement age, there are only three (3) sources of guaranteed income: Pensions, social security and annuities. All of them have inherent risk. But, at present, they're the only vehicles that guarantee lifetime income.

Many investors are now converting 401k plans or IRA accounts to annuities to create their own pension plan. A $500,000 IRA converted to an annuity could provide a 5% income stream. Thus, you are guaranteed at least $25,000 per year for life - this alleviates the fear of running out of money. This annual figure could go up should your underlying account value increase, but the income stream is guaranteed regardless of your account value.

These products aren't for everyone and do come with certain restrictions.