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Retirement Planning Angst: The Five Stages

February 9, 2013 by Leave a Comment

Dr. Kübler-Ross, who died in 2004, is best known for identifying the five stages of grief that people go through once they understand they are dying. And those stages — denial, anger, bargaining, depression and acceptance — describe perfectly my reactions when I read recently that, according to Fidelity Investments, my wife, Alison, and I will need to save eight times our current annual income to come even close to having the kind of retirement we want.

Here’s how I reacted when I got the depressing news, which came as I was assembling our financial records in order to do our taxes.

DENIAL “That figure can’t possibly be correct. Eight times annual income? How can any couple possibly put away that kind of money? They can’t. Clearly, it’s a typo. Has to be. That’s it, someone has the number wrong. Good. Now I feel better. I am not going to think about it any more.”

But, unfortunately, countless people have cited that multiple, or even more chilling ones, as a retirement savings goal. Denial was out. What replaced it?

ANGER “Those financial planners haven’t a clue what things cost in the real world! We had four kids to put through college. Then there is our home, an 1870 farmhouse that should have come with a live-in electrician, plumber and carpenter. And do you know what we are paying in property taxes? We have been conscientious about saving for retirement, and now you tell me we aren’t even close! This is America. There has to be somebody I can blame for this.”

Ranting made me feel better — and I pretended that I didn’t hear Alison mumble under her breath that I was acting like a toddler long overdue for his nap. Once I wore myself out, I figured that there was some way I could cut a deal or figure out an angle. That eight-times-income figure must contain some wiggle room.

BARGAINING “O.K. We’ll need eight times our income. Well, 7.5 would round up to 8, right? So maybe we can get away with that. And maybe I’ll just put in 60 hours a week until I’m 83. Beyond generating more money, that would cut down on retirement time. But that’s probably not going to work. Who the heck will hire me when I am 83? Well, what if we cut our current income in half? That would make the 7.5 times figure doable, although I am not quite sure how we would pay the mortgage. Or we could … . ”

When I couldn’t find any way around the problem, I was, just as Dr. Kübler-Ross predicted, miserable.

DEPRESSION “How could this have happened? I write about this stuff in my work. I know that retirement is expensive and that people are living longer than ever, which means the money has to go even further. This is awful. I should have seen this coming. I wonder how cat food tastes?”

Fortunately, I don’t have the discipline to wallow. My attention span is too short. And so, in a surprisingly short amount of time, I broke through to the other side.

ACCEPTANCE “Well, facts are facts. We are not going to have eight times our current income socked away when we finally hang it up. Probably not seven, either. But you know what? To quote that great sage William Stephen Belichick, otherwise known as the head coach of the New England Patriots, ‘It is what it is.’

“And there are some advantages in the fact that we are going to fall short. For one thing, I don’t have to agonize every day whether our retirement accounts closed up or down. The final figure will be, to quote Bill, whatever it is, and I think I am O.K. with that.

“We can’t increase our retirement savings contributions without jeopardizing how we live now — and I like how we live now. And I am not going to regret the fact that we paid for the kids to go to the colleges of their choice (although it would have been nice if even one had picked a state school).

“Yes, we have home-repair services on speed-dial, but Alison loves this place, faulty wiring and all. And the saying is on target: Happy wife, happy life.

“Given all this, I am going to be O.K. with whatever number we end up with when we retire. If we remain diligent, it looks as if we will have about six times current income. And between that and Social Security, we will make do. I am at peace with it. Effective today, I am not going to spend hours agonizing over whether to save tax-deferred or not. I am going to make one decision — with a lot of help from our accountant — and let it go.”

WHAT have I accomplished by going through these five stages of grief? Well, I have to tell you that I am happier for having reached this point. And I know that I won’t have to live on cat food, but I have tripled-checked the numbers just to make sure.

I am not arguing that you should give up on saving money for retirement. Rather, I think that you should try to save as much as you can, but that when you have done all that you humanly can do, accept it.

The good doctor was right.

Article source: http://www.nytimes.com/2013/02/10/business/yourtaxes/retirement-planning-angst-the-five-stages.html?partner=rss&emc=rss

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Most Americans Face Lower Tax Burden Than in the 80s

November 30, 2012 by Leave a Comment

“It feels like the harder we work, the more they take from us,” said Mr. Hicks, 55, as he waited for a meat truck one recent afternoon. “And it seems like there’s an awful lot of people in the United States who don’t pay any taxes.”

These are common sentiments in the eastern suburbs of St. Louis, a region of fading factory towns fringed by new subdivisions. Here, as across the country, people like Mr. Hicks are pained by the conviction that they are paying ever more to finance the expansion of government.

But in fact, most Americans in 2010 paid far less in total taxes — federal, state and local — than they would have paid 30 years ago. According to an analysis by The New York Times, the combination of all income taxes, sales taxes and property taxes took a smaller share of their income than it took from households with the same inflation-adjusted income in 1980.

Households earning more than $200,000 benefited from the largest percentage declines in total taxation as a share of income. Middle-income households benefited, too. More than 85 percent of households with earnings above $25,000 paid less in total taxes than comparable households in 1980.

Lower-income households, however, saved little or nothing. Many pay no federal income taxes, but they do pay a range of other levies, like federal payroll taxes, state sales taxes and local property taxes. Only about half of taxpaying households with incomes below $25,000 paid less in 2010.

The uneven decline is a result of two trends. Congress cut federal taxation at every income level over the last 30 years. State and local taxes, meanwhile, increased for most Americans. Those taxes generally take a larger share of income from those who make less, so the increases offset more and more of the federal savings at lower levels of income.

In a half-dozen states, including Connecticut, Florida and New Jersey, the increases were large enough to offset the federal savings for most households, not just the poorer ones.

Now an era of tax cuts may be reaching its end. The federal government depends increasingly on borrowed money to pay its bills, and many state and local governments are similarly confronting the reality that they are spending more money than they collect. In Washington, debates about tax cuts have yielded to debates about who should pay more.

President Obama campaigned for re-election on a promise to take a larger share of taxable income above roughly $250,000 a year. The White House is now negotiating with Congressional Republicans, who instead want to raise some money by reducing tax deductions. Federal spending cuts also are at issue.

If a deal is not struck by year’s end, a wide range of federal tax cuts passed since 2000 will expire and taxes will rise for roughly 90 percent of Americans, according to the independent Tax Policy Center. For lower-income households, taxation would spike well above 1980 levels. Upper-income households would lose some but not all of the benefits of tax cuts over the last three decades.

Public debate over taxes has typically focused on the federal income tax, but that now accounts for less than a third of the total tax revenues collected by federal, state and local governments. To analyze the total burden, The Times created a model, in consultation with experts, which estimated total tax bills for each taxpayer in each year from 1980, when the election of President Ronald Reagan opened an era of tax cutting, up to 2010, the most recent year for which relevant data is available.

The analysis shows that the overall burden of taxation declined as a share of income in the 1980s, rose to a new peak in the 1990s and fell again in the 2000s. Tax rates at most income levels were lower in 2010 than at any point during the 1980s.

Governments still collected the same share of total income in 2010 as in 1980 — 31 cents from every dollar — because people with higher incomes pay taxes at higher rates, and household incomes rose over the last three decades, particularly at the top.

Article source: http://www.nytimes.com/2012/11/30/us/most-americans-face-lower-tax-burden-than-in-the-80s.html?partner=rss&emc=rss

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2 Big Banks Exit Reverse Mortgage Business

June 18, 2011 by Leave a Comment

Wells Fargo, the largest provider, said on Thursday that it was leaving the business, following the departure in February of Bank of America, the second-largest lender. With the two biggest players gone — together, they accounted for 43 percent of the business, according to Reverse Market Insight — prospective borrowers may find it more difficult to access the mortgages.

Reverse mortgages allow people age 62 and older to tap what may be their biggest asset, their home equity, without having to make any payments. Instead, the bank pays the borrowers, though they continue to be responsible for paying property taxes and homeowner’s insurance.

But the loans have increasingly become a riskier proposition. Banks are not allowed to assess borrowers’ ability to keep up with all their payments, and more borrowers do not have the wherewithal to stay current on their homeowners’ insurance and property taxes, both of which have risen in many parts of the country. At the same time, borrowers have been taking the maximum amount of money available, often using it to pay off any remaining money owed on the home. Yet home prices continue to slide.

“We are on new ground here,” said Franklin Codel, head of national consumer lending at Wells Fargo. “With house prices falling, you reach a crossover point where they owe more than the house is worth and it creates risk for us as mortgage servicers and for HUD.” He was referring to the Department of Housing and Urban Development, whose Federal Housing Administration arm insures the vast majority of these loans through its Home Equity Conversion Mortgage program.

As a result, banks are seeing a rise in what are known as technical defaults, when homeowners fall behind on their taxes or homeowner’s insurance, both of which are required to avoid foreclosure. According to Reverse Market Insight, about 4 to 5 percent of active reverse mortgages, or 25,000 to 30,000 borrowers, are in default on at least one of those items.

Bank of America, meanwhile, said that declining home values made fewer people eligible for reverse mortgages. So it decided to redeploy at least half of those working on the mortgages to its loan modification division, which has been criticized for failing to help enough homeowners on the brink of foreclosure.

For Wells Fargo, however, the inability to assess borrowers’ financial health was the biggest factor for exiting the business. Anyone over the age of 62 with enough home equity can take out a reverse mortgage, regardless of their other income. The amount of money received is determined by the borrower’s age, the amount of equity in the home and prevailing interest rates.

“We are not allowed, as an originator, to decline anyone,” added Mr. Codel of Wells Fargo. We “worked closely with HUD to find an alternative solution and we were unable to find one with them, which led to this outcome.”

Reverse mortgage borrowers are required to pay premiums for mortgage insurance, which protects the lender if the homes are ultimately sold for less than the mortgage value, since the government is required to pay the difference to the lender. The premium rates were increased last October to account for declining home values (though one sizable upfront mortgage premium was eliminated to make the loans more attractive to certain borrowers).

But lenders are responsible for making tax and insurance payments on behalf of delinquent borrowers until they submit an insurance claim to HUD, at which point the agency would be responsible since it provided the insurance against default.

In January, HUD sent a letter to lenders and reverse mortgage counselors that provided guidance on how to report delinquent loans to the agency, and what steps the lenders could take to get borrowers back on track, like establishing a realistic repayment plan that could be completed in two years or less, or getting a HUD-approved mortgage counselor involved to help come up with a solution. If one cannot be reached, the lenders must begin foreclosure proceedings.

Both Wells Fargo and Bank of America have said they have not foreclosed on any borrowers to date.

The National Reverse Mortgage Lenders Association, the industry group, said it has been working with HUD to come up with procedures that would allow lenders to assess a prospective borrower’s income and expenses, or at least require homeowners to set aside money to pay for taxes and insurance. A spokeswoman for HUD said the guidance is still being drafted.

As it stands now, borrowers are required to see a HUD-approved lender before they can apply for a reverse mortgage. As part of that process, consumers are educated on the nuts and bolts of how the loans work and what their responsibilities are, including that they need to be able to continue to pay taxes, insurance and keep the property in good repair.

“We don’t tell consumers what decision to make, but we do try to give them the tools to make a decision,” said Sue Hunt, director of reverse mortgage counseling at CredAbility, a nonprofit consumer credit counseling agency. She added that their sessions last about an hour and 15 minutes, on average. The counselors also look at the consumer’s budget to see if it is sustainable with the mortgage, as well as what circumstances might arise that could throw the borrower off track.

“Outside factors are affecting people who thought five or six years ago that they were in pretty good shape,” she added. “The world has changed a bit around them.”

In days past, the borrower would get the reverse mortgage, and equity would continue to build, experts said, which would provide borrowers with more options — like refinancing — should they fall on hard times. Declining home values have changed that calculus for both bankers and consumers. Borrowers have not been able to pull out as much money. At the same time, the government has also tightened its withdrawal limits.

There were a total of more than 50,000 reverse mortgages, totaling $12.66 billion, made industrywide since last October, according to HUD.

Both Wells Fargo and Bank of America will continue to service their existing reverse mortgages. And the reverse mortgage association has said it will work with its members to ensure that senior citizens who need the loans can get them, though some experts said that less competition could increase certain fees.

“There is a certain amount of the business done by Wells and Bank of America that happens because of their bank branches, brand names and large sales forces,” said John K. Lunde, president of Reverse Market Insight. “We would expect something more than half of their volume to be absorbed by the rest of the industry, with something less than half not happening.”

Wells Fargo, which said that reverse mortgages represented 2.2 percent of its retail mortgage business, employs about 1,000 reverse mortgage workers. They are being given a chance to find other positions at the bank. Bank of America said that about half of its 600 workers have been reassigned within the bank. MetLife, the third-largest provider of reverse mortgages, declined to comment on its business.

Article source: http://feeds.nytimes.com/click.phdo?i=08c7462c631d75ce3a21bb05493559a6

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Off the Charts: If Home Prices Counted in Inflation

April 2, 2011 by Leave a Comment

Now the inflation rate is starting to turn up, and there are warnings that the Fed may need to tighten monetary policy even if the stumbling economic recovery does not accelerate. But home prices, which had seemed to be stabilizing a year ago, are falling again.

Until 1983, the Consumer Price Index included housing costs. But then the index was changed. No longer would home prices directly affect the index. Instead, the Bureau of Labor Statistics makes a calculation of “owners’ equivalent rent,” which is based on the trend of costs to rent a home, not to buy one. The current approach, the B.L.S. says, “measures the value of shelter to owner-occupants as the amount they forgo by not renting out their homes.” The C.P.I. is not supposed to include investments, and owning a house has aspects of both investment and consumption.

Whatever the reasonableness of that approach, the practical effect of the change was to keep the housing bubble from affecting reported inflation rates in the years leading up to the peak in home prices. It is at least possible that the Federal Reserve would have acted differently had the change never been made.

The accompanying charts represent an effort to put together an alternate index of inflation, one that includes home prices rather than the owner’s equivalent rate. The effort is far from precise, in large part because the old index was based not just on purchase prices but also on changing mortgage interest rates and on changing property taxes, while this one is based solely on an index of home prices. But it nonetheless gives an approximation of what inflation would have looked like had home prices remained in the index.

The effect is particularly notable in the core index, which excludes volatile energy and food prices, and which the Fed monitors closely. In 2004, when home prices were climbing at a rate of almost 10 percent a year — more than four times the increase in rents — the core index would have been over 5 percent had home prices been included. Instead, the reported core rate was just 2.2 percent.

The Fed did raise rates in 2004, although perhaps more slowly than seems appropriate in hindsight. The increases then stunned Wall Street, which might not have happened had investors been watching an inflation rate that included home prices.

In the last few months, the two markets have again diverged, but in the opposite way. From October 2010 through January, home prices as measured by an index kept by Federal Housing Finance Agency fell at an annual rate of 12.4 percent, while the government’s calculation of owners’ equivalent rent shows it rising at an annual rate of 1.5 percent. Home prices have not yet been reported for February, but the upward trend in rental prices continued.

Inflation rates may have been understated for years when home prices were rising much more rapidly than rental rates. At the time, the discrepancy might have seemed to be an indication of rising speculation and prompted Fed concern. Now, it is possible that inflation will be overstated precisely because speculative excesses are being purged from the housing market.

Floyd Norris comments on finance and the economy in his blog at nytimes.com/norris.

Article source: http://feeds.nytimes.com/click.phdo?i=fd5eea1a939388936320a63e9bacb5c6

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