May 29, 2020

Bucks Blog: Generation X Hit Hardest By Recession

Members of Generation X, now in their late 30s to late 40s, were especially hard-hit by the recent recession, and are at risk for downward mobility in their retirement years, a new report finds.

Generation Xers, the group of Americans following the Baby Boomers, lost nearly half of their overall net worth between 2007 and 2010, according to a report from the Pew Charitable Trusts.

Generation Xers lost an average of about $33,000, reducing their “already low” relative levels of wealth, the report found.

While Gen-Xers saw greater increases in wealth from home equity during the housing boom, they have lower overall rates of home ownership compared to earlier generations, which mutes the impact on the wealth of their group overall, the report found.

The report defined Generation X as those born between 1966 and 1975, so they now range in age from 38 to 47.

By comparison, both early and late baby boomers also were hurt by the recession, but to a lesser extent, losing 28 percent and 25 percent of their median net worth, respectively.

Gen-Xers also have higher levels of debt than other age groups, the report found.

The upshot is that based on the analysis, Gen-Xers will only have enough at retirement to replace about half of their pre-retirement income, if they retire at age 65. Financial planners typically suggest that retirees should be able to replace at least 70 percent of their annual income, through savings and accumulated wealth.

Early baby boomers — those born between 1946 and 1955, who are currently 58 to 67 years old — appear on track to replace between 70 to 80 percent of their income, in contrast to the age groups that follow them.

Late boomers, born between 1956 and 1965, are also less well-prepared for retirement than earlier generations, the report found.

The report is based on data from 1989 through 2010 collected by the Federal Reserve Board and the University of Michigan.

“As policymakers focus on Americans’ retirement security, particular consideration should be paid to how younger generations of workers can make up for these losses and prepare for the future,” said Erin Currier, director of Pew’s Economic Mobility Project, in a prepared statement.

Are you a member of Generation X? How are you saving for retirement?

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Mortgages: Borrowing in Retirement

While the majority of older homeowners will pay with cash and therefore will not need a mortgage, some may require financing — perhaps because their previous home declined in value, or because they wanted to keep a portion of the money from the sale in income-generating investments.

About a third of the 65-and-older households that owned a home in 2009 had a mortgage, according to the Census Bureau’s American Housing Survey, which also put homeownership in this age group close to 81 percent during the second quarter of this year. By contrast, around 64 percent of people 35 to 44 were homeowners, and only 38 percent of those younger than 35 owned homes, the latest census data found.

Lenders say the mortgage process is the same at any age. If you qualify based on income and credit scores, a lender cannot deny you a loan based on age. That would violate the federal Equal Credit Opportunity Act, which prohibits discrimination based on age, race, gender and other criteria.

“We just had someone who came in at 85 and got a loan — a 30-year loan,” said David Boone, a first vice president of Provident Bank in Jersey City, N. J.

He said the man borrowed under $100,000 and chose a 30-year term to keep the payments low.

Older borrowers should begin the loan process by gathering documentation, Mr. Boone said. If you’re retired, you will need to provide a pension award letter or Social Security award letter, along with income tax returns and statements from other retirement accounts like an Individual Retirement Account or a 401(k) plan. If you’re still working, pay stubs and other documentation from your employer will be needed.

Even if you’re on the verge of retirement, lenders generally will consider only current earnings. But Erika Safran, a financial planner in Manhattan, suggests factoring in retirement income anyway, to help determine whether you will still be able to afford the home down the road.

Borrowers will want to look at their available cash flow now and 5 to 10 years ahead. Ms. Safran cautions against taking too much out of savings for the down payment if the projected cash flow for various expenses is low. Instead, she said, older borrowers should seek a larger mortgage amount, preserve the remaining funds as a cash reserve.

Credit history is important. Besides looking at credit scores, Mr. Boone said, most lenders will want to see at least three credit sources, like utility bills.

And lenders will expect to see a debt-to-income ratio of no more than 40 or 45 percent, said Gary DeTrano, a mortgage broker at Walden Group in Mineola, N.Y. (The ratio measures the amount of gross monthly income that goes to paying off all debts.)

You will need to decide on the length of the mortgage. Consider how long you’re going to live in the home, and whether you want to build up equity, perhaps for your partner or your estate.

“You accumulate equity much more quickly with a 15-year term than a 30-year term,” said Andra Ghent, an assistant professor of real estate at Baruch College.

Many retirees may be drawing down their assets and don’t need to build equity in their home, so they may prefer a 30-year term.

Estimating how long you expect to live there will help determine whether to pay points — each point is 1 percent of the loan amount — to lower the interest rate. Buying down your rate makes more sense, Ms. Ghent said, when you plan to own the house for many years.

This article has been revised to reflect the following correction:

Correction: August 21, 2011

The Mortgages column last Sunday, about borrowing in retirement, described incorrectly the reason given by Erika Safran, a financial planner, for why older borrowers may need to take out larger mortgages. She said they should preserve their cash flow as a cash reserve, not use the money for investments.

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