Month: September 2014

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How to Maximize Social Security Benefits

social security moneyIn 2004, Social Security benefits were projected to account for 40% of a baby boomer’s post-retirement family income, and almost all baby boomer retirees were expected to receive benefits, according to a Social Security Administration study. But Dean Baker, co-director of the Center for Economic and Policy Research, thinks those projections were conservative. Today, according to Baker, Social Security payments account for 90% of income for one-third of all seniors and more than 50% for two-thirds of them. For unmarried seniors, the dependence upon Social Security is even greater, accounting for almost three-quarters of their income.
 
As pensions become increasingly rare – replaced by defined contribution plans, which are subject to the volatility of financial markets – the importance of Social Security continues to grow. In fact, the Securities Industry and Financial Markets Association claims that Social Security is now the “most prevalent and important single source of income for retirees.”

Social Security Monthly Dollar Retirement Benefits

Generally speaking, the amount of Social Security you receive is based upon your total lifetime earnings that were subject to Social Security taxes – as of 2014, maximum taxable earnings stand at $117,000 per year. In other words, the more money you make over an extended period, the more you receive when you begin withdrawing.
 
The specific dollar benefit paid to a beneficiary is the result of an SSA calculation, based upon that person’s top 35 years of earnings, adjusted for inflation. It is further affected by the age at which you begin receiving benefits. In 2014, according to the Social Security Administration, the maximum payment for an individual who begins claiming at full retirement age is $2,642 per month.
 
For help estimating your future benefits – as well as verifying your earnings each year – the SSA provides a useful online resource. Many of the criteria that determine the amount you receive, however, are actually within your control.

Social Security Age Withdrawal Options

There are several options for when you can start withdrawing your Social Security benefits.
 
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The What, How, & Why of the HECM (Reverse Mortgage)

retired black coupleMany seniors struggle to make ends meet each month. At the same time, they often own thousands of dollars of real estate in the form of equity in their home. But unless they take action, that equity remains untouchable, unable to help them out with basic living expense. What’s worse is that mortgage payments further reduce their available cash each month to pay crucial expenses.
 
A Henry J. Kaiser Family Foundation report states that more than three of four seniors over the age of 65 have equity in their homes ranging from $67,700 to $325,200. One in 20 have home equity greater than $398,500, and 1% have more than $799,850.
 
And yet almost half of elderly Americans depend upon Social Security for at least one-half or more of their income, while one of eight depend solely on Social Security. But many of these seniors have home equity that could be converted into cash income.
 
If you or your parents are “house-rich” but cash-poor, it is time to consider whether a reverse mortgage on the family home is a better alternative to traditional avenues of converting home equity into a cash asset.

Traditional Methods to Convert Home Equity Into Cash

For seniors who anticipate and desire to live in their current residence for the foreseeable future, there are a few traditional ways (not including the reverse mortgage) to convert home equity into cash:

Home Equity Loans

A home equity loan is essentially a loan extended to the homeowner secured by the lender’s receipt of a second mortgage lien on the real estate. The underlying loan may be as high as a 100% of the owner’s equity, depending upon the lender’s criteria, the credit rating of the borrower, and the negotiated repayment terms. For example, a homeowner with equity can usually borrow a lump sum equal to an amount between 80% and 100% of the equity.

Home Equity Line of Credit

A home equity line of credit (HELOC) is a line of revolving credit in an amount up to the equity value, usually with an adjustable interest rate, so payment amounts vary from month to month. Like other personal loans, the terms of the loan and the amount of credit that may be available is subject to negotiation between borrower and lender.

Cash Out Mortgage Refinancing

As interest rates move lower and/or their equity grows, many homeowners refinance so they can reduce the interest rate on the underlying loan and subsequently reduce their monthly payments or convert a portion of their equity into cash. For example, say a homeowner bought a new home in 2000 for $312,000. The 30-year, 6% fixed rate loan requires a monthly payment of $1,824.40. Today, the home has an appraised value of $350,000 and interest rates have fallen to 3.5%. The owner subsequently refinances the home at a 3.5% rate for 30 years with a monthly payment of $1,582.85. As a consequence of the refinancing, the homeowner pays off the initial mortgage, reduced his payment by over $240, and is able to pull out $30,000 of cash from built-up equity.
 
Though these methods are a means to access locked equity, they all share a host of disadvantages:

Continued Exposure to Real Estate Declines

Since the lender has “full-recourse” to the property owner if the mortgage loan is not repaid, the homeowner is liable if the proceeds of the sale of the property are less than the outstanding mortgage. Real estate with a value less than the mortgage is considered to be “underwater,” a condition in which many homeowners found themselves following the mortgage securities crisis of 2008-2009.

Payments Required for Term of New Mortgage

The homeowner refinancing his home in our example had made almost 14 years of the 30 years of payments. The refinancing – with a new loan – restarts the clock for another 30-year term, essentially adding 14 years of payments to the old due date. Retired seniors may lack sufficient income to comfortably make payments after retiring.

Delinquent Mortgage Payments Trigger Foreclosure by Lender

The legal obligation to make payments to the lender exists for the loan term. Failure to make payment can result in foreclosure and sale of the property. If the mortgage is underwater, the seniors not only lose their home, but must make up the difference between sale proceeds and the outstanding mortgage loan.
 
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7 Factors That May Affect Your Retirement

man on computer work3In 2010, a Pew Research report indicated that three out of every four members of the workforce expect to keep working for pay after they retire. 60% of them believe this will be by choice, not necessity – but pre-retirees may be more optimistic than justified in their expectations. According to the Center of Retirement Research, less than half of all households are financially prepared for retirement at 65; a quarter will need to work at least one to three more years; and almost one in ten will need to work past age 72 or longer.
 
Whether by need or choice, it’s clear that plenty of folks are likely to continue working in one capacity or another after they officially retire. The decision of whether or not to do so is dependent upon a range of factors.

Factors Affecting Retirement Security

Financial security for American citizens usually results from a combination of government programs, personal assets, and employer benefits. However, each of these factors is undergoing historical transformations right now. Unfortunately, these transformations may mean Americans have to move the goalposts back a bit when it comes to their retirement goals.

1. Investment Volatility

Conventional wisdom suggests that the average annualized return for common stocks over a period of 10 years or more is positive, somewhere between 7% and 9%. However, statistics have a way of disguising inconvenient truths: According to AllFinancialMatters.com, there is actually substantial volatility in the numbers – mainly related to start and end dates.
 
Suppose three brothers work for the same company and each invests $50,000 in its 401k plan over a period of 30 years. Joe, the oldest brother, begins investing in 1966 and – assuming the results mimic the S&P 500 return – retires in 1996 with $1,871,111 in his account. Bill, the middle brother, who began investing in 1976, retires in 2006 with $1,520,397 in his account. And Mike, the youngest brother, begins in 1983 and retires in 2013 with $1,050,416. These figures do not include the effects of inflation or the deduction of fees.
 
Older workers – those most likely to retire in the coming decade – found the impact of the last stock market decline to be especially harmful. Two-thirds of those between the ages of 45 and 60 reported at least a 20% decline, according to one survey. As Gad Levanon, director of macroeconomic research at the Conference Board, observed, “The older you are, it makes it more difficult to make up for [loss of value] and more people are delaying retirement as a result.”

2. Low Interest Rates

Many retirement professionals previously advised that an annual 4% withdrawal rate would result in sufficient funds to last through 30 years of post-work life. In other words, a fund of $1 million could provide $40,000 per year.
 
However, due to lower yields on fixed income investments, many retirement planners now recommend a withdrawal rate between 2.7% and 3.0% in order to achieve a 90% probability of not outliving your assets. Lowering the distribution rate means that income must now be replaced from other sources, and your standard of living must be lowered.
 
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Do You Have Something to Say?

writing a bookFrom the Neanderthals who left hand prints on the cavern walls of El Castillo, Spain more than 37,000 years ago, to the G.I.’s crude drawings of a long-nosed fellow peering over a fence announcing, “Kilroy was here,” humans have sought immortality through art. The same impulse that drives the graffiti tagger in Los Angeles drives the white-haired Hamptons matron to pen a letter to the local newspaper about animal leash laws: a desire to be seen, heard, and remembered.
 
The digital revolution gives us an opportunity to communicate and disseminate ideas, concepts, and opinions without intermediation. Today, every wannabe Stephen King, Tom Brokaw, or Larry McMurtry can write and publish as they please. Grandfathers and grandmothers can pass down family stories to younger generations. The entire world has an opportunity to become both more knowledgeable and more expressive than ever before.

Technology and Self-Publishing

The first electronic book – Peter James’ thriller “Host” – appeared on two floppy disks in 1993 and sold 12,000 copies. Five years later, the first e-readers appeared with mediocre market success. Amazon, the world’s largest book retailer, introduced the Kindle reader to America in 2007, forever changing the dynamics of book publishing. Today, electronic books can be viewed on a variety of readers, mobile phones, tablets, and computers.
 
In the first quarter of 2012, net sales of ebooks exceeded hardcover sales across the industry for the first time. While paperback books remain the industry’s most popular format, their dominance is likely short-lived – according to Mashable, Amazon’s ebook sales surpassed paperbacks in the fourth quarter of 2011. The reason for the ebook’s dominance is clear: Production costs are lower and profits are higher (despite the fact that ebooks typically sell for less than half of what hardcovers sell for).
 
With the full support of Amazon, authors have rebelled against traditional publishing houses, seeking a higher percentage of royalties or threatening to publish on their own – Bowker Identifier Services claims that self-published book titles grew 60% from 2011 to 2012 alone. Writers who never thought they would be able to publish are taking advantage of the new technology.
 
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