Modern humans are the greatest problem solvers the world has ever seen. While our predecessors developed primitive tools to better live in their environments, humans are the first to develop the mental acuity necessary to transform their living space. As a consequence, we thrive around the world, altering hostile, barren desert lands and freezing climates into hospitable habitats with growing populations.
Of course, problem-solving abilities vary considerably from one individual to another – some of us excel in resolving overarching dilemmas, while others are more adept at making basic day-to-day decisions. Researchers at the Center for Research on Learning and Teaching at the University of Michigan believe that difficulty solving problems tends to stem from the following two issues:
Inaccuracy in Reading
Incorrect interpretation of a problem can stem from perceiving it without concentrating on its meaning. It can also result from reading unfamiliar words, overlooking important facts, and starting to address it prematurely. Simply stated, many people have difficulty framing a problem accurately at first and consequently develop inadequate or incorrect solutions.
Inaccuracy in Thinking
Ancients Greeks called the ability to properly reason “logic.” Today, we sometimes refer to this ability as “pragmatism”—a system of thinking to determine meaning, truth, or value. Poor decisions result from a lack of clarity so that irrelevant information is considered in the problem-solving process. We sometimes pursue solutions that do not meet our intended goals, or we fail to break complex problems into understandable parts when time constraints force us into premature decisions.
Each of us makes decisions every day that affect our happiness, careers, and satisfaction with life. By learning and practicing the skills of proven problem solvers—and following the necessary steps— you can boost your self-esteem, reduce interpersonal conflicts, and lessen overall stress.
Despite what Democratic Senator Ron Wyden of Oregon calls “a rotting economic carcass that’s infected with chronic diseases like loopholes and inefficiencies,” federal tax reform is unlikely to occur until after the U.S. presidential election in 2016. Deadlock between the political parties is likely to continue, especially in light of Republicans gaining control of both houses of government during the November 2014 elections.
However, despite the inaction of Congress, the fact remains that more than 50 tax breaks expired at the end of 2013 – and many Americans are unaware of the changes, even though their tax bill may incur a significant increase. If you are among those earners who may be affected, it is important to recognize these changes and to take action before the end of the year to keep more of your gross earnings.
Tax Law Changes That May Affect You in 2015
High-earning taxpayers will be liable for higher taxes due to laws passed in 2013 that include the following:
1. New top tax bracket of 39.6% for incomes greater than $400,000 for individuals and $450,000 for joint filers
2. Medicare surtax charge of 0.9% for individuals who earn more than $200,000, or $250,000 for joint filers
3. Net Investment Income Taxof 3.8% on the lesser of your net investment income or the excess of your modified adjusted gross income (MAGI) over $200,000 for individuals, or $250,000 filing jointly
4. Limitations on itemized deductions and personal exemptions for those with incomes of $254,200 or more ($305,050 for joint filers)
Additional changes that may increase your taxes include the following:
Gene Perret, the comedy writer for such popular television shows as “All in the Family,” “Three’s Company,” and “The Carol Burnett Show,” once said of retirement, “It’s nice to get out of the rat race, but you have to get along with less cheese.” Almost everyone looks forward to that time when they can sleep as late as they want, spend their days traveling or playing golf, and opining about the state of the civilization.
But the responsibility for a comfortable retirement rests almost completely on the shoulders of the individual worker. Government programs like Social Security and Medicare provide a minimum level of income and healthcare costs to recipients – but those benefits are intended to be supplemented with employer benefits and private savings.
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Having failed to save enough during their earning years or being victims of poor investment decisions, many seniors are discovering that the retirement they expected is beyond their reach. As a consequence, they are working longer, scaling back expenses, and forgoing some of their dreams. But fortunately, all is not lost, even for those whose retirement dreams may seem dashed.
The Keys to the Retirement You’ve Always Wanted
Despite the travel industry’s advertisements showing seniors walking through the sand on exotic, foreign beaches or dancing the night away on a Caribbean cruise, fewer than one in five workers are “very” confident that they can retire comfortably, according to the 2014 Retirement Confidence Survey. Only one in four current retirees are “very” confident that they will have enough money to live comfortably throughout their retirement years.
While the outlook for your retirement may be cloudy, there are steps you can take to improve your financial situation and the happiness of your retirement years.
1. Maximize Income Flow
Few people who retire continue to have the same level of income as when working. Nevertheless, there are options available to increase your income:
Many 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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Modern humans are the greatest problem solvers the world has ever seen. While our predecessors developed primitive tools to better live in their environments, humans are the first to develop the mental acuity necessary to transform their living space. As a consequence, we thrive around the world, altering hostile, barren desert lands and freezing climates into hospitable habitats with growing populations.
