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:
Over the past couple of decades, the role of the modern CFO has been, and continues to be, redefined. The advent of new technology allowing for enhanced data collection and analysis tools—as well as operating management’s demands for reliable real-time information—has extended the CFO’s responsibility to all aspects of the company.
International commerce and expanded regulatory oversight in culturally diverse customer and employee bases complicates decisions and increases risk. As a result, the CFO’s authority and responsibilities over traditional finance, accounting, and treasury functions has intensified and expanded to satisfy an exhaustive list of internal, external, and regulatory stakeholders, many of whom have conflicting interests.
Just as businesses have become more complex, diffused, and subject to greater risks—many of which are unidentified—the CFO function has evolved into a multi-focused position with unprecedented requirements for responsiveness and accuracy. Yesterday’s bean counters are as passé in a modern public corporation as Ford’s Model T on the highway.
Best Practices of the Modern CFO
In a 2013 report coauthored by the Association of Chartered Certified Financial Accountants (ACCA) and the Institute of Management Accountants (IMA), Jeff Thomson, president and CEO of IMA, detailed various factors that have changed the CFO function. In addition to traditional finance duties, modern CFOs are expected to work in collaboration with others throughout the organization, direct integration of key business processes, stimulate change and business transformation, and be trusted business advisors to CEOs and boards of directors.
The report identifies several priorities modern CFOs have that their predecessors did not. These are the consequence of increased regulations, globalization, industry and business transformations, aggressive stakeholders, and the adoption of complicated financial and operating reporting requirements. While the actual duties of a CFO vary according to industry, company dynamics, and historical precedents, an effective CFO in the 21st century must excel in each of the following practices.
1. Communications
Whether talking to the board of directors, delivering financial data to stock analysts, investment managers, and regulators, or detailing performance metrics to fellow officers and employees, the importance of clear, crisp, and relevant information delivered in an understandable format cannot be overstated. Knowing what to say, when to say it, and how to present it has become a critical component of a CFO’s responsibility.
As Robert Hoglund, CFO of Consolidated Edison, recognizes, “Communication is essential in every aspect of the business…ultimately I need to persuade people to my point of view.” While CEOs can expound upon such nebulous subjects as mission, vision, goals, and culture, CFOs are expected to bring real data to the table, to put the “meat on the bones” for gimlet-eyed regulators and anxious money managers.
In 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.
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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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.
