How To Keep The Housing Crisis From Bursting Your Retirement Bubble

Everyone dreams of that perfect little retirement home in the relaxing tranquility of some quaint town on the shores of something beautiful.  Ahh, yes.  We can picture it now. The  feel of a cold drink in our hand and the sun beaming down on our face.  The birds are singing and the waves are lapping at the shore.   Then suddenly, “Pop!” What was that, you say. That was the sound of that dream bubble bursting for the 1.5 million older and retired Americans that have lost their homes to foreclosure along with much of the financial security that came with them.

The reality is that, for many older Americans, their dream scenario has turned into a living nightmare.  Instead of visions of beach houses or lakeside homes, many retirees find themselves clinging for dear life to the homes they have inhabited for years.  The housing crisis knows no boundaries, and it has certainly proved that by inhabiting the lives of many retired and soon-to-be retired individuals.  Unfortunately, the tidal wave of foreclosures continues to splash through the 50+ age group.

The AARP released a report outlining the foreclosure climate in the lives of older Americans and the results were a little frightening.  Over 1.5 million of them have already lost their homes.  Currently, about 600,000 people in the 50+ age group are in foreclosure, while another 625,000 are over 3 months behind on their mortgage payments.  16% of all 50+ Americans currently owe more than their homes are worth.
These numbers are not what many Americans are accustomed to.  The proportion of seriously delinquent loans held by older Americans has risen over 450 percent over the last five years.  Many of these people have gone their whole lives with nearly perfect credit, but have now hit a solid wall of debt that doesn’t seem to be budging.  Things aren’t getting any easier with age.  Among Americans 75 and older, one in every 30 homeowners are in foreclosure.  Five years ago, that proportion was just one out of every 300.  The numbers are hurtling downward at an alarmingly fast rate, and they don’t seem to be slowing.

These statistics are more than just ink on paper.  They are seriously altering the lives of many retirees, forcing some to re-enter the workforce or drastically change the budgets they had planned out years earlier.   Their retirement dreams have disappeared and they are simply trying to stay afloat.

The report showed that younger Americans are struggling as well, but the number of older Americans entering the dreaded foreclosure zone is increasing at a much faster rate.  One of the main questions is simply, “Why?”  Why are so many older Americans falling into trouble?   What’s the problem?

The problem is that many of these people set their budgets and their retirement plans before the economy, well, you know.   Most of them are living on a fixed income and quickly find themselves plowing through their retirement savings.  The income from their investments has been drastically cut, but their house payments have not.  Picture this: the faucet of their main source of income has slowed to a drizzle, but the drain of payments remains wide open.  It doesn’t take a financial expert to realize that it’s only a matter of time before the pool of funds will be completely dried up.

That can be a pretty disheartening image, but the bursting of the housing bubble doesn’t have to burst your bubble of retirement dreams, you simply might have to alter your path to get there.  Planning for these difficulties ahead of time can drastically reduce the struggles you could face.  Many people approaching retirement can analyze their investments based on earnings and interest rates of the current market and forecast their plans more accurately.  It might not be as pretty, but it’s a more realistic picture of what things will look like.

The most important thing is to not be blinded by your dreams, but use them as your vision to create a plan that works for you and your future.  With some planning and a little creativity, you could find yourself livin’ the dream in no time!

Photo courtesy of propertyqwest.com

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Tiger Woods, Trans-Fats, and your 401(k)

Recent events have caused people to turn their backs on many of the things they once loved.  Whether it’s from a revealing crash of an incident, a health conscious decision, or a movement of market and times, trends come and go.  With every new report comes a change in the tastes of the people.   But one of these things is not like the other ones.  Unlike many of the fads, the 401(k) may not be something to be written off as a thing of the past, and you should think twice before making it a thing of your past.

 
In recent years the 401(k) has taken a few knocks.  To some people the 401(k) is the ugly step sister of the pension plan, giving employers an easy way out of having to directly provide for the retirement of their employees.  Also, one of the greatest assets of the 401(k), the company match programs, has become another casualty for many companies in this recessive war we continue to fight.  In addition to that, many employees find themselves with a lack of flexibility in their plans in the slate of investment options chosen by the employers.  These options are often selected based on how the employers can best reduce their costs, resulting in high fees for their employees.  Furthermore, the 401(k) can easily become the old ball and chain, tethering an individual to a particular company in order to keep their plan in motion and avoid the hassle of a transfer.

 

 

Some companies even require employees to stay with them for a certain number of years or they risk losing the company’s match contributions.
With all those cons, you might find yourself thinking that a scandal of multiple affairs or an early heart attack don’t seem all that bad.  But it’s important to focus on the advantages of the 401(k) that are unparalleled by most retirement plans.

 

• Take advantage of the perks inside your 401(k).  Most of the time your funds are a healthy mix of actively managed funds with high fees and index funds that offer lower costs.  Those high fees could amass to hundreds of thousands of dollars by the time you retire.  The low cost alternatives can offer you a better long term option.

 

• Switching jobs can be an opportunity, not a struggle.  The money in your current 401(k) can easily be rolled over into an IRA giving you some independence and control over your funds.  This can save you money in fees with the ability to choose from a wider variety of investments.  Also, some companies allow you to transfer your current 401(k) into their existing program.  There are plenty of options for you if you are looking to escape your current job, but don’t want all your hard investing work going down the tube.

 

• Find a window to leave. If you are looking to switch jobs, look into the rules regarding the company’s match program and the term requirements of how long you have to continue with them to avoid losing their contributions.  If its five more years, it might be worth it to just cut and run, but if you are just a few months shy, you might want to stick it out.  Either way, it’s better to know where you’re at on the board than to hope and pray you’ve passed Go and can collect the $200.

 

Your relationship with your 401(k) is like a marriage.  It has its tough times, but if you focus on the good parts, and put some work into making it a cohesive partnership, you can find yourself living happily ever after, possibly in a retirement home in Orlando.  The bottom line is this: falling into a fad or trend can oftentimes lead to disappointment (we all remember the sad day when floral print satin shirts became a fashion faux pas) but make sure you put some thought into your future before you turn your back on your 401(k).

 

Photo courtesy of 123rf.com

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The Ricks Report – July 23, 2012

The Ricks Report

July 23, 2012

The Markets

The man with his finger on the pulse says the U.S. economy faces two main risks. We have no control over one of those risks and the other, well, we do have some control, but whether our politicians will appropriately exercise that control is a big question.

Federal Reserve Chairman Ben Bernanke faced Congress last week and he delivered a rather subdued outlook in his semi-annual monetary policy report. He said our economy faces two major headwinds:

1. The Euro-area fiscal and banking crisis and its potential spillover effects on our economy.
2. The unsustainable path of the U.S. fiscal situation (e.g., the “fiscal cliff”).

Source: Federal Reserve

The U.S. has little control over the euro-area situation so we’re at the mercy of European leaders to make bold and tough decisions to get their houses in order. The second item, though, is clearly within our control.

The so-called fiscal cliff, in which a series of tax hikes and spending cuts will take effect in 2013 if Congress takes no further action, could throw the economy back into a recession. The Congressional Budget Office estimates if no policy changes are made, then our 2013 federal budget deficit will decline by about $600 billion. On the surface, that sounds great. However, such a huge shock to our system in a short period of time could be problematic.

So, will Congress agree to adjust the legislation for the benefit of the economy? We’ll see.

For his part, Bernanke said the Federal Reserve “is prepared to take further action as appropriate to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.” It’s good to know that the Fed is ready to help if needed.

Data as of 7/20/12	1-Week	Y-T-D	1-Year	3-Year	5-Year	10-Year
Standard & Poor’s 500 (Domestic Stocks)	0.4%	8.4%	2.8%	12.7%	-2.3%	5.2%
DJ Global ex US (Foreign Stocks)	0.6	0.5	-16.9	3.3	-7.8	5.6
10-year Treasury Note (Yield Only)	1.5	N/A	2.9	3.6	5.0	4.6
Gold (per ounce)	-1.2	0.1	-0.6	18.3	18.3	17.2
DJ-UBS Commodity Index	4.2	3.9	-11.1	6.3	-3.4	3.8
DJ Equity All REIT TR Index	-1.1	16.0	9.5	31.4	2.7	12.1

Notes: S&P 500, DJ Global ex US, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.

Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.

Past performance is no guarantee of future results.  Indices are unmanaged and cannot be invested into directly.  N/A means not applicable.

IT’S BEEN ALMOST A YEAR since August 5, 2011, the day the U.S. lost its coveted AAA credit rating from Standard and Poor’s. So, how have the financial markets responded in the year since? Quite well, actually.

It may not feel like it, but the broad U.S. stock market, as measured by the S&P 500 index, rose 13.6 percent between August 5, 2011 and last Friday, according to data from Yahoo! Finance. Despite all the angst from the credit downgrade, the threat of a double-dip recession and the turmoil in Europe, the stock market has hung in there.

The returns in the bond market are perhaps even more startling. The 10-year Treasury yielded 2.56 percent on August 5, 2011 and by last Friday, the yield had dropped to 1.46 percent, according to Yahoo! Finance. Normally, you might expect interest rates to rise after a credit downgrade since the ratings agency is essentially saying your bonds are riskier than previously thought.

The U.S., though, is perhaps a “special” case. The day after the credit downgrade, none other than Warren Buffett went on Bloomberg television and said he thought the U.S. should be a “quadruple A” rating. And, to this day, the U.S. dollar remains the world’s leading reserve currency as more than 60 percent of the world’s foreign currency reserves are held in U.S. dollars, according to BusinessWeek.

We shouldn’t get overconfident, though. While the U.S. has tremendous assets, it might only take a few bad decisions from our leaders to undo what took decades to build.

Weekly Focus – Think About It…

“There is nothing wrong with America that the faith, love of freedom, intelligence, and energy of her citizens cannot cure.”

—Dwight D. Eisenhower, 34th president of the United States

Best regards,

Gregory Ricks

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