Houses

Reverse Mortgage: Yes or No?

The older people who either consider a reverse mortgage or actually get one don’t have much else to fall back on.  Their primary assets – outside of their homes – are a car worth no more than $7,000 and about $2,000 in a checking account.

This was one salient fact unearthed about reverse mortgage users – or people who’ve looked into them – in a 2014-2015 survey led by Stephanie Moulton at Ohio State University. This supports a later study by Moulton that found that people who take out the loans tend to be in worse shape financially than other homeowners. The survey provides a more complete picture of who is turning to reverse mortgages – and why other people find alternatives to solve their financial issues.

Federally insured reverse mortgages, known as Home Equity Conversion Mortgages, or HECMs, allow homeowners over age 62 to borrow against their often-substantial home equity. These loans do not have to be paid back until the older homeowners sell the house or die.

Despite these attractive financial features, reverse mortgages are not popular: fewer than 60,000 were sold in 2015.  Many elderly homeowners are appropriately wary of a complex financial product. The fees and interest rates are also higher than on a standard mortgage.  But the idea behind HECMs is to allow cash-strapped seniors either to pay off their existing mortgages, eliminating house payments, or to create a readily accessible pool of cash or a new source of monthly income. Either way, they free up money that retirees can use to meet their expenses, emergencies, or medical bills.

The researchers interviewed some 1,800 older households after they had received the counseling required under federal law to apply for a HECM reverse mortgage.  About two-thirds of those counseled proceeded with the loans, and one-third decided against it. Here’s what these two groups look like: …Learn More

singing

A Day at the Golden Age Senior Center

Chung-Au Loi Tai

Boston – Four mornings a week, a van scoops up Chung-Au Loi Tai and delivers her to the senior center for a full schedule of activities. The 1:30 bingo game is her favorite.

She giggles when she explains why: she likes the Chinese Rice Biscuits that are handed out as prizes.

She is one of 350 mostly low-income clients of the Greater Boston Golden Age Center’s three locations around Boston. Most came to this country from China decades ago and raised families while working in Chinatown or the suburbs. Chung-Au, for example, worked in a shoe factory for nine years, and her late husband cooked in restaurants all over the city.

Now in old age, the Golden Age Center’s community of like-minded people spend their days learning English, new songs, and calligraphy, eating $2 lunches – a “suggested” donation – and getting help with their medical and other needs from the nurse and social workers on staff.

Finding things to do all day might seem trivial to working people – there are barely enough hours in a day. But the center’s carefully planned activities are critical to seniors’ physical and mental health and to their families, who are still out working. One big reason for these daily visits is to prevent the frail or cognitively impaired from becoming too isolated.

The Golden Age Center and similar centers around the country make up a patchwork of often poorly funded non-profit and local-government agencies that quietly fill a big need in the safety net for seniors. These agencies provide an array of services, including transportation, meals, exercise, medical supervision, and cognitive stimulation.  The federal Medicaid program pays the Golden Age Center a per-day fee for its low-income clients.

Ruth Moy, the executive director who founded the center in 1972, raises additional money from donations and other federal and local government programs.  “There is never enough money,” Moy said. “You just keep plugging away.” …Learn More

pig

IRAs Fall Short of Original Goal

Nearly 8 trillion dollars sits in Individual Retirement Accounts, or IRAs. This is nearly half of all the value held in the U.S. retirement system, which also includes employer pension funds and 401(k)s.

A big reason IRAs were created in 1974 under the Employer Retirement Income Security Act (ERISA) was to give individuals not covered by retirement plans at work an opportunity to save in their own tax-deferred accounts.

So, are IRAs helping these workers?

IRAs “have drifted very far from their original intent” of helping those who need them most, researchers for the Center for Retirement Research conclude in a new study.

Who is eligible to receive tax benefits for saving in an IRA has morphed over the years since ERISA’s passage, but the original description is still relevant to millions of Americans: about half of U.S. private-sector workers today do not have a tax-exempt retirement plan at work. Low-income workers are even less likely to have one.

To determine who benefits from IRAs today, the researchers first tracked down the source of the trillions of dollars held in IRAs. Only 13 percent of the money that flowed into IRAs in 2014 was from people putting new savings into these accounts. The rest was from rollovers of funds accumulated in employer 401(k)s, which usually occur when a worker retires or changes job. (ERISA did delineate rollovers as a second purpose of IRAs.) …Learn More

Fined illustration

Autopay Ends Credit Card Late Fees

Credit card companies usually set small-dollar minimum payments, so there’s really no excuse for incurring fees for late card payments.

Yet many consumers fail to pay on time. In a new study, British researchers found a no-brainer solution that is highly effective: setting up automatic payments of our credit cards.

The researchers started out with a different premise: that customers might learn, over time, to prevent maddening late fees after having to pay them numerous times. The researchers roundly rejected this after following nearly 250,000 U.K. credit card holders over two years.  When it comes to late fees, we do not learn from our mistakes.

What they noticed, however, was a clear distinction between card holders who incur late fees regularly and those who don’t or who stopped incurring the fees.   Setting up autopay “all but eliminates the likelihood of future [late] fees,” while the probability remains “persistently high” (about one in five) among people who did not, they said.

Further, a seemingly obvious explanation for chronic late fees didn’t hold water: that people don’t have the cash to make their minimum payments.  Payers of late fees “do not appear to be liquidity constrained,” the study found. Apparently, most people simply forget to pay those pesky credit card bills. …Learn More

Fewer Older Americans Work Part-time

Flip Flop in Work Schedules chartIt’s now a given that more people in their 60s and 70s are choosing to keep working.

But a related trend rumbling beneath the surface isn’t so well-known: the share of working older people with full-time jobs has increased sharply – to almost 61 percent in 2016 from 40 percent in 1995 – as part-time work has become less popular.

The majority of older Americans are retired. But among those who do work, the move from part-time to full-time is “a major shift” in work schedules, concluded the Brookings Institution’s Barry Bosworth and Gary Burtless and George Washington University’s Ken Zhang in a report last year.  This is one aspect of the broader trend of rising labor force participation for the nation’s older workers.

Burtless said in an email that the likely reason for the shift toward full-time employment is that more of the growing number of people who are working in their 60s and 70s are simply staying put in full-time career jobs.

Not surprisingly, much more income for the entire U.S. population over 65 comes from work. In 1990, employment earnings made up just 18 percent of their income from all sources. By 2012, that had almost doubled to 33 percent, according to the Brookings report.

Fueling the increase in full-time work are changes to the U.S. retirement system, as well as an increasingly healthy older population: …Learn More

Paying Medical Bills is a Herculean Task

Hercules sculpture, Florence, Italy.

Hercules sculpture, Florence, Italy.

Medical bills are leaving “a lasting imprint on families’ balance sheets,” JP Morgan Chase concludes from its recent analysis of the anonymous checking and credit card account activity of some 250,000 bank customers.

With little available cash on hand, 53 percent of these families prepare to pay large, one-time medical expenses by waiting for an uptick in their income. Nevertheless, a year after the bill is paid, they are still struggling to patch the hole blown in their household budgets, according to the report, “Coping with Costs: Big Data on Expense Volatility and Medical Payments.”

The 2013-2015 account data show that family incomes tend to be 4 percent higher, on average, in the month a medical bill is paid. This doesn’t mean that people suddenly become Uber drivers or work more overtime hours. What is probably going on, the bank said, is that people “have delayed either receipt of medical treatment or payment of their medical bill until they were able to pay” – when the extra income arrives.

Tax refunds are one clear source of this income for paying large one-time medical bills. These payments were the most frequent around tax time, JP Morgan’s customer data show. But the $163 average increase in monthly income, mostly from tax returns, was small relative to the average $2,000 medical bill.

The damage done to family finances was apparent even a year after such bills were paid.  Credit card balances, which had been reduced prior to paying the medical bill, rose for at least a year following a payment. Meanwhile, spending on non-medical purchases, as well as the amount of cash on hand, decline in the aftermath as the families struggle to repair their household finances.

This dry but compelling report is a window into the Herculean feat of paying medical bills for some families.  It helps to explain why two out of three Republicans and Democrats in a Kaiser Family Foundation poll said that lowering their health care costs should be a top priority for any reform.

To read the full J.P. Morgan report, click here.Learn More

Tennis ball

Retirement Ball’s in Employers’ Court

If employers want to improve the poor retirement prognosis for a large chunk of American workers, there are some obvious things they could do.

That’s the big takeaway in Morningstar Inc.’s new report on employers that offer 401(k) plans to their employees but don’t do what’s required to encourage them to save enough.

During the early 2000s, automatic enrollment to increase participation in employer 401(k)s became all the rage, and the strategy has proved itself. Today, nearly 90 percent of automatically enrolled employees stay where they are put, while only about half of workers sign up to save when 401(k) enrollment is strictly voluntary.

But the auto enrollment trend has stalled, and the crazy-quilt private-sector retirement system still has a lot of holes in it.  Even when companies automatically enroll their workers, the plans are often designed in ways that discourage them from saving enough, Morningstar’s David Blanchett, head of retirement research, concludes in his report.

“Too often the focus among plan sponsors is improving [401(k)] participation,” he writes. The plans themselves have left us “with low and inadequate savings rates that threaten the retirement security of many Americans.”

At least there’s something to be improved upon: many private-sector employers don’t even offer retirement plans, particularly in industries when people earn low-incomes or work for small companies.

Blanchett’s critique of plans already in place rightly leans on groundbreaking academic research a decade ago that tested 401(k) plan design to determine what drives employee participation in the plans and drives how much they’ll agree to save.

Take plans with auto-enrollment. His analysis of T. Rowe Price and Vanguard client data found that     3 percent of salary remains the most popular savings rate that employers default their workers into during automatic enrollment in the plan – but 3 percent is widely viewed as inadequate if a worker wants to have enough money to retire on.

Why so low, Blanchett asks, when people might accept more? …Learn More

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