August 27, 2013
Reverse Mortgage Article Hits Nerve
Readers reacting to a recent blog post about reverse mortgages fiercely debated the financial product’s pros and cons, which they felt were missing from the article.
The July 25 article noted that fewer than 55,000 older Americans in 2012 used the federally insured loans. The advantage of a reverse mortgage is that Americans age 62 or older can borrow against some of the equity in their homes to generate much-needed income or create a financial cushion. The principal and interest are repaid when the retiree or his children sell the house.
Even though reverse mortgages are rare, the topic hit a nerve with readers, including lawyers, brokers, and people with elderly parents.
A mortgage broker named D. Gardner, for example, said that he’s often seen people use reverse mortgages to maintain a lifestyle they can’t afford, eliminating a financial option they may need later in life.
For some borrowers, he said, a reverse mortgage “was a means to paper over problems.” …Learn More
August 20, 2013
What’s Your ‘Money Script’?
Our subconscious often stands in the way of our conscious efforts to save for college, prepare for the future, or spend what we’ve saved once we retire.
Some psychologists and financial planners believe these roadblocks are rooted in an individual’s “money script” – the story about money that we’ve told ourselves repeatedly since childhood. They’re typically passed down from our parents, extended family, or culture, and they are extremely difficult to change.
Writing in the Journal of Financial Planning, two experts in financial psychology, Bradley Klontz and Sonya Britt, presented their research associating three specific money scripts to poor financial behavior. Their study was based on a survey of 422 individuals who were largely middle-aged, white, and highly educated.
Click on a money script in one of the boxes below to read their descriptions of each one, excerpted from the November JFP article, to see if any apply and to learn how they affect the way we relate to money.
The researchers found that one person can hold multiple scripts, and these scripts can even contradict each other. …Learn More
August 13, 2013
End-of-Life Medical Costs Vary Widely
Medical expenses increase unpredictably with age, so the crystal ball gets very hazy when trying to foretell how much you’ll need in retirement.
A new study helps clear things up: a single older American spends about $39,000 on average for medical care in the final five years of life, or about $7,800 a year. For couples in which one spouse has died, $51,000 was spent during that spouse’s final years, or about $10,000 annually.
These out-of-pocket expenses, which were reported by surviving spouses and family members, are for health care not covered by Medicare: insurance premiums, hospital and physician copayments and deductibles, and expenses for medications, nursing homes, and in-home care.
The data also show that the financial burden on older people varies greatly, not just depending on marital status but also income. High earners spend more than $100,000 in their last five years, reflecting the large amounts paid out by those who need – and can afford – long-term care.
The authors conclude that end-of-life medical expenses subject a significant minority of older Americans to “considerable financial risk.” Their evidence: for 43 percent of the people they studied, the medical bills accumulated during their last years exceeded the value of their financial assets, excluding home equity. …Learn More
August 7, 2013
Poor Insurance Advice in India
Prior research has established that agents tend to sell the financial product that will pay them the highest commission. A new study on India’s life insurance market advances the ball by focusing on the quality of one high-commission product agents recommend and concludes that it’s wrong for the client.
The researchers sent trained auditors into the field posing as customers seeking insurance and then analyzed the advice they received. The auditors’ meetings with agents revolved around life insurance, specifically two types of policies: term and whole life.
In a term policy, the individual pays a premium to ensure a set dollar amount goes to a surviving wife or children if the customer dies. Like term policies, whole life policies also cover the risk of death, but insurers charge a higher premium to provide an additional service: the extra premium is invested on behalf of the client, who accumulates a cash balance that he can later redeem.
The researchers said term insurance is much more valuable, if customers in India take what they save on its lower premium and invest in the government’s savings certificates, earning a higher return than they would get from the insurance company.
Yet the researchers found that just 5 percent of the customer-auditors were advised to only buy term policies when that’s what best suited their needs. …Learn More
August 6, 2013
Desperate to Retire? Don’t.
A new article in the Journal of Financial Planning lays out the unpleasant reality facing baby boomers who really want to retire but can’t afford it: working longer helps a lot.
In the article, David Blanchett, who heads the retirement research group for Morningstar’s money management unit in Chicago, calculated the impact of delaying one’s retirement date and found that it can sharply improve a retiree’s odds of financial success.
“There is not one silver bullet for success but if there were it would be delaying retirement,” he said in an interview.
The same case has been made for years by the Center for Retirement Research at Boston College, which supports this blog. Working beyond age 62, when individuals are first eligible to receive Social Security benefits, helps in three important ways: …Learn More
August 1, 2013
Student Debt May Slow Home Buying
First-time buyers are currently responsible for about 29 percent of all U.S. house sales, down from historical levels of 40 percent, according to the National Association of Realtors. The share of young adults who own a house has also declined sharply.
There’s debate about whether buying a house is a good financial move. But the waning of this coming-of-age ritual is a significant change in behavior for young adults in this country.
One culprit may be student debt, which is becoming more prevalent – 43 percent of young adults have some, compared with 25 percent a decade ago. The average borrower’s balance has also doubled in the past decade, to more than $20,000 in 2012.
Researchers at the Federal Reserve Bank of New York believe these unprecedented student debt levels may be dampening house purchases by first-time buyers. Student loans cause individuals to do poorly under two of the primary tests by Freddie Mac and Fannie Mae that lenders use to approve standard home loans. …Learn More
July 30, 2013
Social Security and Two-Income Couples
The decades-long march of women into the nation’s workplaces may be the most enduring trend in the labor force – and a signature of American progress.
But it is also one more reason that Social Security benefits today replace a smaller share of the lifetime earnings of married couples than they did in the past, when far fewer women worked for pay.
Other reasons include the gradual increase in the age at which U.S. workers can claim their full retirement benefits, from age 65 for the oldest retirees to 67 for Generation X. Medicare premiums are also taking more out of the monthly Social Security check, and more retirees are being taxed on a portion of their benefits over time.
But for married couples, the sharp increase in the ranks of working wives has reduced the share of their joint earnings during their working years that is replaced by Social Security when they retire. For the typical couple born in the Depression, Social Security benefits cover 45 percent of their prior earnings, but that falls to 41 percent for baby boomer couples retiring today, according to new research by the Center for Retirement Research, which supports this blog.
These Social Security “replacement rates” – benefits as a percent of employment earnings – will continue to decline, to just 37 percent for Generation X couples born between 1966 and 1975. …Learn More