The Hard Sell

This is the point where two facts collide. You hear a lot of white noise about the so-called delayed retirement, the I'll-have-to-work-longer-because-my-plan-was-undone tales. Those headlines create anxiousness amongst even those who are prepared to retire as planned. This group second-guesses the plan they have in place even if it is viable. And then you also hear the unbelievable number of retiring Boomers that do take the leap, a number that doesn't seem real: 10,000 Boomers are reaching retirement age each day.

Who are these people? The unprepared and the prepared hurtling headlong into older adulthood. They both had expectations of retiring based on what can only be considered now as unrealistic math. They set goals and they weren't met as planned. A few got it right. Remember, there's no shame in that miscalculation. Folks have been doing it for decades. But your plan is all you really care about and if it hasn't met your expectations, which in many instances were a bit lofty, you resign to work longer. This is where the facts collide.

You know all too well that simply working longer will add to the amount of retirement income you will have but only if you significantly increase your contributions. Few resign themselves to do both.

But the other half of the equation, the Boomers who do retire, are often caught in the same anxiety ridden place. They question whether they made the right choice and more importantly, whether the money they have amassed will serve their purpose, remains hanging over every plan as an unknown.

That purpose is often clouded with not only the unpredictable cost of longevity but whether they might have enough to take care of their heirs - a serious consideration among a wide swath of retired adults and those about to retire. This last consideration is entertained by women more so than men, statistics have uncovered, which is often surprising. Why? This same group of women approaching retirement has often saved less, another unfortunate statistic concerning women and retirement.

Those that do retire should consider where they retire. And while there are many suggestions as to what to do and how to go about it, but a quick survey of your current surroundings will offer a great many answers to your dilemma.

For instance, seniors or those about to become seniors often fail to inventory the services they may need. Once retired, your daily life will require things you had previously not considered. More than just the availability of medical services, more than the infrastructure of city services such as public transportation and well-lit and well-patrolled neighborhoods, your current location needs to stimulate you or at least have accessible stimulation to keep you mentally sharp and involved. This is not how many American cities were designed. Far too many cities and their suburbs require a car. And while this may be seen by many older Americans as a freedom, not being able to drive can imprison some seniors if they find where they live too far away from these activities. Only vast sums of retirement income can change that one item and few seniors, who essentially are on a fixed income, want to reach for their wallet or purse to pay to go shopping.

To pre-Boomers or those who are still working, where you live is not often what you can afford. If you live in the city, chances are you rent. If you live in the suburbs, chances are you have a mortgage. If you have a mortgage, chances are you can't afford it. That's a lot of "ifs" but they are an approaching nightmare for those about to retire.

While many of believe that the cities we live in should adjust to us and our current and future retirement needs, it probably won't happen soon. So retirees look to communities that cater to their needs. This ghetto-izing of seniors, much like Florida and Arizona is not only unappealing to many Boomers, it is not as healthy as it first appears. Sure, these senior-only communities do provide like-minded companionship, concentrated services and accommodations that cater to gradual aging, but they are often culturally void of the stimulation that all walks of life can provide. Being isolated is not the answer.

So what is? Cities are struggling with their finances and as a result are cutting back on services that once were taken for granted. We might be living longer but in far too many instances, your health may compromise that statistic or impact the quality of that longer life. And the cost of where you live - assuming your mortgage is paid off before you retire - is not getting cheaper. Add inflation into the mix and you have eliminated all but the most obvious choice: you have fewer options.

Of course, you can stay put in a house that might be too big and too costly to maintain. This will gradually eat away at your fixed income and reduce your opportunities to engage with the outside world. Now one plans on spending their day at McDonalds sipping bad coffee with fellow seniors, no matter how well-lit, no matter how inexpensive the house brew and no matter if the loitering rules don't apply. But take away any portion of that spendable income and you limit the choices.

Where is the right place? While there is no firm answer, you do have options. For instance, if family is important to you, be sure your family shares this thinking as well. The dynamic of marriage - and I am speaking of your children's marriage - can create some confusion. Deciding that you can rely on your children and their spouses for the help you might need is something you need to discuss well in advance of retiring.

At some point, one of your kids or their spouses may find you in their care. Perhaps not in the day-to-day sense or even the long-term care situation, but in the need to check-in, help with errands or assume a financial role. This needs to be discussed in advance, a discussion that should be instigated by you. This is no easy discussion.

You do need to tell your children what you expect from retirement, even if you are unsure. Answer the hard questions (can you afford to stay in your house for instance) and when the time comes, unfold your finances for them to see. Let them know where you stand and what your plan is.

Boomers will be sold a retirement that is unlike any other before them. If you live longer as the statistics suggest you will, what do you expect of your surroundings? What role does your community play in the decision? What role will your kids have? Retirement is much more than simply amassing cash. It is amassing support. And believe it or not, that is old school thinking, a throwback to the time when retired family members depended on their kids for everything. But those kids, who may not be thinking along the same lines as you need to be involved now, rather than later.


Paul Petillo is the Managing Editor of BlueCollarDollar.com/Target2025.com and a fellow Boomer

A Retirement Plan in the House

I have to wonder what people sometimes think, Boomers in particular. Confidence is down but spending is up. The recession isn't really a recession but for many it seems like one.The media talks of millions of homeowners looking for mortgage relief, being foreclosed or worse, are feeling the crush of owning a home adversely impact their retirement plans. And yet, some people are still planning a future with their house as part of the process.

Could be a sign of the times and then again, it might be the progression of where we would be in our retirement plan. If the results of the latest Associated Press-LifeGoesStrong.com poll are any indication, we have reached a pivotal point in retirement planning. Should I stay or should I go?

A great many retired couples have told me over the years that the biggest mistake they may have made was selling the family home. They have opted for a dream instead and chased it with their new found retirement freedom. But many failed to take into consideration that a place is more than just a shelter. It can be proximity to children and grandchildren, services such as health care facilities or other seniors and often, in communities that are growing with younger cohorts. And almost equally as many have found the size of the house they own in their pre-retirement years is simply too large to accommodate - or worse, afford.

Should it be a surprise that we begin making post-work plans in midlife? Or is the surprise the decision we make? According to the recent Associated Press-LifeGoesStrong.com poll, three out of ten midlife retirement planners are suggesting that they will look elsewhere when they do retire. And according to the poll, they are resigned to sell the family home for less than what they had thought it was worth a decade ago.

But that is understandable for two reasons: those out-sized estimates of property worth have been adjusted to fit a lackluster economy and there is a greater chance that the equity they may have calculated has shrunk due to refinancing. Folks in the midwest are more likely to stay put, more so than their east coast neighbors.

The poll also suggests according to Barbara Corcoran: "more than four in 10 want a smaller home, 30% would like a different climate, 25% will look for a more affordable home, and 15% will pack up our bags for the sole purpose of moving closer to family." And when they do move these people dream of a one-level home with enough room to accommodate the occasional visitor, close to medical facilities and not in-city. And those that stay put waste almost no time converting their children's rooms into something more focused on their evolving interests.

Oddly, the question of taxes didn't come up in the poll, something of major interest to older people planning on a fixed income lifestyle. A larger home requires upkeep and maintenance that might not configure into a retired income. And the thought of a second home was not amongst the wishes this group had either. In fact, only about 12% want to feel the sea breeze in their graying hair.

The question is: how much of a role should your home play in your retirement plan? Many people have factored in the equity in their plans - or at least they used to - and the mistake made by these folks is twofold. One, you need to live somewhere and two, unless you own your home and have considered the chance that you might reverse the mortgage at some point. this equity is nothing but paper dreams.

A harsh reality but more true than not. If you are factoring in your home as part of an estate, then no doubt you have made all of the considerations, tax and otherwise, surrounding that decision. But if the home will become unmanageable (how hard is the upkeep now?), then looking for the opportunity to sell it, no matter how much you might "love" the house, the location, the neighbors, should be weighed.

As retirees approach that magical time when you either cutback or stop working altogether, the best advice woud be to begin to stage the sale of the property now while your income is less fixed. If you don't sell, you will have a slightly improved place. If it does sell, it will help you get the price, or closer to the price you might think it is worth.

Paul Petillo is a fellow Boomer

On the Radio with Author Mike Egan

Monday on Financial Impact Factor Radio, we had Mike Egan, author of "Your Stronger Financial Future: The Eight Essential Strategies for Making Profitable Investments". This book takes the time to rearrange your thinking about the world of finance around us and in doing so, arrange it so that we can systematically confront fear and presumption and get on with our plans for retirement.

Listen to internet radiowith

Paul Petillo of Target2025.com/BlueCollarDollar.com

and Dave Kittredge and Dave Ng

of FinancialFootprint.com

on

The Financial Impact Factor

at Blog Talk Radio

New Book for Boomers and Their Kids

I have been writing for BoomersRetirement for quite some time. And while I tend to address the concerns of this older demographic - being one myself - I don't want you to think we can do so and ignore those around us.

Yes, we need to be focused. But personal finance has become intra-personal with our kids (and their decisions) often impacting our decisions. So we owe it ourselves to make sure that we educate them in the basics. I wrote the first version of this book seven years ago and my how things have changed - even as they stayed the same. Someone once told me that if everyone had read it, we wouldn't be in as deep of a financial mess as we are in now.

So I updated it for 2011 and published my fifth book - this time with Smashwords! And a special offer to readers of this blog, ReBuilding Wealth in a Paycheck-to-Paycheck World by Paul Petillo is available for a limited time (until 10.29.11) when you can use this coupon code to get the ebook for half price or $1.50. The code for the coupon is UJ76Q This ebook is available across all platforms including iPad and iPhone, Amazon and Sony.

So download it for yourself. Give it to your kids. Tell anyone you know how important this is.

Your Personal Finances: Like Cleaning out the Garage?

Sometimes, it's the little things that add up to the big things. or perhaps better put, what Henri Fredric Amiel suggests much more aptly: "What we call little things are merely the causes of greater things". So it goes with most of what we consider personal finance. It is mostly a collection of little things, some missteps, some untapped with potential, others forgotten. So in a season where most of us toy with the idea of cleaning out the garage, I thought we'd look at a few personal finance tips to clean up those accounts.

Who are you?
One of the first things every self-help book will ask you for is some sort of self-assessment. Which is fine but in almost every instance, you already know what is wrong.

You want to know how to fix it with the least amount of effort and perhaps embarrassment. If you cringed when I made the off-handed remark about "cleaning the garage", you probably have pockets of money laying around you didn't know you had.

Take out your utility bill and read it. Why start there? Because if you're the type that simply pays every bill without so much as a question as to how much this really costs and how can I trim this, you know who you are. Money is somewhat an inconvenience.

And then there is the you who believes in this cycle: You made it, you spent it and you went back to make more. Granted some of you whipped out your credit card, and that's worse - and a much bigger problem than what we're discussing here, but the point is, do you like being the person who simply, blindly and willfully pays for what they don't need?


Do you pay your mortgage?
Of course you do. Most of us do. Mortgages are actually not what you think they are. They are the best forced savings plan ever and an opportunity too few of us take.

Yes, your home is like saving. For a couple of reasons not the least of which is that it isn't an investment, at least in the classical sense of liquidity. You put money towards the eventual ownership of the place an believe it or not, the vast majority of us never move. Statistics have shown that in ten years, 80% of you will be right where you are now.

But there is the question of what are you really saving in your home? Yes, you pay interest and yes, you get a tax deduction and sometimes, once upon a time, we saw the value of our homes increase with each remodel. Which made us feel good even if we didn't move. And that's all well and good. But in the mean time, you are paying a portion of that mortgage payment to debt service. A big portion with most of it piled into the first years of the loan.

To get the most bang for your buck, you need to put a little bit more into this plan called home. The numbers are relatively simple and I've discussed them before. But they bear repeating. Suppose you had a $200,000 mortgage with a 6% loan. Your payment would be about $1200. If you found an extra $100 each month and directed it toward the principal, not only would you trim about five years from a 30-year mortgage, but you'd save about $48,000 in interest over that time - most of it paid in those early years.

Yes the numbers get better with each extra payment you make to the principal, not tagged onto the house payment, but directed at the loan. Some banks will offer you bi-monthly payments attempting to do the same thing. Problem is that you will pay the interest off quicker but not eliminate quick enough to make the switch - which you are locked into - worth it. Trying to make two extra payments a year will turn a traditional 30-year loan into something lasting barely over 20-years. And save almost $80,000.

Next up,  we'll take a look at what you are missing in your retirement.

Paul Petillo is the managing editor of BlueCollarDollar.com/Target2025.com and a fellow Boomer.

Your Home: Is it Part of the Plan?

American dream or not, the games you may have once played with financing your home are not available for the vast majority of homeowners. And there is no doubt that this a good thing, a lesson learned that was far too painful but often, those tales are. But there is another game afoot in the world of mortgages, even as the largest lenders pull the plug on the process: the reverse mortgage.

Most of us don't envy those who are toying with this option. We know two things about these folks: one they own quite a bit of their house, referred to as equity and two, these homes are owned by cash-strapped people older than 62.

The reverse mortgage is a rather simple product with relatively simple goals. Because those who are considering this option are often older and in possession of much of the house they live in. This pool of cash is a very tempting option to a fixed income or one where retirement savings no longer is able to keep up with the cost of living. There are a variety of reasons they may need to tap this cash in their homes from medical bills to simply poor money management.

So the concept of tapping some of that equity is quite appealing. A reverse mortgage essentially gives you the money that your house is worth. Ron Lieber recently visited this topic in the New York Times explaining "reverse mortgages begin with a lender that is willing to pay you instead of you paying the bank. How much you get depends on your age, prevailing interest rates and the amount of equity you have in your home. The payout may also depend on whether you choose a lump sum, a line of credit, a regular payment for as long as you live or a regular payment for some fixed number of years."

The problem is getting a lender to do that. Many of the biggest banks have pulled away from offering the product, not because they don't think it is a good idea. But because those they lend the money to tend to fall behind on key elements of the loan agreement: paying taxes and keeping the house in sale-able condition. Aside from a check with the feds, there is no credit check on the applicants.

So banks, seeing the issue of foreclosing on granny because she opted for the lump sum payout and failed to keep current on those obligations have decided the bad PR will come with too steep a price. So enter the second and third tier lenders who will, without a doubt fill the void.

This could create several issues. The first would be fewer loans or on the flip side, loans that revert back to why this type of mortgage got its bad rep in the first place. Fees will be higher in a space with fewer competitors. Elderly will sign more complicated documents that will force them to maintain a fund for emergencies - which on the surface isn't a bad thing but could turn turn out to require higher funding balances than needed, leaving the reverse mortgager with less cash for the effort.

Another issue might be in how your heirs feel about the whole process. Often, parents,who may have mentored their children on the subject of money and financial prudence and who now find their finances in need of some review, may not be willing to or may be too embarrassed to ask for help. If there is no dialogue, the whole process might come as a surprise for kids who thought that house would eventually become part of the estate. And once these second and third tier lenders begin the process of foreclosing, it is often too late for the children to step in to help.

There are some key things to consider here. The first is what options do your parents have? Can they downsize? If not, can you talk to them about the options? Often this conversation needs to happen but it also needs to approached with great care and consideration. But once the barrier has been breached, you can move to include yourself in their financial affairs before it is too late.

This is also some tricky water to navigate. But the effort is worthwhile. If they need the money, and many older Americans will, attempt to get them to allow you to help budget the funds. In the future, HUD will probably set rules about creditworthiness and because many older Americans have little or no recent credit history, this might prove an obstacle at a time when they are already facing one too many. Helping them build some creditworthiness will enable them to be in a better position - with your help - to get the best deal possible.

Once you have gained their trust, you can include your input with their financial planners, with their attorneys and possibly with their medical doctors, all of whom may not be able to tell you what their clients or patients are deciding. You can take control of the vital payments that need to be made and keep things in good financial order.

So this summer, take a moment when visiting your parents or grandparents and have the discussion. And while you are at it, consider a plan to pay off your mortgage as well. (You can find recent articles about this topic here.)

Paul Petillo is the founder and managing editor of BlueCollarDollar.com/Target2025.com and a fellow Boomer.

Paying off Your Mortgage or Financing Your Retirement

I have had numerous conversations over the past week with some financial friends of mine about the idea of paying off your mortgage or funding your 401(k). The question, which I posed with a sort of bias, suggested that carting a mortgage into retirement was among the worst things you could do. So if that is the case, what should Boomers or late Boomers do?

In spite of the bleak economic news posted last week, the economy is not as bad for the majority of us as it is portrayed in the media. It is difficult however to ignore the plight our neighbors are going through, the prolonged unemployment, the forced early retirement, the underwater mortgages that are, if anything, keeping them from getting back on their feet. But the vast majority of us understand now that we need to take care of our personal finances - seemingly much more personal now than they were in the past - and that will quite possibly help the overall recovery. The more stable footing we have, the greater the chances our impact on the economy improves.

But today, I thought I'd focus on making the decisions you may have not considered: Is paying down the mortgage better than maxing out your 401(k)?

We often focus on the 401(k), the self driven retirement plan many of us have at work as the be-all-to-end-all retirement plan. It comes close but only as close as your debt in retirement allows. If you are headed towards retirement with a home mortgage, calculating the net downside of that mortgage can give you even more pressure to work more, contribute more or simply put off your retirement until a later date.

In every calculation about retirement, money stands front and center to its success. But you need a place to live and the vast majority of Americans looking at retirement in the next ten-years have a house payment saddling their plans. So I thought I'd run some numbers and offer some suggestions.

Although the actual numbers vary on where you live, $200,000 is about the average home price. A 30 year mortgage with a 6% rate will cost you about $1200 a month in mortgage payments with taxes and insurance excluded. These are rough and rounded numbers. Now if you were able to make a $100 a month additional payment, $1200 divided by 12, and apply it to the principal, the savings in total interest would be about $48,000 and it would shorten the loan by over 5yrs. So an extra $100 applied to principal would turn your 30 year mortgage into a 25 year mortgage.

The math gets better the more you pay. For instance, make a thirteenth and fourteen month payment (and for these calculations to work, you need to do it every month, not just once a year - although that's not a bad way to use the out-sized tax return) you would save almost $79,000 in interest payments and the loan would now be for 21 years. No paper work, no refinancing, no hassle and you just theoretically made $79,000.

How much would you have made had you invested the same amount in your 401(k)? Keep in mind, your mortgage is fixed at 6% and your 401(k), no matter what you invest in will have some fluctuation over time and it may never successfully return you a steady 6%. But the numbers go something like this: Invest $100 a month for 360 months at 6% return will net you a $12,000 a year income in retirement for ten-years. This means that if you are 45 and save a paltry $100 a month in your 401(k) - and I hope you are investing more than that - you will get a monthly payout for ten-years of about your mortgage payment.

But the difference is what you saved compared to what you will have to continue to pay for the loan. One allows you to enter retirement in full ownership of you house; the other gives you the ability to pay your mortgage with your retirement income. Even retirement planning neophytes can determine the benefits of having no loan and an income rather than having the income to maintain a loan.

I used an average $40,000 household income as an example and $100 as the contribution to the principal. If you were to make a contribution to your 401(k) of just $25 a week based on that income, you would come out with the results I have offered here. But if you were able to make both - a $25 a week contribution to your 401(k), which is just about 4% and make a $25 contribution to mortgage pre-payment plan, you will have only taken about $200 off the monthly budget.

The trade-off seems even but having a paid-for home in retirement gives you an great deal of economic peace of mind in terms of known worth, the potential to reverse mortgage the house and the ability to borrow against it should it come down to it. We have to live somewhere and this insures that where you live will be what you own.

Paul Petillo is the managing editor of Target2025.com/BlueCollarDollar.com and a fellow Boomer.
Be sure to check out Paul's new book available on Amazon, designed as an ongoing series. This ebook contains the Introduction and the first two chapters is on sale for only $2.99. 
Target 2025 (Ten Steps to a Secure Retirement)

Remember how You once thought of Old?

Boomers have no problem with admitting they are getting old. They may not want to face the realities of age but the facts are there - if only in the reflection staring back from the mirror.

Remember when old was anything just a generation ahead of you. If you were ten, anyone in their thirties, more often than not, your parents and their friends, your teachers and coaches, were all old to you. It seems that as you got older, the definition of what old was was pushed back further. By the time you were 30, old was fifty. Why do we place such importance on this bookmarkers of passing time? Because each "old" has its own problems, not just health-wise as our bodies age, but financially as well.


Everyone has an answer to the conundrum of age. When it comes to money, the issues seems to double in size and complication and as a result, weigh much more on what our next stage of old will be like. You are told to invest in your retirement early and often even as the only word financial word you have any real acquaintance with is debt. In your early to late twenties, it manifests as college debt and the high cost of flying on your own for the first time. You invest little for retirement and pass up the financial golden ring to pay-as-you-go because you will never be old.

And then, a decade or so later, you are older faced with mortgages and kids and schools, saving for college, insurances and taxes and simply keeping pace with your family. You have begun to invest but in a piecemeal way. You may be auto-enrolled in your company's 401(k) if your workplace has one. If not, you probably haven't done much, at least regularly with investing for old when left to your own devices. You may have lumped summed it, which is bette than having done nothing, by dropping tax returns or bonuses in some IRA. But old costs more than you might have and debt, that first word you learned upon getting your diploma, is probably still a very real participant in your day-to-day decisions.

Forty is better and older but you now feel the bruden, mostly in the form of guilt at having underinvested. Now you struggle with older kids, college realities and aging parents. You probably have refinanced you home and if you are like many Americans, still paying for a vacation you took a couple years back all the while planning on the next. If you are like most, you haven't increased your payroll deduction in your 401(k) since you enrolled and probably haven't done much in the way of rebalancing or choosing the best age-appropriate investments.

Fifty, the real old, hits you like a ton of bricks. You may have some or all of the same problems you did at 30 (I hope not) and at 40 (kids are failing to launch, parents are a real concern) but now you grasp them to their fullest. And with a gasp and a moan, you realize that you will have to work until you are 70. the oldest person alive when you were 10.
Here are five basic things to do if you realized you are old. Or 50.

1. Get your head around any and all debt. Nothing will bring a future to its knees faster than paying interest on borrowed money.
2. Get out a calculator. Not just the physical kind but the online kind as well. As much as I dislike these tools, because one allows this input while another doesn't, just take the raw data: how much is currently in your retirement accounts, estimating that they will grow until you decide to retire at a modest 4% (this accounts for mistakes you can't know about like inflation and taxes) with a modest 4% withdrawal if asked to enter this as well and hit enter. Now take that number, usually expressed as a annual income, divide it by twelve and ask yourself, can you live on this?
3. Ask yourself is this enough? If it is 75% of what you currently need to live on, you aren't just old you're wise too. It its less than that, you will need to rethink your cost of shelter, the amount of money you spend each month and in doing so, channel every available cent to the plan you have in place. It might seem like a huge hurdle and it is. But you are running out of time. It means budget, budget, budget.

Of course, it goes without saying that starting early is best. And it also goes without saying the every age has its own setbacks financially. But every age has its potential for success and as you age, the potential doesn't go away, it simply becomes a little more challenging. Worrying about money as many surveys suggest we do, will not fix the problem. Why? Because worrying is the purview of someone who has no control over a situation happening. This one is all yours and well within your ability to control.

Paul Petillo is the managing editor of Target2025.com/BlueCollarDollar.com and a fellow Boomer

The Retirement Change of Address

Boomers are often considering a move when they retire, sometimes just to get to something smaller and more manageable, sometime to simply be where they have always dreamed of being.

There is something to be said about planning for retirement that is often discussed at length, often just as quickly dismissed and in many instances,wouldn't be practical for the vast majority of us. That would be moving at retirement to some place other than the city of town you currently live in.

There are numerous considerations to any move. But at retirement, the move needs some serious thought.

Here are a few things to think about before you make the leap. First: how much of your home is actually yours. Equity valuations change and with any luck, will begin to improve.

Having enough of a dollar value built up in your home will allow you a greater freedom of choice in moving and will determine whether you will need to buy or rent in your new location. If you are thinking about a mortgage, be prepared to face some strict financing issues getting a new mortgage.

Although reports about mortgages being held up because of the potential of having a baby have been reported, none so far have been shown that mortgages are being denied to newly retired. I don't expect that to continue.

Mortgage companies and banks are going to look at your potential health problems the same way they look a income interruptions for young families. And these health issues play another leading element in your choice of a new place. Are you close to facilities you might need? Do you anticipate health issues that would require you own a car or live nearby?

This could affect your choice of communities where some amenities are limited. These small towns may be quaint. But can you get your needs met in a timely and cost effective manner? If you are thinking about a move and money is not really an issue, the following cities do offer some of what you may need - but probably not all. I can vouch for Eugene - it does rain a lot - but when the sun shines, it is truly amazing. And as an added bonus, you are only an hour or two from the coast or the high desert.

Here are some great spots to retire.

Paul Petillo is the Managing Editor of Target2025.com/BlueCollarDollar.com and a fellow Boomer.

Mortgage Math for Boomers

There was a discussion on a popular morning business show about whether the interest rates on long-term, 30-year mortgage rates could ever get to one percent. They could, theoretically  get that low and it would certainly fix a huge amount of problems.  But most economists can't envision it ever happening based on the way our current bond market is structured. In the meantime, what should we do if we are close to retirement?

Yes, folks are still out there looking to purchase a mortgage. And yes, they, like the banks, are doing the calculations about what would be better for them: short-term loans or the traditional, long-term, 30-year variety. While the differences often seem easy to spot, on the surface at least, the nuances are harder to decipher.  The 15-year mortgage comes with a lower interest rate but because of the length of the loan, the monthly mortgage payment is higher.  The 30-year mortgage on the other hand offers a lower monthly payment but you end up paying more in interest over the life of the loan.

Those are the easy to see differences between the two.  The choice is also easy and depends on not only who you are as much as how your history of handling money plays into the equation. If you consider yourself disciplined, you might want to pick the longest term mortgage for several reasons, one of which stands out: flexibility.

Locking your cash into the higher mortgage payment will pay off the loan quicker and over a fifteen year period, cost less in terms of interest rate.  What you sacrifice is the ability to plan for the unknown.  Among those unpredictable moments that life can throw your way is a sudden change income, unexpected medical bills,  the chance that during that period, you may find another job that would force you to move.  Locking yourself into the higher monthly payment may have a negative effect on your retirement investments as well.

The person considering the 30-year mortgage can see some significant savings in terms of monthly outlays. On a loan of $300,000 spanning 30-years at 4.5%, the monthly mortgage payment would be around $1500 a month.

That same loan at a lower 15-year rate (currently about a half percentage point lower than the 30-year) the monthly payment would be about $700 more.  Looking into the future, when both loans are satisfied, the difference in interest savings can be sizable.  The 15-year mortgage would cost you about $100,000 over the original mortgage; a 30-year would show a lifetime interest payment of about $248,000.  You are going to pay interest.  The question is: Is paying $148k more worth the lower monthly payment.

While it does depend on who you are and the answer laid in bare numbers seems obvious, the statistics indicate that the longer loan is actually a better use of your money than the shorter term loan.  Conventional wisdom suggests that if you invest the saved dollars each month, you might be able to best the difference.  This requires not only investment savvy and consistent investment, but the long-term cooperation of the markets. Few have all of these attributes in place and are able to execute them without, at some point down the road, making a mistake.

There is a better argument for the long-term loan as opposed to the shorter one. If the mortgage holder of the long-term loan paid additional money to the principal each month, they could conceivable shave years off the mortgage.  In this case, an additional payment earmarked for the principal, could bring the life of the loan down just as quick as the loan for the shorter period of time.

It works like this: If the 30-year mortgage holder paid a thirteenth month payment ($1500 divided by 12 = $125) over the course of a year, they would have satisfied the loan in about 23 years.  Make a fourteenth month payment ($250 extra each month, directed towards the principal) and the loan would be paid off in about eighteen years.

Make a fifteenth month payment ($375 each month, directed towards the principal) and you would essentially have 15-year mortgage for about $325 a month.

Because mortgages are calculated each month, (interest against what is owed), by directing more money to the principal each money and doing so early on, you will also lower the amount of interest rate owed as well.  Of course your savings depends on the interest rate you get.  But the difference can be quite remarkable and will get you closer to what the 15-year mortgage holder received over the life of their loan.

You also need to consider the inflationary magic a mortgage works.  While inflation is somewhat benign now, it is not expected to stay that way forever.  If it starts to tick up, your dollar with be worth less, giving you less in terms of purchasing power.  Unless you have a fixed loan.  This could be quite sizable in terms of future savings.

Suppose your $1500 was effected by a 4% inflation rate over the next fifteen years.  In terms of purchasing power, that $1500 would be equivalent to $4865. ironically, you mortgage payment stayed the same.

You also need to consider the saved dollars -after you made the fifteenth month payment.  Invested in a super-conservative fashion, say in a Vanguard US treasury fund (VUSTX) and if the past is any indication of the future, your yield would average around 8%.  Even if that fell to almost half, you would still be on par with the owner of the shorter-term mortgage.

This sort of flexibility allows for those hiccups in our daily lives to happen and do so without creating financial hardship. And it is avoiding those potential mishaps and possibly profiting when they don't occur that is key to ensuring that we have enough to pay our bills and invest in our retirement futures.

Paul Petillo is the Managing Editor of Target2025.com/BlueCollarDollar.com and a fellow Boomer

Walking Away: The Judgment that Cripples

It is my greatest hope, particularly for those close to retirement, that your house is secure, with any luck close if not already paid for and there is no chance of foreclosure in your future.  But things happen and fates change.

Last Friday, on MomsMakingaMillion radio with Gina and Kat, the topic of deficiency judgments was discussed in the MoneyTips section of the show.  I know something about foreclosures and wondered if what was being discussed could be prevented and how.

In a previous article here, we looked at the possibility of walking away from your home. The obligation, we argued is one that involves two parties: lender and the borrower.  Every financial contract, we all know comes with obligations.  But exactly how those obligations are applied can vary from state to state.

Gina, who resides in Nevada, gave fair warning to the homeowners in her state about the pitfalls of owing money long after you have been foreclosed.  Called a deficiency judgment (the only states that have no right for the lender on the books are Massachusetts, Mississippi, West Virginia and Delaware), this action theoretically allows the lender to pursue you for the balance of the loan due after the house has been foreclosed, .  While on the surface, this seems like an additional blow to your already decimated financial world, but there are steps that must be taken and certain rules that protect you.

Do you know about deficiency judgments?

Paul Petillo is the Managing Editor of Target2025.com and a fellow Boomer.

Money Magazine Wants Your Story.

ARE YOU A FEW YEARS OUT FROM RETIREMENT BUT STILL HAVE A BIG MORTGAGE?

More and home homeowners are heading into retirement with the debt of their house on their shoulders, having bought homes at peak prices during the bubble. We are looking to talk to couples in their 50s or 60s who are in this situation, and are wondering what to do as they near retirement.

You must be willing to appear in a national magazine, and reveal some of your financial numbers. In exchange, you will be given free, personalized advice from some of the country’s most respected financial planners.

Please send an email with your names, ages, incomes, home value and mortgage amount, and when you’d like to retire to Lauren_Kelleher@moneymail.com ; include a recent picture of you and your spouse.

Reply

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The Weight of the Economic Recovery

Seems that there isn't a day goes past that I am not asked about the concept of buying a house.  These questions usually come from younger workers who may be barely into their thirties.  And the answer I offer them is not what they want to hear.  In fact, it flies in the face of everything they have ever heard about home buying, much of it now like the retirements of our parents: not something we can count on for us.

But what about Boomers who find themselves underwater in their homes? Can you walk away?  Will you know why?

For more on this topic, visit Target2025.com: Is Owning a Home No Longer Smart Money Management?

Paul Petillo is the Managing Editor of Target2025.com and a fellow Boomer.