Why Housing Costs are the Biggest Threat to Your Retirement

We should be looking at smaller "starter" homes as our "stay put" homes.

Time was that retirees were supposed pay down their mortgages or drastically downsize their homes before retirement. But that behavior has changed, perhaps as a result of the refinancing boom or the housing crash—or both. According to the Consumer Finance Protection Bureau, more people are carrying mortgage debt into their retirement years, up from 22% in 2001 to 30% in 2011.Moreover, the costs of maintaining a home remain stubbornly high as we age, according to a new analysis by the Employee Benefit Research Institute. For those 75 and older, housing expenses accounted for a whopping 43% of spending, even as other expenditures (except for health care) dropped.If there is one thing we have been trained to fear about retirement, it’s crippling medical bills that threaten to force us out of our homes and decimate our nest eggs. But it turns out that we might be better off worrying about our future housing expenses, as these costs are the single largest category of spending in retirement.

Even as the rate of homeownership has remained stable, the median amount owed on mortgages for people aged 75 and older increased 82% during that same decade, from $43,000 to $79,000. Delinquency in paying mortgages and foreclosures also greatly increased for seniors from 2007 to 2011.

The lesson in all this is that while financing one’s home can be hugely beneficial, mortgages can grow into significant burdens when you’re living on a fixed income. The time to stretch yourself financially on a home is not when you’ve already left the workforce and have no way to make more money.

It’s not just larger mortgages that saddle retirees—it’s everything that comes with homeownership, including property taxes, homeowner’s insurance, home repairs, housecleaning, gardening and yard services. At the same time, transportation, entertainment and travel expenses all tend to decline as a natural course of retirement.

It seems that people have an easier time forgoing vacations and restaurant dining than they do square footage and lawns, which is understandable. The comforts of home can bring great stability during a time of transition. But as we struggle to figure out how much money we will need in retirement, we might need to consider how to defray the expense of these patterns.

For those in mid-career, now is the time to get control of our mortgage costs. As a recent study by Pew Charitable Trusts shows, Gen X has lower wealth than their parents did at their age, in large part because they hold nearly six times more debt, including student loans, unpaid medical bills and credit card balances. And that’s despite having generally higher family incomes than their parents did.

Given these headwinds, we may want to rethink the American way of constantly trading up to larger houses through our 40s and 50s. The more we grow accustomed to more luxurious living, the harder it will be to downsize when it makes sense. Perhaps instead of looking at smaller houses merely as “starter homes,” we should be looking at them as “stay put” homes instead.

Millennials face a different challenge. After taking longer to get started in their careers, they will end up buying houses later in life, which means they risk carrying significant mortgages into retirement. They would benefit from not biting off more than they can chew—putting more cash down than the minimum, not buying more house then they can really afford, and making sure to max out out their 401(k)s or IRAs. Home equity can be an excellent investment, but only if it enhances rather than jeopardizes financial security—now and in the future.

http://time.com/money/3418195/retirement-housCing-costs-threat/

By: Ruth Davis Konigsberg 

Konigsberg is the author of The Truth About Grief, a contributor to the anthology Money Changes Everything, and a director at Arden Asset Management. The views expressed are solely her own.

Take the worry out of retirement and high college costs...

Parents worry that high college costs will hurt their retirement, survey shows

Herb WeisbaumTODAY contributor

Sep. 19, 2014 at 7:06 AM ET

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Parents worry that they won't have enough to retire as a result of their kids' college tuition costs.

As families struggle to pay the skyrocketing costs of higher education, a growing number of parents are concerned that the money they borrow for their child’s tuition will hurt their retirement.

In a recent survey, a majority (54 percent) of the parents said they’re worried that their retirement will be jeopardized by student loan debt. That survey was done for Citizens Financial Group which operates Citizens Bank and Charter One Bank.

“Households are feeling the pinch of higher tuition costs and it’s starting to impact other big things in their lives,” said Brendan Coughlin, president of auto and education finance at Citizens Financial Group. “Getting a college degree is still very much a part of the American dream.

"Parents are very aware and supportive of this, but they’re also very worried about the cost and how to pay for it.”

It’s not surprising that most parents (94 percent) said they feel an increased financial burden from their child’s college debt, according to this survey. What’s alarming is the fact that nearly half (45 percent) said they don’t have a plan to pay for that debt.

“People who have a financial plan for any sort of major expense are more likely to succeed,” said Robert Brokamp, editor of the Motley Fool Rule Your Retirement newsletter. “If you don’t have a plan for how you are going to pay off those loans, you’re just flying blind. It will take much longer and you’ll wind up paying more.”

Brokamp, a former financial adviser, thinks college financial planning should start well before your child is a junior or senior in high school and before you apply for financial aid or take out any loans.

“When it comes time to take out loans, look at who applies for them,” Brokamp said. “Kids will often be eligible for lower-rate loans and loans where the interest is tax deductable.”

Of course, free money is the best. Exhaust all sources of grants and scholarships before you start applying for loans.

“Parents who borrow to help their children pay for college should not borrow more than they can afford to repay in 10 years or whenever they retire, whichever comes first,” advised Mark Kantrowitz, senior vice president and publisher of Edvisors.com, a website that provides free information to families about financial aid and dealing with college costs.

Kantrowitz urges parents to save as much as possible before their child enrolls in college, because it’s so much cheaper to save than borrow. “When you save, you’re earning the interest; when you borrow, you’re paying the interest,” he said. “Every dollar you borrow will cost about two dollars by the time you pay back that debt.”

Keep in mind: Most financial experts advise parents to focus on their retirement first and their children’s college education second. “It may not be easy to do, but you have to pay yourself first and too many people get that backwards,” said Greg McBride, chief financial analyst at Bankrate.com.

“The kids can borrow to go to college, you can’t borrow to retire.”

Herb Weisbaum is The ConsumerMan. Follow him on Facebook and Twitter or visit The ConsumerMan website.

Excellent article about 401K's:

401(k)s face ‘crisis,’ says Nobelist Merton

By Anne Tergesen

Since the dark days of 2008, employers have taken some steps to fix the 401(k), the backbone of the nation’s private retirement-savings system. But Nobel laureate, Robert Merton, says that in the rush to upgrade these plans, plan sponsors and administrators have overlooked one big problem: They are managing these plans with the wrong goal in mind.

Bloomberg News

Merton says a crisis is coming for 401(k) investors.

“The seeds of an investment crisis have been sown,” the MIT professor of finance writes in an article in the July-August issue of Harvard Business Review, which was published Tuesday. “The only way to avoid a catastrophe is for plan participants, professionals, and regulators to shift the mind-set and metrics from asset value to income,” writes Merton, who won the Nobel Prize in 1997.

In recent years, employers have tried to improve 401(k)s by introducing features such as automatic enrollment and products including target-date funds. But in his article and in a recent interview with Encore, Merton said these moves weren’t likely to be sufficient. To fix the 401(k), he argues, employers and the financial services companies that manage these plans must get past the ongoing obsession with two things: Account balances and annual returns. These metrics, Merton says, are far less important than one other: The amount of sustainable income an employee can expect to receive in retirement.

By disclosing annual income, instead of (or in addition to) an account balance, Merton says, employers will help employees quickly and easily calculate how much of their annual salary they can expect to replace in retirement, together with Social Security. As a result, employees will be better able to take action to ensure they are on track to retire as planned.

But that’s only half the battle. In order to accurately calculate how much retirement income a participant’s 401(k) balance will purchase, the plan sponsor must assume the money will be invested in an inflation-adjusted deferred annuity or long-term U.S. Treasury bonds. These investments, Merton writes, ensure “spendable income” that’s “secure for the life” of the bond or annuity and are “the very assets that are the safest from a retirement income perspective.”

That’s not to say that 401(k) money shouldn’t be invested in stocks. In fact, Merton says, 401(k) investment managers should invest participants’ savings in a mixture of “risky assets,” including equities, and “risk-free assets,” such as long-term U.S. Treasuries and deferred annuities. Moreover, the investment manager should shift the investment mix over time to optimize the likelihood of success.

Employers, he says, should begin by asking employees not about their tolerance for investment risk, but about their expectations for income needs in retirement.

If the investments are managed well, the employee – upon retirement—should have enough money to buy a deferred, inflation-indexed annuity that (together with Social Security) will replace his or her salary in retirement. Retirees who don’t want to buy an annuity don’t have to. But once they achieve their retirement income goal, he says, they’d be foolish to leave their money at risk in the stock market.

“Think of risk as a tool,” he writes. “When you don’t need it, get rid of as much of it as you can because it’s costly. When we take a risk, it’s generally for a good reason. You wouldn’t normally put yourself in harm’s way for no reason.”