Tag Archives: financial planning

Should Seniors Pay Off Their Mortgages?

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photo by Andreas Lehner

TheStreet.com quoted me in Should Seniors Pay Off Their Mortgages? It opens,

Increasingly, seniors are going against the conventional retirement wisdom about mortgages which, always before, preached that a cornerstone of a good retirement was to enter it debt free. That meant without a mortgage.

And yet about one-third of homeowners 65 and older have a mortgage now. That’s up from 22% in 2001. Among seniors 75 and older, the rate jumped from 8.4% to 21.2%.

The appeal, of course, is that home mortgages are cheap; 30-year fixed-rate loans are going out under 3.7%, and 15-year fixed rates can be had for 3.1%.

That puts the question in sharp focus: is this good financial planning or is it reckless?

Understand: age discrimination is flatly illegal in home loans. But law does not dictate financial prudence and the question is: is it wiser to pay off a home mortgage if at all possible – which used to be the prevailing wisdom? That still brings a sense of relief, too. Tim Shanahan of Compass Securities Corporation in Braintree, Mass. said: “It’s a great feeling to have no debt and a significant accomplishment to be able to tear up the mortgage.”

True.

But is this still the smartest planning? As more seniors take on home mortgages, experts are re-opening the analysis.

“The short answer to the question is it depends,” said certified financial planner Kevin O’Brien of Peak Financial Services in Northborough, Mass. O’Brien is not being cute. So much of this is individual-centric.  O’Brien continued: “It depends on how strong the person’s cash flow is or not. It depends on how much liquid savings and investments they have after they might pay it off. It also depends on the balance they need to pay off in relation to their sources of cash flow, and liquid assets.”

Keep in mind, too: today’s retirement is not yesteryear’s. About one senior in four has told researchers he plans to work past 70 years of age. That means they have income. Also, at age 70, a person has every reason to claim Social Security – there are no benefits in delaying – so that means many 70+ year-olds now have two checks coming in, plus what retirement savings and pensions they have accrued.

That complexity is why Pedro Silva of Provo Financial Services in Shrewsbury, Mass offered nuanced advice: “We like to see clients go into retirement without mortgage debt. This monthly payment can be troublesome in retirement if people are using pre-tax money, such as IRAs, to pay monthly mortgage. That means that they pay tax on every dollar coming from these accounts and use the net amount to pay the mortgage.”

“If clients will carry a mortgage, then the low rates are a great opportunity to lock in a low payment,” Silva continued. “We encourage those folks who don’t foresee paying off their home in retirement, to stretch the payments as long as possible for as low a rate as possible.”

David Reiss, a professor at Brooklyn Law and a housing expert, offered what may be the key question: “I think the right question is – what would you do with your money if you did not pay off the mortgage? Would it sit in a savings account earning 0.01% interest — and taxable interest, at that? Paying off your mortgage could give you a guaranteed rate that is equal to your mortgage’s interest rate. So if you are paying 4.5% on your mortgage and you take money from your savings account that is not spoken for — like your emergency fund — you would do way better than the 0.01% you are getting in that savings account, even after taxes are taken into account.”

 

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Multifamilies for Retirement Income

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photo by Laurent Montaron

Financial Advisor quoted me in More Retirees Turning To Multifamily Homes For Income. It opens,

Many clients are investing in multifamily residences as a way to generate retirement income.

“A common way for people nearing retirement is to buy a triplex or fourplex, live in one unit and rent out the others,” said Keith Baker, a financial advisor and professor of mortgage banking at North Lake College in Irving, Texas. “They sell their home and use the equity they have built up to do this, and if they still owe some debt, it will be paid down more quickly.” Among the best multifamily properties to acquire for supplemental income is one that has separate entrances with no shared common areas so that each family has their own space, according to Michael Foguth, a financial advisor in Brighton, Michigan.

“Townhomes are very popular,” Foguth told Financial Advisor. “Also popular are duplexes where you have one unit on the ground level and one unit on the second level.”

But clients should not spend so much money to acquire a property that their retirement income ends up undiversified. “If the bulk of your retirement income is tied up in one property, you are exposed to natural disasters like floods as well as economic downturns in that market,” said David Reiss, a professor at Brooklyn Law School who teaches real estate finance.

An alternative to buying a property is modifying an existing residence with the intent of renting out rooms on websites like AirBnB or HomeAway. “You would need to make sure that deed restrictions, zoning and city ordinances allow this,” Baker said. “It also will require property insurance and additional liability coverage.”

When a multifamily rental property is also a primary residence, a portion of the mortgage is tax deductible, according to Carla Dearing, CEO of SUM180, an online financial planning service. There may also be the opportunity to leverage tax benefits like depreciation.

“Selling your home and taking out a loan on a rental four-unit apartment complex allows you to deduct from your income the pro-rated interest expense along with the depreciation expense of the portion of the units you don’t live in so that much of the income is sheltered,” Baker said.

Over time, the income support received from a rental property can be greater than the interest income from investing in the stock market. “You’re likely to receive a nice stream of income when you are renting to people with guaranteed incomes,” said James Brewer, CFP, in Chicago. Nationally, the average price-to-rent ratio is 11.5, meaning that the average property owner is buying a property for a price of 11.5 years worth of rent, which is an estimated 8.7 percent yield on her investment, according to data from Zillow.

A house that cost $200,000 should bring in $1,450 per month in rent using the national price-to-rent average, according to Matt Hylland, an investment advisor with Hylland Capital Management in Virginia Beach. That’s compared to 10-year government bonds, which yield 1.7 percent and the S&P 500 index, which yields about 2 percent.

“But this 8.7 percent is before any costs,” Hylland noted. In other words, clients who add rental property to their portfolios should also add cash to their emergency funds so that have money on hand to maintain and repair the house. “If the roof needs replacing, do you have $5,000 available to fix it?” asks Hylland.

Ideally, a multifamily acquisition will be move-in ready. “Homes that require construction or renovation can easily turn into a money pit, costing twice what you estimate up front,” Dearing said.

When Should Millennials Buy?

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photo by Richard Foster

SelfLender’s personal finance blog quoted me in When Should You Start Worrying About Buying A House? It opens,

If you’re a young person, then you’re probably already familiar with the fact that younger generations are more hesitant to purchase a home than previous generations.

Times are much different than when your parents were worrying about buying a house for the first time. In the “olden days,” the traditional life plan was set in stone: get married, buy a house, raise a family.

Fortunately (or unfortunately), young people aren’t jumping into homeownership within the same timeline as the generations before did, which is causing a stir amongst the real estate and financial industries.

What’s more bothersome is that many young people are having trouble gauging when they should actually start worrying about becoming a homeowner.

The answer is: it depends.

Figuring out when to buy a house is different for everyone. There is no set age that signals the right time. There are, however, financial and lifestyle signals that will help you make an educated decision on when you should, if at all, purchase a home.

The following is our rough guide to figuring out if homeownership is right for you or if you should continue renting.

Homeownership is Long Term

Purchasing a home is not for everyone. Especially for people who like to move and travel. Unless you’re able to pay for your house outright in cash, then purchasing a home might not be a good idea for someone who has been known to move around frequently.

Lauryn Williams, four-time Olympian and owner of Worth-winning.com, a financial planning company for young professionals and professional athletes, says that millennials love traveling and moving around. Just take a browse through Instagram and count the amount of selfies in exotic locations.

“My tip would be not to buy a home, because it seems to be ‘the next logical’ step in life,” says Williams. “Think about your lifestyle and whether homeownership is truly for you.”

You need to think long term about whether or not you’ll be in the same place that you’re buying your house.

Maybe you don’t travel much, but is your current job security good enough to keep you in one location for more than a few years? What if you get a better job offer that would require you to move?

The traditional career path in America is to graduate school, find a company and stay with that company for your entire life, which is not the case today. Millennials are more likely to switch jobs than previous generations.

“When people are thinking about settling down for five or more years in one location, they should start to seriously think about owning over renting,” says David Reiss, a Professor of Law at Brooklyn Law School.

Who Knows The ABCs of Finance?

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Annamaria Lusardi recently posted a working paper, Financial Literacy: Do People Know the ABCs of FInance? to SSRN. The abstract reads,

Increasingly, individuals are in charge of their own financial security and are confronted with ever more complex financial instruments. However, there is evidence that many individuals are not well-equipped to make sound saving decisions. This paper looks at financial literacy, which is defined as the ability to process economic information and make informed decisions about financial planning, wealth accumulation, debt, and pensions. Failure to plan for retirement, lack of participation in the stock market, and poor borrowing behavior can all be linked to ignorance of basic financial concepts. Financial literacy impacts financial decision-making, with implications that apply to individuals, communities, countries, and society as a whole. Given the lack of financial literacy among the population, it may be important to remedy it by adding financial literacy to the school curriculum.

As I have stated previously, not only is financial literacy in bad shape, but efforts to improve it have not proven to be very effective. Lusardi’s paper has some sobering findings:

most individuals in the United States and in other countries cannot
perform simple calculations and do not understand basic financial concepts such as interest compounding, the difference between nominal and real values, and risk diversification. Knowledge of more complex concepts, such as the difference between bonds and stocks, the workings of mutual funds, and basic asset pricing, is even scarcer. Financial illiteracy is widespread among the general population and particularly acute among specific demographic groups, such as women, the young and the old, and those with low educational attainment. (3)

Because evidence does not demonstrate that additional financial education is all that effective, I take a different lesson from Lusardi’s review of survey results. The government should take an active role in regulating financial markets to protect consumers from abusive behavior and to encourage them to make good financial decisions. Financial education is no replacement for consumer protection.