Retirement, the Financial Meltdown, Bailout and Bailout Failure -- Big Developments Impacting Seniors
Information on How the Financial Crisis Could Effect Retirement, Inflation, Savings, Pensions, IRAs, Housing, Insurance, Debt, Social Security, Medicare and More...
Retirees are seeing swings in their investments, declines in home values, uncertainty about the solvency of banks and insurers, threats of inflation, pressure from their own sources of debt and concerns about government’s ability to pay for bailouts as well as Social Security and Medicare.
Continue below for more information on these issues and how seniors can protect themselves.
What is the Credit Crunch and Why has it Caused Financial Meltdown? Mortgage Crisis and Subprime Crisis Spurred Meltdown
Everyone is talking about the credit crunch and financial crisis. But it is important to understand exactly what it is and how it happened.
- The current woes on Wall Street first started with a credit bubble and a corresponding decrease in lending standards. Low interest rates and the advent of subprime mortgages (mortgages issued to buyers who were much less likely to be able to pay off the mortgage) enabled more people to buy homes than ever before.
- The increased home buying also meant unprecedented increases in home prices -- since more people and more money were chasing a limited supply of homes.
- As home prices increased, many existing home owners borrowed heavily against their home equity.
- Banks who issued these mortgages and refinancing packages later resold them to aggregators who put them into big packages with thousands of other mortgages. Then those loan packages were chopped up and sold again as mortgage backed securities to many different kinds of institutions. The consumer’s loan payments were meant to provide the coupon (or payment stream) from these bonds.
- However, the inflated housing prices were unsustainable and the loan terms could not be met by many borrowers. As a result, the housing market began to collapse:
- Home prices are falling
- Homeowners owe more on their loans than their homes are worth
- Many homes can not be resold
- Unprecedented numbers of families are facing bankruptcy
According to Alicia Munnel of Boston College’s Center for Retirement Research: “The evidence suggests that the housing boom caused people to increase their borrowing, to extract equity from their homes and to raise their level of spending. The Federal Reserve Flow of Funds report shows total household debt ... soaring to 120 percent of income in 2007 (from 80 percent in the 1990s). Most of this debt is home mortgage debt. Essentially, the result was that people had more debt. If they had kept all the cash they took out, they'd be even. But they spent about a third of the cash, so they're less well-off.”
“For people approaching retirement, ages 50 to 62, we found that their net worth was 14 percent lower than it would have been without the housing boom.”
- With the collapsing housing market, banks no longer know the value of their mortgage-backed assets. They are holding assets (a share of your home loan) but they don’t know how much it is actually worth now nor what it will be worth next year or in 30 years.
- Because banks don’t know the value of their current assets, they don’t know how much they can lend – both to homebuyers as well as to small businesses, big corporations, everyone. The banks also don’t know which of the other banks they do business with might hold these toxic securities and as a result the banks don’t want to lend to each other.
In summary, the financial crisis is happening because banks don’t have a firm grasp on what kind of assets they own and as such, they can not conduct business. The great fear is the fact that the current credit crunch will become a self fulfilling prophecy, because credit is the lifeblood of the US economy. Since credit is less available now the overall economy has slowed down as most businesses which depend on credit to finance their day to day operations have to cut back to the limited credit available.
What is the Congressional Bailout? Will it Work to Solve the Financial Crisis?
The Congressional bailout is a plan for the government to commit to buying initially $350 billion and up to $700 billion in troubled assets – monies linked to mortgages -- from financial firms.
The hope is that this would free the firms’ balance sheets of bad or unknown debts and enable banks to return to the business of lending and trading assets. The economy can continue functioning. The plan does provide for constraints on executive pay, gives government a shareholder stake in firms that sell them securities and – maybe of most interest to retirees -- has a requirement that the government take more aggressive home foreclosures.
The Bill which passed in the Senate on Oct. 1 was amended to include:
- Tax breaks for businesses and the middle class
- A provision to raise the cap on Federal deposit insurance from $100,000 to $250,000 (This is an attempt to reassure small businesses and individuals that their money would be safe – insured by the Federal government – if their bank collapsed.)
Other provisions -- $110 billion in “sweeteners” -- were added in an attempt to make the bill attractive to certain constituencies – particularly Republican congressional representatives. The bill keeps the alternative minimum tax from hitting 20 million middle income Americans. It provides $8 billion in tax relief for those hit by natural disasters in the Midwest, Texas and Louisiana. Help for rural schools was included. Texas and Florida who don’t have income taxes got to extend the deductibility of state and local taxes. People with mental illness got better health insurance coverage….
Lingering Concerns: The remaining concerns are that the plan does not really solve the fundamental problem of declining home values and too much consumer, corporate and government debt. It is also debatable whether it is actually enough money to shore up the financial system and whether or not banks will be willing to sell their bad debt given the constraints. Furthermore, it is unclear if the government has the skill set necessary to administer such a program.
These are critical issues facing retirees.
Will the Financial Crisis and Declining Home Values Effect Retirees?
Simply put, the answer is a BIG YES.
For most retirees, their home is their biggest financial asset. For example:
- Among middle-income baby boomer homeowners, home equity accounts for fully half of their net worth.
- For Americans age 65 or older, home equity accounted for about 80 percent of their median net worth in 2002.
- Worse yet, for those over 75 years of age, home values represent 86 percent of their net worth.
The study, “The Impact of the Housing Crash on Family Wealth,” analyzed the wealth holdings of families in all age cohorts in 2004 and projected the wealth of these families in 2009. The findings are presented by income quintile under three scenarios...”
“In all three scenarios, the vast majority of these families will have little or no housing wealth in 2009...”
“This extraordinary destruction of wealth will have tremendous implications for millions of families,” said report co-author Dean Baker. “Coupled with a very low personal savings rate, this means that many people, especially those near retirement will only have Social Security and Medicare to rely on once they leave the workforce.”
So YES -- Declining Home Values Could Have a Massive Impact on the Financial Well Being of Retirees
The housing boom began in 2000 and many homeowners felt that the boom set them up for a better retirement. The problem is that their wealth was only on paper.
However, the perception of wealth caused many retirees to borrow against gains in their house that have rapidly disappeared or that may disappear. And those that spent those borrowed funds are in worse financial shape now than before.
What Can Retirees Do About Declining Home Values?
The reality of today’s economy is grim. Government, corporations, small businesses and everyday Americans are going to have to spend less and figure out ways to earn more.
More and more seniors are delaying their retirement or returning to work -- which can actually have emotional as well as financial benefits.
Other retirees are exploring ways to help make ends meet by safely tapping their home equity now – without incurring additional debt.
Is Now a Good Time for a Reverse Mortgage?
The financial meltdown is freezing credit markets. The good news for retirees is that Reverse Mortgages are still being issued in large numbers, since they are FHA insured and ultimately purchased by Fannie Mae.
There may be some good reasons to do a Reverse Mortgage now rather than later. Here are a few developments to consider – both pros and cons:
- Falling Home Prices: By locking in a Reverse Mortgage now, you might get more money out of your home than you could if home values drop further.
- Swings in Interest Rates: Although the interest on a Reverse Mortgage is built into the Reverse Mortgage financing, it is still a big factor on your loan. Reverse Mortgage interest rates neared a low point recently, but are fluctuating daily as the current financial crisis plays out in Washington and Wall Street. A Reverse Mortgage lender can talk with you about currently available rates and where they are forecast to go. In addition, there are also Fixed-Rate Reverse Mortgages now available from some lenders.
- No More Jumbo Reverse Mortgages: The credit crunch has all but eliminated Jumbo Reverse Mortgages for the time being. These loans had enabled owners of higher than average valued houses to borrow more of their home equity.
- Potential for Inflation and Other Rising Costs: The financial crisis has signaled inflationary pressures. Retirees living off a fixed income are particularly at risk during inflationary periods. While Social Security adjusts with inflation, most other income sources do not. Many seniors will face increased income needs and a Reverse Mortgage is one of the least restrictive ways to get cash out of your home to use for retirement expenses, since it doesn’t depend on your credit score or income.
- Lending Limit on HECM Raised Significantly: The FHA announced a huge increase in the maximum loam amount available to Reverse Mortgage borrowers. The new lending limit is, for this year (2009) only, $625,000. Depending on the current value of your home, you could now be eligible for more money than you were before.
Connect with a Prescreened Reverse Mortgage Lender to Discuss these advantages and disadvantages and get an up to date quote, now.
What About Alternatives to Reverse Mortgages?
Numerous alternatives to Reverse Mortgages exist to help seniors extract some of their remaining home equity for living expenses.
Are There Financial Crisis Ramifications for Social Security and Medicare?
The future for government programs is far from certain.
As you may be aware, many experts believe that the government does not have the money necessary to adequately fund Social Security or Medicare for the baby boomer generation. And this was before the current financial meltdown and costly government bailouts of Fannie and Freddie, AIG and firms holding mortgage-backed securities.
For more analysis on the threats to Social Security and Medicare solvency, continue here:
Changes to Social Security,
Shortcomings of Social Security,
Rising Medical Costs,
Serious Medical Crisis.
Pensions and the Financial Crisis
There is indeed bad news for pensions in this Financial Crisis. Many pension funds – the funds that are designed to protect retiree’s money – hold mortgage backed securities.
The mortgage backed securities are the asset that is causing the vast uncertainty in the financial markets.
If you are lucky enough to have a pension, there may or may not be reason to be concerned. Pensions can provide a fantastic source of reliable income in retirement. And the bailout could provide the necessary backstop to help government and banks value those assets and keep the pension fund solvent.
The good news on pensions is that they are managed by experienced financial experts who have probably diversified the overall portfolio to manage risk. However, you may want to contact your pension fund administrator to discuss the viability of your benefits.
How to Protect Your Assets in a Financial Crisis. What to Do About Your Investments.
Unfortunately, it is not only housing values that have been impacted by the credit crunch.
The stock market and most everyone’s retirement accounts have been on a roller coaster.
Many retirees are wondering if they should shift their assets from one financial vehicle to another, sell, buy or stay put.
Retirement investments and their security are dependent on a wide range of factors, including:
- The risk profile of the stock(s), bond(s) or fund(s) in which you are invested
- Your time horizon for needing that money
- The percentage of your wealth in different types of investments -- your diversification
- Whether you have retirement income needs dependent on that money or not
- And much much more...
Your best bet – although by no means an ironclad protection – is to work with a Retirement Financial Advisor. You would probably do well to talk with an advisor who can take a holistic approach to analyzing all of your assets and all of your retirement goals to create the right mix of investments, savings and investment draw downs, insurance products and more.
NewRetirement can match you to a prescreened advisor.
Are Your Retirement Savings Safe in a Bank?
Wachovia, Indymac, Washington Mutual and other banks have been on the brink of failure, failed or have been bailed out from failure at the last minute.
Americans and seniors in particular have been concerned about the solvency of their assets held in banks.
The good news is that deposits in most banks are government insured. And, Congress is trying to increase the federal insurance on bank deposits to $250,000 from $100,000. Furthermore, a bank run is the exact kind of crisis that the Federal bailout and all current maneuverings and worries are trying to avoid.
If you are concerned about your assets, you should probably consult with a Retirement Financial Advisor. A qualified advisor should be able to diversify your holdings to make them as safe as possible.
To connect with a prescreened Retirement Advisor, continue here.
What About Insurers and Insurance? Annuities, Long Term Care and Other Insurance Products for Seniors
Any insurance product is only as good as the company that stands behind it and makes those guarantees.
It is important to note that annuities can be an important part of a retirement plan – especially inflation protected lifetime annuities which provide guaranteed lifetime income. Again, a qualified Financial Advisor can advise you on which insurance products you might need.
To connect with a prescreened Retirement Advisor, continue here.
What is Inflation and How Does it Impact Seniors?
Most people underestimate the impact inflation will have on their retirement plans. Even at relatively low rates, inflation is a real thief of buying power over time. Most experts feel safe recommending that individuals calculate their retirement needs using a 3 percent inflation rate. But, it is important to understand that we have seen (as in the late seventies and early eighties) sustained inflation rates of around 10 percent!
The really bad news is that government’s increasing debt load due to the financial bailouts may trigger an inflationary period.
For more information about inflation, continue here.
You may also wish to consider ways to boost your income without incurring additional debt.
A retirement job can be both interesting and financially rewarding.
Many seniors are also turning to a
Reverse Mortgage
or
Downsizing
as a way to make ends meet.
What to Do About Your Own Debt?
At a top level you want to make sure that any debt you have is optimally structured – meaning that you are paying the lowest interest rate and have the best terms possible.
For example – say that you have $20,000 in credit card debt that you are paying 20 percent interest on annually – you would be pay $4,000 a year just for interest on this debt. If you own a house and could get line of credit – which would most likely be a much lower interest rate – the payments on the home equity line would also likely be tax deductible.
And, retiring with debt is probably not the best idea. The average person retiring today carries over $6,000 in high interest credit card debt into retirement. Paying just the minimum payment will consume a total of over $22,000 over a period of 20 years. By comparison, a person taking advantage of debt consolidation could pay off the same debt, with same monthly payments in just 6 years and with a total of only $6,760.
Learn more about debt here.
For debt consolidation advice, NewRetirement can connect you with a home equity lender to discuss a Home Equity Loan.
