< I am fed up with most large (as in “to big to fail”) financial institutions. You should be too. Do not let yourselves be burdened with more monthly financial overhead.

Yes, I understand that the average consumer checking account is not a profit-maker for the mega-banks. In that sense, you can reasonably conclude that the new fees are intended to drive you away.

So let it work.

The obvious course of action is to find a bank that does not (yet) charge fees for a checking account. Some folks are not making this move because they believe that after they change banks, their new bank will also add fees. That’s probable, if you choose another large bank. But there are plenty of options in smaller banks.

The  big bank account  fees are being imposed because of new federal banking regulations that limit fees (“interchange fees”) that can be charged by the banks to retailers for debit card transactions. Those regulations exempt banks that have less than $10 billion in assets.  Thus, the smaller banks (if you consider $10 billion small) do not feel the pressure to increase fees. I am sure you can find plenty of those in your community and online. We did.

A good place to start looking is to read my earlier post on rewards checking accounts.  I updated this post based on our one year experience with our community bank.

Don’t procrastinate. Moving to a smaller bank can be a win-win proposition, with no fees and higher earnings on your deposits. Good hunting!

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According to a recent article from the Wall Street Journal, 40% of households headed by a person aged 60-64 have a first mortgage. This is an increase from just over 20% of similar households in 1974. Although the percentages have flattened out since 2008, that’s of little consolation for those who are getting older but not less in debt.

But the bad news about pre-retirees and mortgage debt doesn’t end there. The average balances on the mortgages owed by older boomers has also increased over the years. Amazingly, 20% of these same folks had second mortgages or home equity loans with balances!

What is going on?

The personal anecdotes reported in the story are revealing. One couple is sacrificing their retirement saving so that they can continue to live in the same expensive neighborhood. In fact, when they could no longer rent the home they were in, they bought another one instead! At the same time, they almost completely stopped contributing to their retirement plans. Supposedly, they are doing this for their son. I suspect that a stubborn refusal to accept reality is also a factor. I wonder what the son will think when Mom and Dad are 70 – and broke.

There are ways other than negative cash flow to get trapped by a mortgage. Loss of freedom to move or downsize can occur if that mortgage balance exceeds the value of your home. This is an all too common occurrence in today’s economy. You can no longer assume that the home you bought in 2005 will be worth more in 2015.

People really struggle to break free from the debt-driven consumption habits they were taught by banks, retailers, and credit card companies over the past three decades. At age 60, reason needs to take over. Don’t you think?

Here is a link to the WSJ article. You may need to be a subscriber to read the entire piece. (I read it in paper form.)

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This morning, I came across an article that does a very good job of summarizing the  pros and cons associated with the use of a reverse mortgage in retirement. In fact, reading just this quote can give you a good feel for the reverse mortgage industry:

Reverse mortgages are full of pitfalls and they are very expensive — but they are very valuable to the people for whom they work. If you are sitting on a mortgage and you can afford to make payments on it, and have home equity and other assets, this is probably not a good idea. But if you are 85 years old and have $250 a month in income and a $500,000 house, it’s a great idea no matter how much it costs, because the lender will give you money you don’t otherwise have.

For those retirees who might fit into that last sentence, there is probably a better approach but it requires foresight and advance planning. That approach is to sell that $500,000 house before you become 85 and broke, move into something more affordable (or rent), and use the equity to generate income. Heck, at age 85 you don’t need to generate income. Just put the cash in some CDs and spend it as needed.

The article makes another important point. Many seniors are tempted by sales pitches that tell them to use a reverse mortgage as a source of cash to buy cars and take vacations. That is a bad idea, again because of the cost. Your $5,000 vacation could cost you $10,000 in lost equity and fees.

A final thought and warning, again from the article: A reverse mortgage becomes payable in full if the retiree fails to pay property taxes and homeowners insurance, or neglects needed repairs on the house. According to the National Consumer Law Center, those scenarios are becoming more common. This means it is extremely important that the retiree have income and cash reserves available to take care of all the other financial obligations of home ownership before considering a reverse mortgage.

Here is the link to the full article: Reverse Mortgages: Do the Benefits Outweigh the Risks?

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The mortgage lending problem for condominiums begins with the principle that most conventional mortgages are sold on the secondary market and/or may be insured by the F.H.A. This means that no matter who you are talking to about a loan for your condo purchase, that lender or broker will likely be subject to lending standards imposed by Fannie Mae and/or Freddie Mac and/or the F.H.A. Because of the mortgage default and foreclosure crisis of the past few years, those organizations have tightened their lending guidelines, particularly for the hard-hit condo market.

Let’s review some of these new guidelines:

• Fannie Mae ordinarily will not buy a condo loan from a lender if more than 15 percent of the owners in the condo development are 30 days late on monthly maintenance fees.
• Condominium associations must set aside 10 percent of their budgets for maintenance and reserves.
• New condo developments (like ours) are ineligible for Fannie Mae or Freddie Mac financing unless 70 percent of the units have either sold or are under contract.
• The F.H.A. requires that at least 50 percent of a building’s units belong to owners who occupy their units, and that no more than 10 percent are owned by a single investor.

Waivers of these requirements can be sought but I wouldn’t hold my breath.

We were aware when we bought our condo that obtaining conventional financing could be a problem, because we were the very first buyers in the very first condo building in our development. We also knew that we would not need a conventional loan. Instead, we arranged with the community bank that financed the entire project for the developer to give us a 20 year loan with a three-year balloon payment. This loan is kept in-house by the bank so the guidelines summarized above did not apply. Our plan is to pay the condo loan off in full before the balloon payment is due, when we sell our house here in Nashville.

A smart condominium developer will arrange for buyer financing ahead of time so that these new lending standards don’t cause trouble. Prospective condo buyers should be beware, however, and make sure that they have a well-crafted financing contingency in their purchase contract.

Here is a link to a longer article discussing these new condo lending standards: Stricter Lending Guidelines for Condos

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Significantly, 39% of survey participants now define “financial success” as being debt-free.

Another 29 percent defined “financial success” as being able to save money for long-term goals such as education and retirement.

The definition varied significantly by age. For example, 51 percent of those in the 65+ age group defined financial success as being debt-free. Only 30 percent of those in the 18-34 age group adopted that definition. My guess is that the older Americans are more likely to be debt-free when surveyed. This made it easy for them to equate that to financial success.

The younger adults are more likely to have considerable debt and therefore don’t want to use a definition that immediately brands themselves not successful. I’ll bet that many of them rate financial success as having a good credit score. That’s a sad way to look at it.

What surprised me was that there was no apparent mention of measuring financial success by net worth. That metric takes into account your level of debt but as a factor compared to your assets. Many baby boomers are still carrying mortgages but may have substantial equity and a downsizing plan to use that equity for a mortgage-free retirement. A substantial positive net worth enables this and results in a debt-free retirement. I would consider that scenario financial success.

If you were asked to define “financial success” as a survey participant, how would you answer?

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First, here are three important reasons why you can ignore the new rules:

1. You won’t carry a balance. Instead, your card balance will be paid in full each billing cycle. This means that you don’t care what the account interest rate is or will be because none of that interest will apply to you. Your card issuer may have increased the nominal interest rate on your card (or made it a variable rate) in anticipation of the new rules, but so what? Let the card companies make their money on the young and irresponsible cardholders, not on you. This also means that you can choose the card with the lowest (or zero) annual fee and best rewards program for you, disregarding the interest rate.

2. You won’t pay late. Because the new rules will make it somewhat harder for the card issuers to raise interest rates in the future, they will find other ways to make money from cardholders, including late fees. You won’t care about late fees because you have automated payment of your credit card balance every month, on time.

3. You won’t overcharge. The credit card companies may lower limits on your cards. You don’t care because you always stay well below your card limit. If your balance is close to your limit at the wrong time, your credit score could be negatively affected. Also under the new rules, the card companies can no longer automatically allow you to charge over the limit and then hit you with over-limit fees. You may opt into continuing this practice, but you won’t, because you won’t need to.

Three things to watch for in the new credit card rules:

1. New Annual Fees. Your bank may try to impose an annual fee on your previously “free” card, to compensate for their inability to make money in other ways. Don’t let them do it. Call and complain. You are a good customer and don’t deserve that treatment. If they persist, find another card. There will be competition for the best customers. That’s you. Let the bank make money from the transaction fees.

2. Sneaky account fees. Many industry watchers are predicting that banks will become more creative in imposing fees, such as a fee for not charging enough each month. Make sure you read everything that is sent to you and that is printed on your statement. Do not let the bank get away with these sneaky fees. Threaten to cancel your card and even move your banking business if necessary. The card-issuing bank makes money every time you swipe your card so don’t fall for any sneaky fees.

3. Lowered credit limits. This is another tactic that a bank might try, even on longstanding accounts. The important task for you is to be aware of it, so that you can be sure to stay well under the limit at all times.

The bottom line is that the new credit card rules were created to help people who carry balances. Those people are not you. You are thinking about and planning for retirement. Consumer debt is incompatible with a successful retirement. Even mortgage debt is a risk. Don’t you agree?

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Part of the mystique and emotional attraction of home ownership is the ability to fix it up just the way you like. As you age, that would seem to be less important, because of the time and cost commitment. If you already own the home mortgage free, then keeping it can be a logical move if you don’t need the equity to generate retirement income.

But as this article points out, renting is another way to be mortgage free in retirement. The benefits are many: fewer maintenance costs; less time spent on household tasks; more financial freedom to relocate on short notice; more money to invest in income producing assets. Once you free yourself from the notion that homeownership is compulsory for a secure or contented retirement, renting can make more sense than buying.

It used to be taken for granted that a single family home would appreciate in value over time, even during a short time interval. We know from recent economic events that this is a false and even financially dangerous assumption. Instead of making a rent or buy decision on false assumptions, it makes more sense to run the numbers based on your own situation and living options.

I recently came across this helpful “rent or buy calculator.” The calculator takes into account rent escalation, taxes, mortgage costs, insurance, selling expenses, and that all important “home maintenance” cost category. It uses these numbers to generate a financial gain vs. time curve, comparing buying to renting. In other words, it helps you determine where the financial break-even point might be, based on how long you might be living in that residence. The biggest wild card in the calculation is your estimate of how much your home will appreciate in value each year. I would run the break-curve for different appreciation rate estimates, including a scenario where home prices stay flat.

We own a home that is paid-for. Our current plan is to keep that home and leave it as a legacy to our sons. That may not be the best financial decision for us, but it provides numerous intangible benefits.

Have you made a decision about renting or buying a home when you retire?

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The essential findings of the survey were that 63 percent of Americans say that the way they spend and save has been permanently altered by our economic downturn. Conversely, only 29 percent said that their spending and saving would revert back to the way it was before the recession hit.

The answers to the more specific survey questions about current spending and saving habits were compelling:

• 75% of survey participants have cut back their everyday expenses.
• 62% have reduced credit card purchases.
• 57% have reduced their level of debt.
• 53% have delayed purchasing a major item such as an automobile.
• 42% are using savings or investments to pay expenses. (Ouch!)
• 34% are saving and investing more. (Yes!)

These same folks were asked similar questions about their future spending and saving plans:

• 59% will continue to reduce everyday expenses.
• 60% will continue to save and invest more.
• 61% will continue to pare back their credit card purchases.
• 63% will continue to reduce the amount of money they owe.

In the past, we baby boomers have been criticized for our spendthrift ways and making ourselves unprepared for retirement.

I hope that these survey findings apply to us. In fact, I hope that baby boomers are even more determined than ever to maintain better spending and saving habits. We don’t have as much time to recover from the economic damage. Therefore, our level of diligence should be increased to compensate.

What about you? Have your spending and saving habits permanently changed for the better?

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According a new report from the Center for Retirement Research, in 2007 41% of households aged 60-69 had a mortgage. Remarkably, half of those mortgage debtors had sufficient assets to pay off their mortgage.

So why would a baby boomer not pay off a mortgage, even when having the resources to do it?

Let’s consider the possible arguments.

1.  I can earn more with my money in the stock market. I don’t believe this is a reasonable position for a baby boomer to take. Your return on investment in a mortgage pay-off is the interest rate on your mortgage. This is a guaranteed return. (Yes, there are some tax benefits from a mortgage but those are minimal for retirees – see below.)

Assuming that you have a 6% mortgage interest rate, do you really think that you can earn 6% year after year in today’s stock market? Recent events suggest otherwise. Also, what happens if you make a huge investing mistake and lose a lot of needed retirement income from those invested funds? You place your home at risk if you can’t make the payments.

If you want to compare apples-to-apples in the “invest vs. mortgage payoff” equation, use risk-free Treasury bonds or CD’s.  In other words, compare a 6 percent mortgage with a five-year bank CD yielding less than 3 percent or a 10-year U.S. Treasury bond yielding 3.5 percent. Bingo – mortgage pay-off wins.

Adjusting potential market returns for risk, the mortgage payoff seems like a slam dunk. The article I cited reached the same conclusion.

2. I need financial liquidity. Some folks hesitate on a mortgage payoff so that they can have money in more liquid assets, “just in case.” My question is: In case of what? If you are planning for retirement, you want cash flow freedom, meaning low recurring expenses in retirement that require income to meet. A paid-for house provides that, netting you tax-free phantom income (shelter services) at no monthly mortgage cost to you. If you ever have an emergency need for funds or income, you can probably obtain a HELOC or a reverse mortgage.

3. I can save on taxes by keeping my mortgage. Maybe – but probably not enough to justify keeping the mortgage. First, your marginal tax rate in retirement is likely to be lower. Second, most baby boomers are probably well into the length of their mortgage, meaning that the amount of deductible interest you are paying has declined. Third, a married couple in retirement receives at least $11,400 in standard deductions. Will your mortgage interest exceed that? Probably not, or not by much.

Final Thoughts on Mortgages in Retirement

Many financial planners believe that retiring debt-free is so important, they recommend that we work longer just so we can make that happen. The arguments in favor of keeping a mortgage are weak. Add in the emotional well-being associated with a stress-free, mortgage free life, the pay-it-off option is a winner in my book.

Photo credit: Aaron-H

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The Present and Future of Credit Card Terms

A 2009 study of the major credit card issuers by Bankrate.com provides some sobering conclusions about the future of credit card accounts. Here are some important points to consider from the study:

1. The average credit card Annual Percentage Rate is likely to increase in the coming months, from today’s 10.8% to as high as 15% according to some analysts.

2. All card issuers will raise your card interest rate if you violate any term of the card agreement. Some will raise your rate for any reason, including problems with other credit accounts that you have.

3. Card account fees remain major profit sources for the issuers, including late fees ($20-$39 depending on your balance) and over-limit fees (average $32).

4. Balance transfer and cash advance fees remain high and for some, are going higher, e.g., 3%-5%.

5. Last minute payments by phone will also cost you, typically $12-$15. Ouch.

6. Payment grace periods range from 20-25 days. But remember that there is no grace period if you carry a balance. Interest accrues from the day of the charge for those folks. Also keep in mind that all of the credit card issuers apply payments to the lowest interest rate balances first, leaving the highest interest rate balances to accrue more interest.

If you are wondering what happened to all of the federal credit card reform legislation, most of that doesn’t take effect until February 2010. Even then, plenty of loopholes remain that can cost you plenty.

Credit Card Pay-Off Strategies

To me, the best strategy for a baby boomer to consider in paying off credit card debt is this: ASAP. We are close to retirement and we are at greater risk from job loss. What other reasons do you need?

To help you determine when and how to pay down and eliminate that credit card debt, try these two payment calculators:

• The Bankrate Minimum Payment Calculator lets you plug-in balances, interest rates and payment amounts for multiple credit card accounts. The calculator output tells you when you will be finished with all of them. It may scare you but it won’t help not to look.
• The Federal Reserve Bank has a simplified credit card payment calculator. It will help you determine a payoff schedule and/or payoff amount for your particular circumstances.

Final Thoughts on Baby Boomers and Credit Card Debt

There is very little to like about credit cards in general and nothing to like about carrying a balance. It is so important that boomers get out of the debt business and particularly unsecured debt. Get busy and good luck.

Photo credit: iDanSimpson

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