Retirees: Monetary Fear Is Their Reality

September 23, 2008
Retirees Filling the Front Line in Market Fears
By JOHN LELAND and LOUIS UCHITELLE, New York Times

Older Americans with investments are among the hardest hit by the turmoil in the financial markets and havethe least opportunity to recover.

As companies have switched from fixed pensions to 401(k) accounts, retirees risk losing big chunks of theirwealth and income in a single day’s trading, as many have in the last month.

“There’s a terrified older population out there,” said Alicia H. Munnell, director of the Center for RetirementResearch at Boston College. “If you’re 45 and the market goes down, it bothers you, but it comes back. But if you’re retired or about to retire, you might have to sell your assets before they have a chance to recover. And people don’t have the luxury of being in bonds because they don’t yield enough for how long we live.”

Today’s retirees have less money in savings, longer life expectancies and greater exposure to market risk than any retirees since World War II. Even before the last week of turmoil, 39 percent of retirees said they expected to outlive their savings, up from 29 percent in 2007, according to a survey by the Employee Benefit Research Institute, an industry-sponsored group in Washington.

“This really highlights the new world of retirement,” said Richard Johnson, a principal research associate at the Urban Institute in Washington. “It’s a much riskier world for retirees, because people don’t have defined benefit plans. They have pots of money and they have to worry about making it last.”

Carol J. Emerson, 65, sees herself as particularly vulnerable. Her annual income of $50,000 comes almost entirely from dividends, and she says she is worried that as her stocks decline, some of those dividends will fall, too.

“If I were guaranteed that the dividend would remain unchanged, I could ignore that the underlying value of my stocks has eroded,” she said. “But that is not the way it works. If the value of the stocks doesn’t go up again, there are not a lot of companies that can keep on paying a 16 percent dividend.”

Nevertheless, Ms. Emerson decided to push ahead last week with the rebuilding of her sun porch in Ventura, Calif., not wanting to endure any longer the discomfort of life in a mobile home with a leaky and rusting porch. “I don’t obsess about what is happening, but it is always in the back of my mind,” Ms. Emerson said, adding that she would cancel the $30,000 project if she lost faith that stocks would rebound in her lifetime.

“I can sustain the ups and downs, as long as the downs are followed by ups,” Ms. Emerson said, “but I cannot sustain a constant slow erosion. I am assuming, despite all the terrible news, that somehow things will get better.”

Older people with few assets, including the one-third of retirees who rely on Social Security for 90 percent or more of their income, may not suffer directly from the decline in the stock market, but they feel the pain of higher gas and food prices and reductions in volunteer services like Meals on Wheels, which have been curtailed because of fuel costs.

The collapse of the housing market has hit older homeowners. According to the Center for Retirement Research, Americans over age 63 pulled $300 billion out of their home equity through refinancing from 2001 to 2006, lowering their net worth.

Surveys by AARP, the Transamerica Center for Retirement Studies and the Employee Benefit Research Institute have found that more workers nearing retirement age are putting off their plans to retire, curtailing contributions to their 401(k) accounts and borrowing from the accounts to pay for living expenses, including credit card and mortgage debt.

After three decades of decline, a higher percentage of Americans older than 55 are now working than at any time since 1970, the Bureau of Labor Statistics reports. Some are working because they want to, but many because they need to.

The McKinsey Global Institute reported in June that the typical worker would have to work to age 70 to maintain his or her standard of living in retirement.

Mary O’Connell, 76, and her husband, S. F., 78, of St. Peters, Mo., retired without pensions and with meager benefits from Social Security, counting on income from four stocks. But the bulk of the stock was in Bank of America, whose stock has dropped by nearly a third since the start of the year, including 10 percent last week. “It’s been horrible,” Ms. O’Connell said.

“I can’t cash anything because the value has deteriorated so much that I would lose money. And even if I did I’d face capital gains tax that would wipe out what little bit I’d get.” At the same time, she said, her “safe” investments — her certificates of deposit — have rolled over to lower
interest rates, reducing a reliable stream of income.

Ms. O’Connell said she did not follow her stocks too closely because it would only make her depressed. "We figure we worked all our lives,” she said. “This is something we wanted to enjoy. Now that’s taken away from us.”

For many older people, last week’s turmoil on Wall Street was just the latest in a series of shocks that have eroded their stability.

When Robert Waskover, 79, was asked how the economy was affecting him, the first thing he mentioned was gas prices. Mr. Waskover, who sells insurance part time in Palm Beach Gardens, Fla., said he and his wife, Barbara, 75, were being squeezed from all sides: rising expenses for gas, food and health care; lower income from his business; and the collapse in value of their home and stock portfolio.

Mr. Waskover described a one-two punch from the economy. First, his expenses started to exceed his income, so he began occasionally selling some of his stock. Then the stock prices fell, so any sale meant taking a loss. “Now I’m looking to see if I can take a bridge loan on the house so I can draw on that,” he said. “We’ve beenwatching every penny. And everything keeps going up and up.”

Corlette McShea, 61, of Libertyville, Ill., is one of those worried about how she will live in retirement. Ms.McShea, who works nearly full time for a market research company, has scrimped to build a nest egg — buying her house for cash after a divorce settlement, building a 401(k) account and buying a seven-year, $30,000 annuity from the American International Group.

Then she discovered the annuity was not protected by the Federal Deposit Insurance Corporation. As A.I.G. teetered this month, Ms. McShea tried to call the number given to her for A.I.G. “Their office is in Texas, so after the hurricane, the office is not even open so I couldn’t talk to anybody,” she said. She was willing to pay a penalty for early withdrawal, she said, but at 61, “how do you recoup any of this?”

At the same time, other parts of the economy are closing in around her. Though her home is paid off, her property taxes have risen to nearly $14,000 a year, up from $5,000 when she bought the house 10 years ago. She was counting on the annuity to pay the taxes.

“What a terrible situation that you have a house that is paid for and you can’t even afford to stay in it because the real estate taxes keep going up,” she said. “In my neighborhood, there’s houses up and down the street that are for sale and not even an offer.

I’m stuck. I’m stuck with the house; I don’t know what my investments are doing; and here’s this annuity with A.I.G. that is in jeopardy. Every way I look, I’m feeling kind of scared and panicked.”

Younger people, of course, have been feeling the market’s pain as well. But for some — including those who have felt priced out of the housing market — the dips mean a chance to get in. For older people, there is no upside to the distress. “They’ve got to adjust their expectations of retirement,” said Martin Baily, a senior fellow at the Brookings Institution. “The market will recover, but you won’t.”


Malcolm Gay and Ana Facio Contreras contributed reporting.

The Outrage Was Palpable: Congress vs Bush

My Notes:

This last minute power play (before the elections eject the President, Paulson and other political appointees from their jobs) is highly offensive to me.

Yes, some major overhaul needs to take place to unclog the lending pipelines at banking and lending institutions. But, not this proposal.

What would it do?

It would give the Secretary of the Treasury, an appointed, not elected official, absolute control of the program and the money, with no questions asked. The wording is "...would make the Treasury secretary's decisions "non-reviewable" — including by "any court of law or any administrative agency." That is, if not unconstitutional (and that's definitely up for debate) absolutely outrageous.

The free capitalist market is based on risk and reward. If you invest in a venture, you reap rewards if it works, and pay the price if it doesn't. That's why there are business schools and advanced degrees given out to people who study business and risk and reward. It takes a lot of knowledge, experience and nerve...and should take ethics and fudiciary responsibility seriously to invest or run a business.

Little people, like me, trust in these people who run banks, investment funds, mutual funds and lend money, to use that knowledge and experience to run safe and profitable entities. But, I, like many of you have to sit here and watch my IRA's and 401K's melt away because of their actions and misdeeds.

As noted in the article below there are other ways to unclog the lending institutions' pipelines so money may flow freely; but if what Paulson and Berneke are proposing is the best way, then why does it start with $700 Billion? (It will turn out to be much more, I believe). What's wrong with starting with $50 or $100 Billion, with establishing the proper and correct procedures, establish meaningful oversight and reporting procedures and audits?

The Secretary of the Treasury can't possibly spend all that money before the elections; they don't know how many institutions would participate, how quickly it would work, or if the plan would work as envisioned.

There's already one holdover issue of the greed and bad judgment that started all this - executive pay. But, Paulson (former executive at Goldman-Sachs) resists this.

He thinks cutting executive pay would discourage companies from participating, and, oh, it would take time to review executive compensation packages. I wonder, just how fast does he think he can give away the money from Congress (read taxpayers)? And why do executives that have failed, failed like no executives before them, deserve huge salaries that range into millions of dollars a year, and golden parachutes?

"Paulson and Bernanke have warned lawmakers about the dire consequences of not acting — but these economic Doomsday scenarios have not been spelled out to the public." And, to me, the fearmongering, the bums rush remind me too much of how the Iraq War got funded

I do understand their argument about the falling dollar, and how it must be stablized. For instance, right now all oil is traded in US dollars. If we don't stablize the dollar, if we don't stop it's fall, there will be worldwide calls to trade/buy oil in Euros. That would be a calamity for the United States, with far reaching changes in our way of life.

And we must stop the volitility of the market; we must pay off our debts; we have been a superpower because we have always been a save haven for investors, and we have an outstandingly stable government. But now our national debt exceeds anything we ever dreamed of, and over $500 Billion in Treasury Bonds are owned by China and Japan, and over $60 Billion by Russia. We certainly don't need them selling off these huge investments or having this kind of economic power over us.

So, yes, we must do something quickly about the banks and mortgages, but to me this is not the answer - to consolidate all this power and money into the hands of an appointed Secretary of the Treasury, who wants no controls, whatsoever, from Congressional oversight to the Courts, yet still wants to protect the executives who blatently disregarded the basics of lending --security, assets, credit, and some of the borrower's money in the game.

Have a great day! Friday will soon be here.

Gloria


Why Congress Objects To The Bailout Plan
by Maria Godoy NPR, September 23, 2008 ·

The outrage was palpable Tuesday as the Senate Banking Committee grilled Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke on the details of their $700 billion plan to bail out Wall Street with taxpayer funds. But lawmakers are hardly the only ones questioning whether the plan will work. Here's a look at some of the objections being raised on and off Capitol Hill.

It's A Huge Amount Of Power To Invest In The Treasury:

The Bush administration's plan would grant the Treasury secretary nearly absolute control of the $700 billion authorized by the bailout measure. The language in the measure sent to Congress would make the Treasury secretary's decisions "non-reviewable" — including by "any court of law or any administrative agency." That would give the Treasury secretary powers that are not only extraordinary but, some would say, also unconstitutional because of the lack of accountability.

Jon Macey, a professor and deputy dean of Yale Law School, says the bill contains the largest transfer of power from Congress to the administration that he has ever seen. Macey says Congress is handing over more power than it did in granting the executive branch leeway in the Patriot Act, and more powers than when authorizing combat through the war powers clause. He says the move amounts to a sidelining of Congress.

Senate Banking Committee Chairman Christopher Dodd, a Democrat from Connecticut, on Tuesday called the language in the plan "so troubling" and said it "cannot last" as part of the legislation.

It Represents A Fundamental Shift In The Way The U.S. Economy Works:

The Bush administration's plan to bail out the nation's financial institutions represents an unprecedented intervention in free markets. If the Wall Street bailout is adopted, Republican Sen. Jim Bunning of Kentucky said last week, "the free market for all intents and purposes is dead in America."

A fundamental principle of free-market capitalism is that investors take on big risks to reap big rewards — but they also assume any losses that occur. The government's plan would radically alter that model, leaving profits private while making losses public.

It's Not The Only Viable Option For Fixing This Mess:

In a nutshell, the Bush administration's plan would authorize up to $700 billion to let Treasury buy up bad mortgages from financial institutions. With these toxic assets off the books for firms, lenders would once again be willing to lend and the money would start flowing freely through the markets, the theory goes. Objections to the plan have come from both sides of the aisle — and from academics and economists who say it amounts to a huge handout to Wall Street without necessarily fixing the problem.

Many economists have proposed alternatives and alterations to the administration's proposal, some of which have been taken up by lawmakers. Details of the plan are still being negotiated, but here are some of the key points of contention:

Equity stakes: Rather than simply buying up bad loans and letting taxpayers assume all the risk, why not take shares in the financial firms in exchange, so that taxpayers could also participate in any potential profits? Banking Committee Chairman Dodd has proposed "contingency shares" that would only be issued if losses are realized on the assets bought up from a firm. In Tuesday's hearing, Paulson rejected the idea of equity shares, saying it would make the bailout program "ineffective" — though he didn't offer details on why that would be the case.

Valuing assets: There are already buyers for these toxic assets out there — they just aren't willing to buy them at prices that financial institutions find palatable. (In some cases, selling at those prices would make firms insolvent.) Many critics argue that the fundamental problem is that the financial markets lack capital, so the only way the government's plan will work is if the Treasury overpays for the assets; otherwise, why not just let investors buy them up?

So, how to price these assets? Technically, assets are only worth what a buyer is willing to pay for them. If no one wants to buy mortgage-backed securities, then right now they are worthless — but that doesn't mean they will always be worthless. Paulson has suggested that one way to set prices would be through what's known as a reverse auction, the goal of which is to drive prices down, rather than up.

But some economists note that reverse auctions work best when the assets being auctioned off are essentially identical. That's not the case with mortgage-backed securities: Some of them may have plenty of healthy, payment-producing mortgages in them, while others may be full of defaulted loans. If the government simply buys the securities with the lowest price, it may end up with $700 billion worth of the worst loans, critics say.

Executive-pay limits: Some lawmakers want any company that participates in the bailout to agree to slash the pay of its executives. After all, they say, those who created the mortgage mess shouldn't be allowed to profit from the bailout.

But Paulson has resisted this idea. He argues that pay cuts would discourage firms from using the program and would force thousands of firms to review their executive compensation before participating, a time-consuming process.

Lawmakers Are Being Urged To Act While Staring At The Barrel Of A Gun:

Congress is being asked to enact a fundamental restructuring of the U.S. economy — in one week. That's not a lot of time for lawmakers to weigh their options and the repercussions of their actions. In private meetings on the Hill, Paulson and Bernanke have warned lawmakers about the dire consequences of not acting — but these economic Doomsday scenarios have not been spelled out to the public.

Democratic Sen. Jon Tester of Montana told Paulson as much on Tuesday: "I fully feel the urgency … But the truth is that we have to be given the time to do this right, or it's not going to work and we'll be back here next year or in two years asking for another $700 billion or more."

With additional reporting by Laura Conaway and Adam Davidson.

Related Story: Bernanke, Paulson Face Skeptics On the Hill Despite Dire Warnings

Don't forget to check out the other new stories, listed at the top of the page under New Postings. Just scroll up and click.

5 Ways To Pay Your Mortgage

Sep 23rd, 2008 s to By Michelle Ventress

current housing and mortgage crisis spared few homeown ers, and Rancho Cordova is one of the hardest hit areas. Lower home values, higher interest rates, and tighter lending standards have combined to make the last year one of the worst on record for California homeowners. If you are one of the many local residents who are struggling to make your mortgage payments, these five tips may offer some relief.

Check Your Tax Withholding

Many people pay too much in federal and state taxes each paycheck and then have the money returned to them as a tax refund the following year. If you normally receive a large refund and yet are struggling to make your mortgage payment, you need that money now, not next year.

A tax professional can help you calculate the proper amount of tax withholding and help you complete the necessary forms. Some homeowners may be able to increase their monthly cash flow by as much as $500 a month.

Perhaps you saw your interest rate adjust upward in recent months, causing your payment to increase. Because the increase in your payment is the result of higher interest charges, it is likely to be tax deductible. This could cause you to owe less in income taxes and may allow you to decrease your tax withholding now.

Request a Rate Reduction

Mortgage lenders have taken substantial losses in the past year due to the increase in foreclosures and the decrease in real estate values. Many of these lenders already have hundreds or even thousands of homes that they are trying to unload. Contrary to popular belief, the last thing that a lender wants is to put another home in foreclosure. This has made many lenders willing to negotiate the terms of the loans that they service in order to keep the borrower in the home and making the payments.

If you have a mortgage that is currently above the market rate for new mortgages but don’t have enough equity to refinance, you should contact you lender to negotiate a reduction in your interest rate or an increase in the term of your loan, both of which will lower your monthly payment. Remember, it never hurts to ask. It is in both your and your lenders best interest to find a way for you to be able to afford your monthly payment.

Have Your Home Re-Assessed

One of the biggest expenses for many local homeowners is their annual property tax bill. This is especially true for homeowners who purchased their home in 2005 or 2006 when prices were much higher.

If the value of your home has declined since you purchased it, you may benefit from contacting the county to request that they re-assess your property value. If the county agrees that your home is worth less than the assessed value on your property tax statement, they will adjust their records and reduce the amount that you are required to pay. For some Rancho Cordova homeowners, this could equal a savings of as much as $250 a month.

Is a Reverse Mortgage an Option

A number of our community’s senior citizens who are living on a fixed income were coaxed into refinancing their homes in order to access money to do home improvements, pay medical bills, or pay off other debt. Unfortunately, many of these individuals were only able to qualify for a loan with a low teaser rate that has now adjusted upward. In some cases the new monthly payment exceeds the homeowner’s monthly income.

If this is the situation that you are in, a “reverse mortgage” may be a solution. A reverse mortgage is a loan on your home that does not require you to make monthly payments. Instead the amount that you owe increases over time based on the interest rate of the loan and is paid off when the house is sold. This could allow you to use your monthly income to pay for living expenses rather than mortgage payments and still live in your home.

Ask for Help

It is estimated that more than 60% of the homeowners who have gone into foreclosure in the past year have not asked anyone for help. Ignoring a problem and hoping it will go away is never a good financial strategy. There are many financial experts who want to help homeowners who are struggling to pay their mortgage.

If you are concerned about your ability to pay your mortgage, there are numerous resources available to you. The City of Rancho Cordova has posted several forms on its website that are designed to help homeowners organize their financial information and contact their lender to negotiate a possible solution to their mortgage problems.

On a national level, Hope Now is an organization dedicated to helping distressed homeowners explore their options. You can learn more at http://www.hopenow.com/. If you would like to talk to a professional on a one-on-one basis, you can find a local financial planner by going to the Financial Planning Association website at http://www.fpa.org/ and clicking on planner search.


Don't forget to check out the other new articles shown at the top of the page, for help, advice, or news about housing and senior issues.