About The Baby Boomers Already Flocking to Retirement

The persistence of our dragging economy has created a lot of concern for baby boomers and their retirement prospects. One concern is that the stock market crash has eaten up a lot of boomers retirement income and forced them to delay leaving the workforce. Another common belief is that boomers are temporarily leaving the workforce during the bad economy and plan to return once things turn around. However, a recent Metlife survey is offering a very different view of boomers and their exodus from the workforce.

Baby Boomers

More Boomers Are Retiring Than Expected

Contrary to the “boomers will be staying to rebuild stock investments” view or the “boomers will be back in a few years” theory, boomers are leaving the workforce en masse and many aren’t planning a return. In fact, the rate of departure, for those 65 and not coming back, has more than doubled in the last few years. In 2008, about 19% were fully retired compared to 45% in 2011.

One Quarter Retired Early for Health Reasons

Of the boomers already collecting social security, almost half retired earlier than planned. Of those, almost another half retired early for health reasons. While everyone hopes to enter retirement healthy, there is a large population of boomers forced into retirement due to illness and health complications. It’s a sobering reality for us younger folk and those in view of their fifties. Health considerations are a necessary consideration for our retirement plans.

One Quarter Retired Late for Budget Complications

If health concerns weren’t enough bad news for your retirement planning, one quarter of retired baby boomers retired later than planned, citing income requirements for day-to-day expenses. This statistic is harder to theorize about. If anything, I tend to think people have a rosy outlook on when they’ll be retiring in the first place. However, another likely culprit could be inflation. It’s easy to know that prices are going to increase over time, but it’s another issue to successfully save and cover those price increases. I’d suggest assuming that inflation will be slightly higher than you think; that might help get you to retirement at the age you plan.

Warm Fuzzy Feelings for Future Social Security Benefits

Nearly two-thirds of boomer retirees are confident in their social security benefits and that those entitlements will be sufficient for their lifetime. While this warm, fuzzy feeling could be naïve, it is a positive finding.

It could be that boomers are confident that politicians will not be seriously curtailing benefits. However, I’d like to think that it is because retirees have sufficient alternative savings to weather potential changes. Either way, boomer outlook on social security seems more solid than I would have expected.

While boomers are starting retirement confident, time will tell whether or not the latest retirement generation was ready to leave the workforce. Until then, learn from the successes and failures of the generations already in retirement and plan your savings to meet those contingencies.

Demand for Rental Property and Residential Contracting is Expanding

Guest post by Sara Mackey

As positive as recent economic data has been in the United States, all economists agree that a full recovery is not possible without significant improvement in the residential real estate market.  Banking foreclosures and qualifying for a mortgage with an adequate down payment are the obstacles at hand.  As a result, the rental and leasing business has grown materially, well above inherent cost structures, and where there is high demand for rentals, the need for residential contracting firms is also increasing.

Apartment Building

Photo by RenoTahoe

Is now the time to start your own residential contracting company?  The answer is undoubtedly “Yes”.  Timing can be everything for a new venture.  The key for any new firm is to gather new customers as quickly as possible at low cost and to build on those early successes going forward.  You also need to be passionate about being your own boss and be prepared for the time commitment involved.  Your relationship skills will be tested every day, as you deal with your customers and with family members that feel that you may have become obsessed with your new undertaking.

Starting a new business can be a very time-consuming effort, but the rewards are worthwhile if you are persistent and determined to accomplish things on your own.  Here are a few other pointers when starting a residential contracting firm:

  • Self-Assessment:  Now is the time to ask yourself and your family if you are ready to start your own company.  Time will be in small supply, as well as money for the short-term.  You will need discipline and an assortment of skills, although others can perform some of these tasks.  You, however, will handle the hiring and firing, new client acquisition, accounting, and advertising.  Timeliness and reliability are necessities in this industry, together with honesty.  Check your passion and desire, and act accordingly;
  • Industry Research:  Research building codes, local permit requirements, and learn from other firms how they conduct their businesses.  There are no shortcuts for experience, but counsel from industry “mentors” is highly advised;
  • Prepare a Business Plan:  You can get help for this effort, but you want to estimate in detail your equipment and staffing needs, state licensing requirements, insurance, website, and accounting/billing software needs.  Offset these projections with expected customer revenues to arrive at your base-line financial needs.  Investment capital will be needed to get started, and once you are up and running, you will also need working capital to cover operating deficits until you reach break-even and the delays in collecting from your clients.  Arranging sources of investment and working capital will demand a healthy portion of your overall effort;
  • Initial Marketing:  Create an attractive name for your business, and decide how you will gather potential customers, prepare estimates, and allocate resources for the work at hand.  A commercial vehicle with your information prominently displayed is a “must have”.

There is never a perfect time to start a new business, but the timing now seems appropriate.  Good Luck!

Common Sources of Retirement Income

There is good news and bad news when it comes to finding income to fund your retirement. The good news is that you have a lot of options available. Perhaps more options than ever before.

The bad news is that most options come with risks and drawbacks. If you want to know how other people fund their retirement, these are the most common sources of income.

Older people

Photo By i.tokaris

Pension

How’s this for an employment perk? Work for a company for a long time and they pay a percentage of your income to you for the rest of your life. Pensions are still a great deal if you can find an employer that offers one. Although, relying on pension funding is very risky.

If your pension is funded by a business, the future of your pension is dependent on the success of that company. It used to be that most retirees lived off a pension, but today it is almost nonexistent. Most companies have either failed or cannot afford the financial burden of sustaining retirees. However, pensions for government employees are still common and relatively safe.

Social Security

For every paycheck that you earn, money is taken out for social security. Everyone who pays into the fund for a period of ten years is entitled to receive monthly benefits starting at age 62. Your benefits are based on a moving average of the income you earned throughout your tenure. Generally speaking, benefits are increased to match inflation each year.

Despite frequent talk about ending social security, the program is very popular and much more stable than Medicare. There is no guarantee against acts of congress, but social security is likely to continue for decades, even if some of the benefits change.

Your Home

One of the most common sources of wealth for seniors is in the equity of their home. Since home values tend to increase over time, you can think of principal payments in your mortgage as forced savings. Home value appreciation and you accumulated principal can be reclaimed as either a lump sum, if you sell or fixed monthly payments through a reverse mortgage.

However, claiming that wealth and turning it into income can be tricky when you retire. Selling your home takes time and while you might claim a large capital gain, switching to home renting will increase your living costs. The housing market is not always stable and you risk losing property values during recession years.

Financial Investment (Stocks and Bonds)

Thanks to numerous financial products like 401ks, IRAs and mutual funds, it’s easier than ever to buy stocks and bonds. The best part is that most of these products are diversified and offer good returns over the very long-term.

Income is earned from appreciation in stock price and ownership dividends. Over the course of the investment, these returns will pool into a massive nest egg. At retirement, you begin drawing out those earnings until you expire or run out of money.

If you’ve been in the stock market anytime in the last 5 years, you know that having a lot of retirement income in stocks and bonds can be very frustrating and even scary. You can retire one day with lots of retirement income and then lose half of it a few weeks into a major recession.

Annuities

I’m sure you’ve heard this one before: “An annuity is a bad investment because you can earn more in the stock market!” However, with lots of baby boomers stuck waiting for the stock market to re-inflate their retirement accounts; I have a sneaking suspicion that annuities will make a comeback.

Annuities can be complicated because there are many different kinds. However, they are all based around a single concept. You make a large payment into the annuity and the annuity guarantees a fixed annual return. Let’s say you have a million dollar annuity with a 5% guaranteed payout. Then you’d get at least $50,000 every year.

Over the long-term, the stock market tends to do better than the 4 or 5% return from annuities. However, annuities offer predictability. It does you no good to have a large nest egg if you are waiting for the market to turn before you cash out.

Entrepreneurial Ventures

Given the lagging of middleclass wages, nonexistent pensions and the dramatic fluctuations in the stock market, I expect to see more people turning to entrepreneurial ventures as a source of retirement income.

Real estate rental is a common venture for this type of strategy. You can be as involved or absent as you want so long as you don’t mind paying property managers and have enough to buy a property. In exchange, you can take advantage of property appreciation and rent revenues.

Any side business can help you achieve your goals, and thanks to e-commerce it is much easier to find a market. However, you need to be cognizant to the fact that any business is a demand on your time. It’s not hard to overextend yourself if you also work a day job.

There are many options for finding retirement income. The important thing is to identify sources that you believe will meet your goals, and position your finances to take advantage of them. For example, I met someone who worked out three different government pensions (military pension, law enforcement pension and a teacher pension). That was his strategy and he now has a very comfortable retirement. Sadly, few workers ever stop and consider all the possibilities and are left with insufficient income to fund the lifestyle they want. It doesn’t have to be that way.

What sources of retirement income are you taking advantage of?

Is It Better to Bank With a Credit Union?

Bank

Photo by I-5 Design & Manufacture

It’s been a long time since I dumped a commercial bank for a large local credit union.  At the time, I was sick of my bank’s name changing every other year, and I hated the large fees that they charged for overdraft and falling below account balance requirements. The credit union offered low fees and a member dividend every year. Add in the friendly staff and the move seemed like a no-brainer.

It seems as though the rest of the nation might be catching on. According to the LA Times, over 1.3 million Americans switched to Credit Unions last year. The article cites factors such as Occupy Wall Street, congressional ire over debit card fee rate hikes and Bank Transfer Day which was organized by activists.

Call me anti-political, but when I start seeing political movements and agendas shape common money wisdom, I get skeptical. So, I’m rethinking credit union banking and taking a new look at which is better for consumer banking: large commercial banks or credit unions?

Banks Versus Credit Union on Costs

Are credit unions cheaper than commercial banks? With the way major banks are increasing fees it sure seems like it. However research from a Fed economist provides a more nuanced picture.

The study found that credit unions charge less in fees, but more in upfront costs. For example, commercial banks offered the best introductory APR for credit cards, averaging 8.5%, while credit unions charged 11.2%. However, late fees for credit cards were $35.84 for big banks and $18.54 for credit unions.

The same goes for depository accounts. Overdraft fees for commercial banks averaged around $22.93, while credit unions hovered at a friendlier $19.75. However, one area of difference has been in closing costs. According to CBS news, credit unions charge 2% less in closing costs for mortgages.

Banks Versus Credit Unions on Interest Paid

When it comes to paying interest; credit unions are the better choice. On average, credit unions pay .3% more in interest on certificates of deposits. While I don’t think that .3% interest will make a giant impact on income you can earn, more money is still more money.

Putting a Price on Customer Service

This is really where you are likely to see a major difference. Credit unions are owed by the members that bank at the institution, while banks are investor owned. It all adds up to a very different banking experience.

Many banks are actually looking for ways to charge for using bank tellers and customer service. However, great customer service can save you money.

When I was going through the closing process for my home, I’d indicated on my application that I wanted to use a particular title company. I worked for a banking company and received a free title search and insurance. Meanwhile, my lawyer, who I would not recommend, took it upon themselves to do the title work and jack up our bill. Our credit union caught my lawyer’s mistake immediately long before closing. They notified me and I was able to iron out the mess (and chastise my lawyer).

The lesson from my experience is that my credit union did not need to work out my title search. They had no interest in who did title and they earned no money from helping me to work out the issue. They could have simply ignored my application and allowed my lawyer to charge for the title search. However, they did take additional steps and it saved me hundreds of dollars.

Usually, poor customer service makes us angry, but doesn’t cost us money. When it comes to banking, it can mean dollars saved or earned.

Which is Better?

For most people, it’s probably a trick question.

Overall, credit unions have better customer service, savings interest rates and lower fees. However, lower fees won’t be much of an advantage for someone that doesn’t have trouble managing their accounts and meeting balance requirements. Banks offer lower overall costs, which is a noticeable advantage.

Perhaps the best answer is that they each have their strengths and weaknesses. It’s best if you pick the institution that best fits your personal needs best.