Saturday, August 22, 2015

Build a better retirement income strategy

Build a better retirement income strategy


  
It's easy to be put off locking your money up for long in bonds or certificates of deposit when rates are so low—even the average rate on a five-year CD is now less than 2 percent.
But there is a fixed income strategy that can provide you with higher yields: laddering.
Here's how it works: You buy a portfolio of bonds or certificates of deposit at staggering maturities, whether it's over several months or years. As the bonds or CDs mature, you reinvest the proceeds into debt instruments that best fit your income needs.


For example, if you had $100,000 to invest in a bond ladder, you may put $25,000 in a one-year bond, a two-year bond, a three-year bond and a four-year bond (with each bond being one rung of the ladder). When the one-year bond matures, you'd reinvest in another four-year bond if you wanted to maintain the duration of the ladder, and take advantage of higher yields. (Typically, the longer the term of the bond or CD is, the higher the yield.) Regardless, cash would be available to you on a regular basis over that four-year period versus being locked up in a longer-term bond or CD.
A bond ladder can also provide some protection against rising interest rates. If rates increase, you can purchase higher-yield bonds or CDs with the income from the debt instruments already in your ladder.


But when building a bond or CD ladder, it pays to shop around.
"I think the biggest mistake that investors, and most advisors, make in building a bond ladder is simply relying on their custodian or broker's inventory to fill it," said Benjamin Muchler, a certified financial planner and managing director at Boston Research & Management. "Bonds don't have a central trading location—they are just inventory items. Thus prices can vary quite a bit between different [firms]."


There are several online resources that can help investors select the best bonds or CDs for their needs when building ladders.

Investinginbonds.com, created by the Securities Industry and Financial Markets Association, offers price and yield information for a variety of bonds and tips on buying and selling bonds. (You can search for yields, ratings and other information on specific bonds at the site's bond center.) You can buy U.S. Treasuries through Treasury Direct. Use Bankrate.com to search for the high-yield certificates of deposit.

Bond ladders do come with some risks. The issuer of bonds used in a ladder could default or, if the bonds are callable, repay the debt before it matures. (Looking for highly rated bonds can help lower the risk of default.)


Some advisors may also build bond ladders using target maturity bond exchange-traded funds (ETFs), which hold a large portfolio of bonds that are expected to mature in the same year, to avoid these pitfalls. "This helps diversify away issuer specific risk," said Brian Power, a certified financial planner and principal at Gateway Advisory in Westfield, New Jersey.


To be sure, creating and maintaining a bond ladder does take some time and effort. Many investors may be better off putting their money into a low-cost, diversified bond fund or having a trusted financial advisor do the ladder construction and risk management for them.
Yet for motivated investors, building a bond ladder can lead to a stable foundation of retirement income.


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Food brands that may fade along with the baby boomers

Food brands that may fade along with the baby boomers



Some of the most recognizable American food and beverage brands—including Campbell's soup, Kraft cheese, Kellogg's Corn Flakes and Coca-Cola Classic—have fallen out of favor with many U.S. consumers, while smaller brands are gaining favor and taking more market share, according to a Rabobank research report released Monday.


Shoppers at a Kroger supermarket in Peoria, Ill.
Daniel Acker | Bloomberg | Getty Images
Shoppers at a Kroger supermarket in Peoria, Ill.

"Unless bold action is taken, they run the risk of following baby boomers—once their core consumer—into retirement," Nicholas Fereday, Rabobank senior global consumer analyst, wrote in the report, entitled "Dude, where's my consumer?"


"Repositioning the core brand may help to improve the situation," he said, "but in our view, new brands and products are needed that better respond to the demands of these new consumers."


Two ways big food and beverage companies are trying to address shifts in consumer taste include innovating existing products using in-house capabilities or outsourcing R&D by way of acquisitions to add new brands or categories. But the report said that innovation—or a "build, not buy" strategy—can result in a "potentially more disruptive" risk for companies because "it requires a reordering of strategic priorities and a longer-term perspective."


As for acquisitions, there's already a trend among big food companies to buy niche brands in the organic and natural foods areas. Hormel Foods, for example, just last week announced it would acquire Applegate Farms, a natural and organic prepared meats manufacturer, for $775 million.
CNBC reached out for comment to the major brands mentioned in the report. A spokesman for Campbell Soup said "condensed soup remains an important part of our business," adding that "the company has been focused on reshaping its portfolio to respond to changing consumer tastes. We have been talking for some time about these consumer shifts, for example, the increased interest in health and well-being and fresh foods.

The company pointed out that it has made moves to shift its "center of gravity" into faster-growing areas, citing its acquisitions of Bolthouse Farms, a producer of fresh carrots and refrigerated beverages, and Plum, an organic baby food maker. The company also offers new items including organic soup.


Kraft declined to comment. Other big companies contacted by CNBC had not responded by deadline.
     
"Smaller companies have proven adept at spotting and responding to new trends and gaps in the market," according to Rabobank. That said, when independent companies are acquired by the larger companies, "their brands run the risk of losing that authenticity in the eyes" of consumers.
Besides the packaged foods landscape, the report said a new generation of small- to mid-sized competitors is finding its way into the food service, soft drinks and alcoholic beverage industries. The drivers behind the trend include the rise in purchasing power of today's 18-to-34-year-olds—the so-called millennials.


"They're more experimental in their food and beverage choices, more health-conscious (seeking fewer processed foods)," the report said, adding that millennials "also appear willing to spend a greater share of their income on food, as many of these new brands aren't cheap."
The research report said the trend away from big brands has been fueled in part by factors such as alternative distribution methods that are now available for small and emerging brands.
What's more, "the social media accelerator" factor has enabled an "increase in speed at which changing consumer preferences fan out across the nation. Consumer experiences with new products and brands, as well as advice on what foods to eat or avoid, can be shared instantly via Instagram, Facebook, Foursquare, Vivino, etc."


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Baby Boomers Ready to Sell Businesses to the Next Generation

Baby Boomers Ready to Sell Businesses to the Next Generation


Millard Patton works at Bimac Corporation, a precision casting company whose owners are seeking to retire after three decades, in Moraine, Ohio, Aug. 18, 2015.
Maddie McGarvey | The New York Times

Millard Patton works at Bimac Corporation, a precision casting company whose owners are seeking to retire after three decades, in Moraine, Ohio, Aug. 18, 2015.
Dan Bizzarro and Bill Jordan were still in college when they went to work at the Bimac Corporation, a castings manufacturer in Dayton, Ohio. After graduation, they joined full time as manufacturing and engineering executives. And eventually they teamed with a third employee to buy the business.


They had a good ride. The company, with 40 employees, has annual sales of about $5.5 million. But as the two men entered their 60s, after nearly three decades as owners, they began to wonder how long the arrangement could endure.


Their partner, Roger Reedy, had been talking for several years about retiring and moving to Florida. After considering various options, including buying Mr. Reedy out, Mr. Bizzarro and Mr. Jordan decided their best choice would be to join with him in finding a new owner.
 

"The three of us aren't that far apart in age," Mr. Jordan said. "At some point in time, Dan and I will be looking at slowing down ourselves."
                                     
It is a realization that many business owners their age are coming to. As the sting of the recession fades and the economy grows healthier, entrepreneurial baby boomers who spent the last few decades building businesses are starting to move on to the next phase of their careers: cashing out.
And as the generational torch is passed, the profile of small businesses is changing, too, with a markedly higher share of minority groups and women among younger business owners — a trend that could shift patterns of wealth and economic prospects.


The number of small businesses listed for sale nationwide is at a six-year high, according to data compiled by BizBuySell.com, an online marketplace. The tally of completed transactions is also rising, and the median sale price is up 12 percent compared with prices a year ago.


Businesses are sold for a wide variety of reasons, and America's improving economy is the largest factor in the recent rise, according to those in the industry. But bankers and brokers say there is a significant increase in sales from business owners in their 60s and 70s who are ready to turn their creations over to a new generation of owners.


"We're seeing the most sales activity we have in decades, and a high percentage are baby boomers," said Ken Connell, the business banking sales director at Huntington Bank in Columbus, Ohio. "For many small-business owners, that's their retirement. All of their wealth is in the business."
Lynn G. Ozer, the president of government-guaranteed lending at Susquehanna Bank in Lititz, Pa., said pent-up demand was contributing to this year's surge.


"Baby boomers who were going to sell got stopped in their tracks in 2008, 2009 and 2010," she said. "Things froze for a few years, then got better. In 2012, 2013 and 2014, they put together great years. Now, their books look good and they're ready."


Chronology and demographics are also a factor. "The '90s were a very good decade, so a lot of businesses got launched," Mr. Connell said. "A lot of business owners were in their 40s. Now, it's 20 years later and they're at retirement age. A lot of this is just timing."


In the case of the Bimac owners, the decision to give up a business intersected with the ambitions of someone eager to take one on.


Working with a broker, they placed an online listing that drew the attention of Roberto Santos, 46, a mechanical engineer from Ecuador.


Mr. Santos spent most of his career in Latin America, working for a family business that was acquired four years ago by a Korean company. He transferred to the company's office in Houston, but he grew concerned about his career prospects.


"The industry was taking a hit," he said. "I decided it was a good time to look for something of my own."
During his seven-month hunt, Mr. Santos gathered information on 10 potential acquisitions and visited two of the companies before finding Bimac. Four months ago, he bought the business and its assets, including its real estate, for $2.5 million.


Mr. Santos is emblematic of the next generation of small-business owners, which is noticeably more varied in gender and ethnicity than the previous one.
"The sellers tend to be Caucasian males," said Bob House, the general manager of BizBuySell.com. "The buyers are younger and increasingly diverse."


A study on buyers that BizBuySell.com commissioned last year found some sharp demographic differences. More than 30 percent of those from age 30 to 49 describe themselves as black, Asian or Hispanic, compared with just 8 percent of those over 65.
     
Women are also more heavily represented in the younger generation. Nine percent of the buyers over 65 in the study were women, compared with more than 20 percent of those under 49.
That could bode well for wealth creation among groups that have traditionally lagged. Economic research has found that across demographic groups, entrepreneurship is associated with greater wealth and upward mobility.


Mr. Santos's financing for the deal is typical of how small-business sales often work. He put down 13 percent in cash, and Bimac's previous owners financed another 12 percent through a seller's note.
The balance of the sale price came from a bank loan guaranteed by the Small Business Administration. Demand for S.B.A. loans is at a high, an increase that bankers say is @partly attributable to the increase in business sales.


Mr. Bizzarro and Mr. Jordan, both 64, are still working for Bimac; Mr. Bizzarro is the vice president of manufacturing and Mr. Jordan is the vice president of engineering. They do not feel ready to leave their careers behind yet.


"If we retired, I think both of us would just go out and find another job," Mr. Bizzarro said.
Mr. Santos says he is happy to have the previous owners stick around. He is planning to make some changes at Bimac — he would like to invest more in automation and expand the company's export business — but he likes having their institutional knowledge to draw on.
"I'm going to keep them as long as I can," he said. "They are teaching me a lot of things about the business."


Business owners looking to sell should start making plans at least a year or two in advance, suggests Jeffrey E. Merry, the founder of the Business House, a business brokerage firm in Gainesville, Ga.


"When you go to sell your house, the best thing you can do is paint it," he said. "It's kind of like that with a business." Accounting records need to be clear and current, and the company's day-to-day operations should run smoothly. Owners who are crucial to their business need to make plans for their replacement, which may involve additional hiring.


"It costs money to do some of these things," Mr. Merry said. "I warn owners, 'Your personal income may suffer.'"


Brokers say they expect the wave of baby boomer sales to crest over the next few years. Steven D. Zimmerman, the owner of Restaurant Realty in San Rafael, Calif., said that even those who were reluctant to sell were keeping an eye on the economic trends — and on their own physical limits.
"Some of the baby boomers we deal with have no choice," he said. "The business is just so demanding that they can't do it anymore."


For those who decide to put their business on the market, the pool of potential buyers is the largest it has been in years, brokers say. Mr. Merry said the shoppers he works with tend to fall into two categories: companies making strategic acquisitions to fill out their business portfolios and individual buyers leaving corporate careers.


"I have a lot of guys who are 40 to 50 years old and need to buy a job," he said. "They've been downsized, or transferred out of the area, and they decide to be their own boss."
It is a choice that Mr. Santos, whose wife and three children left Houston this month to join him in Dayton, is enthusiastically enjoying.


"Houston is having a hard time with the oil industry," he said. "A lot of my friends back there are looking around and asking me, 'How did you do this?'"
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Monday, August 17, 2015

Social Security's next 80 years

Social Security's next 80 years


Social Security may be America's favorite octogenarian.

Two out of 3 Americans view Social Security, which turned 80 years old Friday, as one of the most important government programs, according to a new AARP survey. That view has remained consistent in AARP polling since 1995. And 82 percent of Americans said it is important to contribute to Social Security for the common good.

Most retirees depend on Social Security for part of their income. Overall, Social Security retirement benefits represent about 38 percent of the income for seniors, but more than half of married couples claiming benefits and nearly 3 out of 4 unmarried retirees depend on the program for 50 percent or more of their income, according to the Social Security Administration.

The agency sent checks to more than 39.6 million retired workers in June with an average monthly benefit of $1,335. Last year, more than 59 million Americans received $863 billion in Social Security benefits, which includes disability benefits.

But Americans have doubts that Social Security will be there for them when they retire. Only 43 percent express confidence in the future of Social Security, according to AARP.

They have good reason to worry. The trust fund for Social Security retirement benefits is expected to be depleted by 2034. After that, the program is projected to pay out about 75 percent of benefits. (AARP found that 73 percent of people do not know that Social Security will be able to pay benefits at a reduced level when the program's trust fund is depleted.)

Baby boomers, an estimated 10,000 of whom retire every day, are the cause of Social Security's rapidly shrinking trust fund. By 2033, the number of Americans eligible for retirement benefits will increase to more than 77 million from 46.6 million today. Meanwhile the ratio of workers paying into Social Security to the program's beneficiaries is projected to fall from 2.8 now to 2.1 in 2033.
"We have a retirement income crisis that is not here today, but Generation X and millennials will face it," said Ben Veghte, vice president of policy at the nonpartisan National Academy of Social Insurance.

Last year, Social Security benefits amounted to about 5 percent of U.S. GDP. By 2035, when the youngest baby boomers will have turned age 70, Social Security benefits under current law are projected to be 6.2 percent of GDP, according to projections by the National Academy of Social insurance.

That's an increase of 1.2 percentage points over the current cost of Social Security, which is considerably less than the increase in spending for public education that occurred when baby boomers entered the school system, Veghte noted. "Social Security's shortfall is not that dramatic," he said.

To close Social Security's funding gap, lawmakers will have to reduce benefits, raise revenue for the program or a combination of both.


"Fixing Social Security is not a matter of funding. It's a matter of values," said Nancy Altman, co-founder of Social Security Works, which advocates for increasing the program's benefits. Altman noted that the U.S. ranks toward the bottom, internationally, in terms of retirement benefits, according to the Organization for Economic Cooperation and Development.

Seven in 10 Americans would prefer a package of changes to Social Security that increases revenue, pays for improved benefits and eliminates the projected financing gap to the status quo, according to a survey of more than 2,000 people aged 21 years and older conducted by the National Academy of Social Insurance last year.

The most preferred package of changes included eliminating the cap on earnings that are taxed for Social Security over the next 10 years (the cap is $118,500 in 2015); raising payroll taxes that fund Social Security from 6.2 percent of earnings to 7.2 percent over 20 years; increasing the cost-of-living adjustment by basing it on inflation experienced by seniors; and raising Social Security's minimum benefit so that a worker who pays into Social Security for 30 years could retire at 62 or later and have benefits above the federal poverty line.

These changes would be enough to close the funding gap and add a margin of safety, according to National Academy of Social Insurance projections.
Sixty-one percent of the 1,200 people recently surveyed by AARP agreed that it would be better to pay more into Social Security now to protect benefits for future generations.


Politics are a hurdle to making changes to Social Security. Yet a political fight over the program in Congress may be brewing next year. The trust fund for Social Security's disability benefits is projected to be exhausted by late 2016. After that, the Social Security Administration estimates it will only be able to pay out about 80 percent of benefits to disabled people.

The Obama administration has proposed shifting payroll taxes between Social Security's retirement and disability trust funds, but congressional Republicans want significant changes made to Social Security before moving the funds. Previous Democratic and Republican administrations have transferred payroll tax revenue 11 times to fix shortfalls between the two trust funds. The last time such a tactic was used was in 1994 by the Clinton administration. "It's a false crisis," Altman said.

Presidential candidates of both parties are weighing in on how to improve Social Security too. New Jersey Gov. Chris Christie, a Republican, supports gradually raising the retirement age and reducing Social Security benefits for wealthier people. Meanwhile, Hillary Clinton, the Democratic front-runner, hinted she would be open to the idea of raising the earnings cap on Social Security taxes.

Whatever happens, any reforms to Social Security will be a long time coming. The last major changes were made in 1983. It took a bipartisan commission led by Alan Greenspan, a year of negotiations by lawmakers and 22 years to phase in a modest increase in the full retirement age.

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When to file for Social Security retirement benefits early

When to file for Social Security retirement benefits early


Delayed gratification isn't always the best bet when it comes to Social Security claiming strategies.
Retirees have been more willing to wait to claim Social Security in recent years. The number of men claiming benefits at age 62 dropped from 56 percent in 1996 to 35.6 percent in 2013, according to a recent analysis from the Center for Retirement Research at Boston College, which used unpublished Social Security Administration data. Among women, the rate dropped from 62.8 percent to 39.5 percent over the same period.

That said, 59 percent of retirees are still claiming before they reach full retirement age (for most workers, that's 66 to 67, depending on your birth year), according to a March survey from Franklin Templeton.

That bucks the conventional wisdom among financial advisors and other experts that waiting is the best way to maximize benefits, especially with increasing longevity. "If you claim early and die later, you're at greater risk of eating cat food," said David Mendels, a certified financial planner and director of planning at Creative Financial Concepts in New York City. More clients are more worried about outliving their assets, he said, than leaving Social Security money on the table if they claim late and die early.

Waiting is a pretty solid strategy. After all, claiming Social Security before full retirement age locks in your monthly benefit at a reduced level; for those claiming at age 62, it's as much as 30 percent lower. Holding off until full retirement age secures your full benefit, and for every year you wait thereafter, until you turn 70, it gets an 8 percent boost.

But early filers aren't necessarily making a mistake. "In the last four years, everyone in the financial community has jumped on this bandwagon of defer, defer, defer," said Mark LaSpisa, certified financial planner and president of Vermillion Financial Advisors in South Barrington, Illinois. "To my mind, it's not so cut and dried."

When to claim ultimately comes down to the individual worker's situation. "The magic answer is that there really is no best answer," said Everett Lo, a project manager with the Social Security Administration. He said consumers should start planning well before they expect to retire, estimating their benefit and strategizing possible scenarios.

Several factors in particular could make it worth reassessing an early claiming strategy:

Financial need. Social Security benefits can make a big difference in your bottom line. For the typical retiree, they represent 38 percent of income, according to Social Security Administration data. If you're in dire financial straits with limited sources of income, filing early makes sense, said Mendels. "Obviously there are people who don't have a choice, and if they don't have a choice, they don't have a choice," he said. "Not eating is not recommended."

Keep in mind, though, that if your situation improves—say, you find a new job, or receive an unexpected windfall—you may be allowed a one-time reset. You'll have to make that election within 12 months of first filing and repay all your Social Security benefits received, among other hoops, said Catherine Seeber, certified financial planner and principal for Wescott Financial Advisory Group in Philadelphia. Then you can reapply for Social Security at a later age, she said.

Big retirement plans. "There are three phases of retirement," said LaSpisa. "Go-go years, slow-go years and no-go years." Clients who have planned well for retirement and aren't counting on Social Security benefits to pay the bills may find filing early gives them the extra cash flow for bucket-list travel and hobbies while they still have their health and energy. "They think if they don't do it now, they may never be able to," he said.

Poor health. A 65-year-old man today can expect to live to 84.3, while a 65-year-old woman can expect to live to 86.6, according to the Social Security Administration. If you have a particular health concern or other good reason to think you won't be around that long, that can warrant filing earlier rather than later, said Victoria Fillet, certified financial planner and founder of Blueprint Financial Planning in Hoboken, New Jersey. "You need to know your family history," she said. "Is there longevity in the family? Are you healthy?"

It's not just your health to consider. If you have a higher-earning, older spouse in poor health, it can be smart to claim your own benefit early, said Mendels. (The potential benefit of doing so depends on your ages and eligibility.) Then you can switch to the survivor benefit after he or she passes away, Mendels said.

Other beneficiaries. If you have dependent, underage children when you qualify for retirement benefits, they may also be eligible to receive a benefit based on your record, said Fillet. The value of that extra payout can make up for the reduction in filing early. "It could be a college fund," she said.

Retirement assets. "The real question is, 'If I defer, where is that money coming from?'" said LaSpisa. "The money is not operating in a vacuum." If the alternative is to draw from your portfolio, it's worth crunching the numbers to see how a bigger drawdown in the years you delay will affect your chances of outliving your money. The reduced compounding power in your portfolio might be more damaging than taking a lower Social Security payout, he said.


Marital status. Married couples have a number of strategies they might employ, but it's widowed individuals and those who are divorced (after being married for at least 10 years) who may particularly want to take another look at claiming early, Mendels said. Surviving spouses can opt to claim either their own benefit or a survivor benefit first, and then switch later to the other (presumably more valuable) option. Divorced individuals might claim on the divorced spouse's benefits and wait to claim his or her own at a later date.

This is first part of a week-long CNBC.com series on the state of Social Security on its 80th anniversary.
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Monday, August 10, 2015

The end of rising living standards?

The end of rising living standards?

                      
If you are worried about your children's financial prospects, get in line.
Just 1 in 8 Americans believe the next generation will be more financially secure than they are, and only 1 in 5 think they will have a better quality of life, according to a new survey commissioned by Haven Life, an online term insurance provider. A small majority also expect the next generation to have less disposable income. 


"There are certain economic realities that a lot of parents are facing in terms of difficulty making ends meet and struggling with their own financial challenges," said Yaron Ben-Zvi, co–founder and CEO of Haven Life, which is owned by MassMutual. "A lot of it is taking their own experience and projecting it forward and thinking their kids are going to be struggling with some of the same issues."
The online survey of 1,124 adults was conducted during the first quarter of 2015.


The respondents have reason to be pessimistic. Census Bureau data show that median earnings for workers ages 18 to 34 rose between 1980 and 2000 to a high of $37,355, but for the period 2009-2013, they dropped to $33,883.  The figures were in 2013 dollars.


Rising levels of student debt are also weighing on the next generation. Between 2000-2001 and 2012-2013, the average amount of a student loan for any kind of postsecondary institution increased 39 percent in 2012-2013 dollars, to $7,000, according to the National Center for Education Statistics.
Read MoreHow millennials can ease their financial worries

Green generation?

Financial insecurity debt stress
Wavebreak | iStock | Getty Images

If money is no object, though, the survey respondents are more optimistic. Some 66 percent expect the next generation to be at least as healthy as they are, and to have healthier habits. Half of the respondents expect the next generation to be more environmentally conscious and lead a greener lifestyle.

A slim majority also expects the next generation to be more ethnically and racially diverse—a reasonable assumption if current trends in Census Bureau data hold true. The bureau calculated that 44.2 percent of millennials, whom they define as being born between 1982 and 2000, are part of a minority race or ethnic group. (Younger cohorts are even more diverse: in 2014, 50.2 of Americans under age 5 were part of a racial or ethnic minority.)


With millennials now the largest generation—the Census Bureau counts 83.1 million millennials, compared with 75.4 million boomers—the impact of their financial situation will likely ripple through the economy.

Ben-Zvi sees millennials having financial goals similar to their parents', like wanting to own a home and start a family. "Their goals, to my mind, don't really shift" from what their parents wanted, he said. The implication of the survey, he added, "is probably that they may do these things later, and that will probably trickle down to other financial goals in their lives."


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Rent or buy a home? What millennials should know

 

Rent or buy a home? What millennials should know



More millennials are moving into the real estate market. About 65 percent of people ages 25 to 34 years old surveyed by Realtor.com in mid-June said they plan to buy in the next three months.
But buying is not always the best option. When deciding one of the biggest financial decisions of your life, keep these things in mind to see if you're better off buying or renting.



Here's where it makes sense to rent:


You have limited funds. If you don't have the money for a down payment and additional costs of owning a home, renting is the best option. Use rent-versus-buy calculators at Trulia or Bankrate.com to see what you can afford.
 
You are uncertain about your employment. If you are unsure about your job situation or living paycheck to paycheck, focus on conserving cash for future living expenses and building up your emergency fund, said Evelyn Zohlen, a certified financial planner and president of Inspired Financial in Huntington Beach, California.


 

You have a short-term time horizon. If you are on a work assignment that lasts two years or less, it makes more sense to rent rather than taking on the high transaction costs of purchasing a home. Same goes if you plan to move in the next couple of years or want to start a family in a few years. On a similar note, if you are going through a significant life transition, like divorce or loss of a spouse, renting is a better idea while you get a little better footing.
But you are better off buying if:


You can cover the additional costs of owning. Make sure you can pay the down payment and closing costs before buying a home. "Most banks still want a 20 percent down payment," said Ryan Severino, a senior economist and director of research at commercial real estate data provider REIS. So if you are purchasing a $250,000 home, a 20 percent down payment would be $50,000. That's in addition to a typical 5 to 6 percent in commissions plus another 1 percent in closing costs. Maintenance costs are also a big factor to budget for.


 

You plan to stay in the home at least five years. It's best to buy when you have the "long-term horizon," Zohlen said. Staying in a house that you buy for five years or more means you are more likely to recoup what you paid in transaction costs and generate a return on your investment.
You want to reap the financial benefits of homeownership. Low interest rates make homeownership attractive because it decreases the amount borrowers pay on their loans. Mortgage rates remain near record lows after the 2008 financial crisis. The average rate on a 30-year fixed-rate mortgage is 3.9 percent, according to Bankrate. If you itemize your federal return and don't qualify for the alternative minimum tax, you can deduct your mortgage interest and property taxes from your tax obligations. And most importantly, you can build equity in your home, something that isn't possible with a rent payment.



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Monday, August 3, 2015

Turning 65? How to avoid a pricey Medicare misstep

Turning 65? How to avoid a pricey Medicare misstep

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As Medicare celebrates its 50th anniversary, consumers may find there's still plenty about the government program that's tough to cheer about, if they're not careful about their choices.
"I don't think Medicare is very user friendly, although they have tried to be," said economist Alice Rivlin, a senior fellow at the Brookings Institution.
One of the first potential missteps is waiting until your 65th birthday is imminent to think about Medicare, said Carolyn McClanahan, a certified financial planner in Jacksonville, Florida. Many people don't understand what the various parts of Medicare cover, she said—and perhaps more important, what they don't. Some of the noticeable gaps include long-term care, most dental care, vision exams if you need prescription glasses, and hearing aids.
"They don't understand there's unlimited out-of-pocket potential," said McClanahan. A healthy couple retiring this year is likely to spend $266,589 over their lifetimes on Medicare Parts B and D, and supplemental insurance, according to the 2015 Retirement Health Care Cost Data Report. Including uncovered costs such as dental, vision and co-pays, the tally rises to $394,954.
Those gaps can merit more advance planning. The need for long-term care insurance, for example, is something best assessed in your 50s, said Lazetta Rainey-Braxton, a certified financial planner in Baltimore. But that tends to fly under the radar. "People just think it's a medical issue, with long-term care," she said.
Healthcare senior medicare
Ariel Skelley | Getty Images
Forethought can also help you decide among gap coverage options, including Medicare supplements and Medicare Advantage plans, McClanahan said. A bad pick on the latter, she said, is "like being in an HMO you don't want to be in." (One trick to narrow the field: Ask your current doctors which Medicare Advantage plans they work with and like.)
But don't take too long to consider your options. A second big early Medicare misstep is missing enrollment deadlines, said Rainey-Braxton. "Miss that window, and you're essentially locked into paying a higher rate (because of penalties)," she said. That's a lifetime of penalty rates for Part B, and higher Part A premiums for twice as long as you went without coverage. You might also be without coverage until the next enrollment period.
When to take action depends on your employment situation. If you and your spouse are already retired, you have a seven-month window that starts three months before the month of your 65th birthday, and up to three months after.
Still working? That depends on the size of your employer and the kind of health plan you're on, McClanahan said. You may need to sign up, and have your employer's plan become secondary coverage. Or you may be able to keep your employer's plan, with an eight-month window for Medicare enrollment opening once you retire.
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