Saturday, January 18, 2014

Providing Additional Financial Security Through Partial Retirement

Our grandparents might give us a funny look when we mention a “partial retirement” to them.  However, for those of us nearing retirement or even for those who have 30 years or so ahead of us, partial retirement might be becoming more a fact of life. 

As Amy Hoak notes in her MarketWatch.com article, “The rise of the ‘partial retirement”, “In fact, 20% of workers between the ages of 65 and 67—and analyzed in a recent University of Michigan Retirement Research Center study—are partially retired, up from 5% to 10% in 1960. More workers are slowing down earlier, too: 15% of those 60 to 62 years old are partially retired. According to the report, in 1960, partial retirement among this younger group was “virtually non-existent.”

But partial retirement might not be that bad of an idea, and it could actually help protect us in several major areas of our retirement future.

Combating rising healthcare costs
According to a November 2013 Huffington Post article, “From 2000 to 2011, U.S. health care spending increased from $1.6 trillion to $2.7 trillion -- a big leap owing almost completely to factors other than increased demand, from the elderly or anyone else. More than nine in 10 of those dollars spent, the study found, paid for higher treatment and drug costs.”

Meanwhile, a CNBC.com article reports that the average spent on health-related costs not covered by Medicare is about $135,500 according to 2012 data from the Employee Benefit Research Institute.  It also found that Ameriprise noted that experts predict Americans could need $227,000 for health-related costs not covered by Medicare by 2020.”

With retirement for my wife and I still a good 30 years off, who knows how much health-related costs will be in 2040.  However, being able to rely upon part-time work and even potential work-sponsored health benefits from this work could be a big help in covering some of these costs.

Minimizing popping bubbles
Who knows when the next financial bubble will pop or what sort of bubble it will be.  The tech bubble, housing bubble, and financial crisis are just a few recent examples of what could happen when it comes to financially devastating events.

According to a September 2013 CNBC article, “Four months ago something troubling happened in the housing market. The home price affordability index tracked by the National Association of Realtors slipped below its long-term trend line, marking a possible beginning of a housing bubble.”

With the financial crisis cutting my retirement account nearly in half, and the housing bubble sucking tens of thousands of dollars worth of equity out of our home, partial retirement could be a great way to hedge against the extreme and often unexpected financial effects of a popping bubble, whatever they might be.

Furthering family financial security
A Forbes.com article from February 2011 reports that “As a whole, baby boomers are expected to receive an estimated $8.4 trillion in inheritances; they’ve gotten $2.4 trillion already with $6 trillion more on the way, according to the Center for Retirement Research at Boston College. That works out to a median amount of $64,000…”

While it might be a pipe dream, I hope to leave more to our children than this $64,000 amount.  And though any number of factors could affect this aspiration, partaking in a partial retirement could allow us to better protect our retirement savings by utilizing this extra income as a supplement to cover expenses.  This could help us maintain or even grow our savings, which could help us one day leave more to our children.


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Disclaimer:
The author is not a licensed financial professional.  This article is for informational purposes only and does not constitute advice of any kind.  Calculations have not been verified by a professional.  Any action taken by the reader due to the information provided in this article is solely at the reader’s discretion.


Tuesday, January 7, 2014

3 Key Factors in the Buy vs. Rent Argument

I was a long-time renter before I ever bought a home.  I enjoyed renting and found a variety of aspects much more beneficial than being a homeowner.  However, when considering the “rent vs. buy” argument, there can be several major factors that sometimes get left out of the equation and that can play huge roles in the decision-making process.

Timeframe
The planned timeframe for living in a home or apartment can make a huge difference in the decision as to whether to buy or rent.  If that timeframe is only a year or two, or even less than five, all the costs involved in obtaining a mortgage and buying (and eventually selling) a home might make it far more expensive than renting.  However, if a buyer is looking to be in a home for a substantial period of time -- say 10 years or more -- it could be enough time to recoup some of those many carrying costs that go along with home ownership.

Mortgage interest
According to creditloan.com, the average American’s interest payments on debt total $600,000 over the course of a lifetime.  They go on to note that, “After 30 years of making payments, a homeowner with a $240,000 mortgage loan will have paid over $580,000 on his/her house.”

Interest on a mortgage can add substantially to how much it costs to own a home over time.  Factor in things like property taxes, home repairs and maintenance, homeowners and possibly mortgage insurance, higher utility costs, and other home expenses that might not come with a rental or that might come in lesser amounts, and the costs to own may not seem so great as when compared to renting.  And even just a one or two percent increase in interest on a mortgage can equate to tens of thousands of additional dollars on a loan’s overall cost throughout its term.

How a loan is amortized can also affect how long it could it could take living in a home to make it worthwhile.  Understanding that maybe only $200 or $300 of a $1,000 mortgage payment toward the beginning of loan may be going to principal while the rest goes to interest could make a big difference in whether it’s better to rent or buy for a particular length of time.

Closing costs both when buying and selling a home
Closing costs on a home can add substantially to how much it costs to become a homeowner, how much it costs to sell, and whether it’s better to rent or to buy.  There can be closing costs not only associated with the sale of the home, but with purchasing it as well, and such costs can range into the thousands or even tens of thousands of dollars.

When purchasing a home, there can be the costs of obtaining a mortgage, inspecting the home, insuring the mortgage, insuring the title of the home, and insuring the home itself.  When selling there can be credits to the buyer, title company fees, costs of paying off a mortgage, real estate agent commission, postage fees, and additional costs that can really have the costs of selling a home skyrocketing, whereas with renting, many, if not all such fees can be avoided completely.

Therefore, the next time you’re considering whether it’s better to buy or to rent, remember that there can be much more than just the price of a mortgage to compare to the price of a rental to help make your decision…much more.



Disclaimer:

The author is not a licensed financial, tax or real estate professional.  The information provided in this article is for informational purposes only and does not constitute advice of any kind.  Any action taken by the reader due to the information provided in this article is solely at the reader’s discretion.