Protecting Your Retirement Plan

You've done a great job with your retirement plan and a great job of saving. But now you're thinking about worst case scenarios. What happens if there's another recession? Will I lose everything? Is my current allocation too aggressive? That's the scenario on the latest bonus call with Bob from Philadelphia.

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Bond Yield Plunge is a Boon for Mortgage Borrowers

Post-Brexit uncertainty has meant that global investors are pouring money into so-called safe haven investments, like US government bonds. As prices rise, benchmark 10-year Treasury yields touched an all-time low of 1.344 percent – think about that…if you lend the US government money for ten years, you will only receive just over 1.3 percent interest—and if you lend for 30 years, you will only get about 2.1 percent! That’s terrible news for savers, especially risk-averse ones -- as well as pension funds, which try to provide stable income for retirees. But it's great news for mortgage borrowers. The average contract interest rate for 30-year fixed-rate mortgages for conforming loans ($417,000 or less) has dropped to near all-time lows for those with good credit. There are some lenders going as low as 3.25 percent, the lowest level since May 2013. 15-year loan rates are running at about 2.75 percent. Adding to the good news is that at the same time, home prices have mostly increased and credit scores have improved, which means many people who couldn’t refinance a few years ago, can do so now.

According to Mike Raimi of Luxury Mortgage Corp, “Closing a loan is still labor intensive. Borrowers need patience and perseverance” according to Mike. Mortgages for new home purchases can take about three weeks to close, while refinancing can take longer – “anywhere from 30 to 45 days.”

If you are looking for a 30-year conventional mortgage with 20 percent down, the best rates are available for those with credit scores above 740. For every 20-point drop in score, the mortgage rate jumps by a quarter of a percent. If your credit score is below 620, it’s tough to get a loan closed. (Credit scores do not have nearly as much impact on loans of 15 years and shorter.)

If you are preparing for the mortgage process, here’s what you will need:

• W-2 (2 years)
• Tax Returns (2 years)
• Pay Stubs (2 months)
• Bank statements – all pages (2 months): You may also need to provide the lender with an explanation for any large deposits that have been made into bank accounts. This has more to do with beefed up anti-money laundering efforts than the mortgage process itself.
• 6 months of mortgage payments in cash reserves (sometimes less, but this is a good rule of thumb)
• Investment accounts: If bank accounts do not show adequate assets, lenders may ask for investment account statements.
• Donor letter: If a family member or friend is helping you with your down payment or providing cash for the re-fi, he or she may be required to provide a letter and may also have to present his or her account statements.
• Self-employed applicants: Must have 2 years of proof of self-employment and 2 years of tax returns. Gone are the days when self-employed borrowers can “add-back” tax preference items. While you may have used the tax code to your advantage, the bank will not cut you any slack – the numbers on the return are set in stone.

Mortgage Market: What you Need to Know to Close a Loan in 2015

Fears over a global slowdown may have stock investors wishing for the merry go-round instead of the roller coaster, but bond investors have been thrilled. In fact, the recent unrest has meant that investors are pouring money into the US government bond market, which drives prices higher and yields lower. As of this writing, the yield on the 10-year treasury has fallen to 1.85 percent, a far cry from the 3 percent seen just over a year ago. As a result of the bond market rally, the average contract interest rate for 30-year fixed-rate mortgages for conforming loans ($417,000 or less) has dropped to 3.8 percent, the lowest level since May 2013, according to the Mortgage Banker’s Association. A jumbo loan will cost slightly more—3.86 percent and the average rate for a 15-year loan has decreased to 3.1 percent.

Additionally, there is new pricing on FHA loans, which could bring more first time homebuyers into the market this year. With an FHA loan, borrowers need a 3.5 percent down payment and the agency is more flexible when it comes to underwriting, especially for those with credit scores all the way down to 620 and for those carrying student loan debt. This year, FHA loans are cheaper, because the government reduced premiums for FHA mortgage insurance by 0.5 percent – its now 0.85 percent, down from 1.35 percent of a loan's value. The move is expected to save a typical first-time homebuyer about $900 in her annual mortgage payments.

With all of this news, I thought it was time to check in with Mortgage Mike (aka Mike Raimi of PMAC Lending Services) for an update on the 2015 mortgage market.

What do you need to know about attaining a mortgage now? “The process continues to improve, but it is still labor intensive. Borrowers need patience and perseverance” according to Mike. Mortgages for new home purchases can take about three weeks to close, while refinancing can take longer – “anywhere from 30 to 45 days.”

If you are looking for a 30-year conventional mortgage with 20 percent down, the best rates are available for those with credit scores above 740. For every 20-point drop in score, the mortgage rate jumps by a quarter of a percent. If your credit score is below 620, it’s tough to get a loan closed. (Credit scores do not have nearly as much impact on loans of 15 years and shorter.)

If you are preparing for the mortgage process, here’s what you will need:

• W-2 (2 years)
• Tax Returns (2 years)
• Pay Stubs (2 months)
• Bank statements – all pages (2 months): You may also need to provide the lender with an explanation for any large deposits that have been made into bank accounts. This has more to do with beefed up anti-money laundering efforts than the mortgage process itself.
• 6 months of mortgage payments in cash reserves (sometimes less, but this is a good rule of thumb)
• Investment accounts: If bank accounts do not show adequate assets, lenders may ask for investment account statements.
• Donor letter: If a family member or friend is helping you with your down payment or providing cash for the re-fi, he or she may be required to provide a letter and may also have to present his or her account statements.
• Self-employed applicants: Must have 2 years of proof of self-employment and 2 years of tax returns. Gone are the days when self-employed borrowers can “add-back” tax preference items. While you may have used the tax code to your advantage, the bank will not cut you any slack – the numbers on the return are set in stone.

Should your retirement plan be to work longer?

Here’s the good news: we’re living longer. And here’s the bad news: we’re living longer. According to the Society of Actuaries, Americans who reached age 65 in 2011 are projected to live another 21 years to age 86, on average. If these same Americans reach age 86, their life expectancy would extend to age 93! As a result, the U.S. population aged 65 years and older is growing rapidly. In 2010 (the most recent year for which data is available), older Americans comprised 13 percent of the population. But as baby boomers creep up in age, population projections for those over 65 explode within two decades. In 2030, older adults are expected to number 72 million, almost 20 percent of the country’s total population.

While 75 may be the new 55, there are some significant ramifications of the population boom. Whereas previous generations could plan on retirement lasting 10 or 15 years, today we have to count on 25 or 30 years, making the task of saving enough a mighty difficult one.

When most people think about retirement planning, there are three basic strategies: save during your working years; spend less in retirement; and delay the age of retirement. While saving early and consistently is the oft-prescribed remedy, it’s not always easy to implement. In fact, pre-financial crisis retirement planning often consisted of relying more on an increase in home equity and a steady rise in investment accounts, than on increasing contribution levels. But the financial crisis and Great Recession of 2008-2009 blew up those assumptions, forcing some to reduce or abandon contributions and in extreme cases, to spend down a substantial portion of their nest eggs to survive.

These folks are looking at ways to squeeze their current and future expenses, but many have determined that the only way they will be able to fund a lengthy retirement is to work longer. According to a recent Associated Press poll, 82 percent of working Americans over 50 say it is at least somewhat likely they will work for pay in retirement, and 47 percent of working respondents now expect to retire later than they previously thought. Respondents plan to call it quits at about 66, or nearly three years later than their estimate when they were 40.

Given what has transpired over the past five years, those results should not surprise anyone. Among those who report retiring before the Great Recession, the retirement average age was 57, while the average for those who retired after the crisis is 62. The dramatic turn in financial circumstances, combined with living longer and healthier lives, has led many to remain in the workforce. According to the U.S. Bureau of Labor Statistics, about 18.5 percent of Americans age 65 and over were working in 2012, almost 8 percentage points higher than in 1985, when just 10.8 percent of Americans over age 65 were still at work. By 2020, an estimated one-quarter of workers will be 55 or older, up from 19 percent in 2010.

But just because you want to work, does not mean that you will easily get a job. The AP poll found that 22 percent of adults, age 50 years and older have searched for a job in the last five years. Of that group, over half have found the job search to be moderately or very difficult. With 11.3 million Americans seeking employment, the competition is obviously stiff.

In fact, a third of retirees told AP that they did not feel they had a choice except to retire. They may have wanted to work longer, but without steady income, they were forced to file for Social Security benefits early. Although doing so permanently reduced their benefits, a lower monthly check is far better than no check at all.

One glimmer of hope is that as the recovery continues, more jobs will become available and as the folks in charge of hiring examine the applicant pool, they may find that a robust 55 year old will be a more appreciative and loyal employee than a younger counterpart.

Distributed by Tribune Media Services