The Money Class (11 page)

If your parents are in their 50s, you probably planned on skipping the Retirement Class aimed at people in their 40s and 50s, not to mention the class on living in retirement. But guess what: I am going to ask you to read those classes too because they contain a few important lessons. There are some defining conversations you should have with your parents while they are still young (yes, parents in their 50s and even early 60s are young by my standards). As I explain in that class, there are some critical measures to be considered and acted on in your 50s to help ensure your financial security in your 70s, 80s, and beyond.

Too often, families avoid these conversations about the inevitable road ahead. Then when the parents are in their 70s and not in great financial shape, they turn to their child for help, and at that point there is less time and opportunity for either the parents or the child to deal with things effectively. If you have this conversation sooner rather than later, you will both be better off. This isn’t an attempt to accelerate a type of role reversal; this is about adults—children and parents—coming together to work out a plan for the future.

So go to the Retirement Class and “audit” that class; know what your parents are facing. And when you’re ready to have the talk, here is a short list of topics you will want to cover:

Will they be able to retire mortgage-free?
Whether they plan on staying in their current home or relocating, their goal should be to have no mortgage costs in retirement.

Have they considered long-term care insurance?
If your parents cannot afford a policy on their own, you (and your siblings) should consider whether you can help with the premium cost for a policy. Spending a hundred dollars or so a month now to help with LTC premium payments could save you tens of thousands of dollars decades from now if your parents will require nursing care or assistance with daily activities when they are elderly.

Have they carefully run the numbers on their retirement income?
If your parents are considering retiring before age 66 or so, do they feel confident that they will have enough retirement income to support themselves for 20 or so years? In the Retirement Classes, I discuss strategies that can deliver more income in retirement, from delaying retirement, to waiting until at least age 66 or 67 to begin receiving Social Security, to choosing the right payout option if they are entitled to an old-fashioned pension.

Building Family Financial Security Under One Roof

For most households, the monthly expense of the mortgage or rent, and all the other costs that come with maintaining a home, are the biggest line item in the budget. If you look down the road and find that your dreams require a dramatic reduction in living costs, then quite possibly your next conversation should be about whether it makes sense to combine households. Yes, I am talking about multiple generations living under one roof.

Of course, you know best whether family dynamics would doom this to fail or could make it a brilliant move. But if you are a close-knit family and the thought of moving in with your parents, or having them move in with you, doesn’t set off your stress receptors, then I am here to tell you that combining households is a phenomenal idea. Interestingly, even before the recent recession took hold, a survey by the Pew Research Center found 16% of households—accounting for 49 million Americans—had at least two adult generations present. That’s up from 12% in the 1980s. I fully expect that that percentage is higher today, simply because of the vast number of families that have lost their homes or are struggling with long-term unemployment.

But I don’t think extreme financial hardship is all that is at play here either. Part of the New American Dream is a shift in emphasis. Overextending ourselves to buy more or own more has lost some of its cachet. Sure, we still want to live well and have our creature comforts. But I sense we are also rethinking the extent to which our material possessions matter, and recognizing—or remembering—that it is relationships that matter most.

Now, of course, not every family can pull this off. Personalities will dictate what is possible for your family. But I ask those of you who can envision combining households not to be shy about raising this possibility and starting the conversation. I think for many families—across generations—it could be the path toward ensuring everyone’s new dreams are realized, together.

Do your parents have their essential legal documents updated?
It’s not enough that they drew up a will or revocable living trust 10 or 20 years ago. They—and you—need to make sure that those documents are up to date. If there has been a death, divorce, or remarriage, they might inadvertently be disinheriting you.

Go to The Classroom at
www.suzeorman.com
:

I have written extensively in the past on the essential documents every adult must have. On my website you can find articles on why a simple will is often not nearly enough protection for you and your loved ones, and on how to put together the key essential documents: a will, a revocable living trust, and an advance directive.

Make sure, too, that your parents have an advance directive that spells out what level of medical intervention they want if they ever become too incapacitated to speak for themselves—and that they give you a copy. Without that document, adult children are exposed to unnecessary heartache, and often irreparable sibling arguments, about how to handle end-of-life decisions. The parent can make sure it never comes to that, by having this document in place.

When a Parent Remarries

We tend to think of the impact of blended families mainly in terms of small children, but the truth is, adult children need to pay attention here too. Very often when a parent remarries, he or she moves into a new home and takes ownership as joint tenant with right of survivorship (JTWROS). That means that when one co-owner dies the other inherits full control of the home. So let’s say your mom remarries and puts money down for a new home she moves into with your stepfather. He is a great guy, don’t get me wrong. But if Mom and Stepdad own the home as JTWROS, and she dies first, your stepdad has full ownership of the home, with no legal obligation to leave you any portion of the home when he passes. Mom didn’t mean to disinherit you, but it can happen nonetheless. Please understand that even if Mom’s will or trust says you are to inherit her stake, it doesn’t matter. How the home is owned—the title—overrides what is in a will or trust. What your mom and stepdad should have done is take title as Tenants-in-Common; at either’s death, their portion of the home would pass to their heirs, not the surviving spouse. (At that point the heirs could then make arrangements, if they chose, to allow the surviving spouse to remain in the home until his/her death.) In The Classroom on my website I review the various ways you can take title to property.

So while you’re having those very adult conversations with your parents, you might want to touch on the matter of how their house is owned and what they would like to happen to it in the event of their passing. And then make sure their will and trust reflect their wishes.

I recognize that these may not be the easiest of conversations to initiate, but bring the right energy to the task and I think you may be surprised by how cathartic this could be for everyone. The goal here is to establish that your parents have what they need for a comfortable and secure retirement. In my opinion, it is a great way to honor your parents—to show them they have raised responsible, thoughtful, farsighted children with their best interests at heart. What a powerful legacy that is.

LESSON 6.
ADVICE FOR GRANDPARENTS: HOW TO BUILD A LASTING LEGACY

According to a recent poll by the MetLife insurance company, grandparents bestowed $370 billion in financial support on their grandchildren from 2003 through 2008. The median gift was $3,000, and nearly 4 in 10 grandparents with a college degree were contributing to a grandchild’s education.

The beating heart at the core of all that giving is, without a doubt, love. Every grandparent I know yearns for their grandchildren to have the resources and opportunity to live a wonderful life. That is a universal dream. But in the years since that survey was taken, the financial gifts grandparents can provide have taken on a new importance. As parents struggle to retool their financial plans, assistance from grandparents can be a huge help. In the MetLife survey, more than 80% of gifts were made in cash. I don’t think that’s smart. The money you give today funds the dreams of your grandchildren. Do you hear that? Grandparents: You are the dream makers for your grandchildren! In the lesson that follows I will share strategies that will help you help your grandchildren make the most of your giving.

The benefits to your grandchildren aside, it also happens to be a smart way to shift assets out of your estate. In 2011 any individual can gift up to $13,000 to any other individual without running afoul of gift tax laws.

Here are a few different ways to consider how to gift money for dreams:

Follow the parents’ lead
. Ask your kids if they have instituted any savings programs within the family. As I explained earlier for parents raising kids, I recommend encouraging children from an early age to set aside some money for savings and charitable giving. Grandparents can participate in the plan that is already in place and you can institute your own matching policy.

529 college savings plans
. Ask your kids if they have set up a 529 college savings plan for their children. You can make contributions directly into that plan.

Set up a Roth IRA for a teenage grandchild who has a part-time job
. As long as your grandchild has earned income you can fund a Roth IRA for them. So let’s say your grandson made $2,000 last year in a summer job. You could give him $2,000 to open a Roth IRA; he doesn’t have to invest his own money. As long as he made $2,000 you can bankroll the IRA contribution. In fact, if your grandchild earned at least $5,000, you could give him that much in 2011 for a Roth IRA; $5,000 is the current maximum annual contribution limit to Roth IRAs for anyone under the age of 50.

Here’s where the legacy part comes into vivid display: Let’s say you contribute $2,000 a year to your grandson’s Roth IRA each year from the age of 15 to 25. So you have contributed a total of $20,000 over 10 years. Now let’s assume that money grows at an annualized 6% all the way until your grandson turns 70. Your $20,000 in Roth IRA gifts could be worth nearly $400,000. And as I explain in the Retirement classes, contributions to Roth IRAs can be withdrawn at any time without owing a penny in tax. Wow—I wish someone started an IRA for me when I worked my first job as a counter girl making sandwiches in my dad’s delicatessen when I was a teenager. That’s quite a legacy to put in place.

Help them save for a car and/or home
. Notice I said “help.” I think it is very important that your grandchildren—and your children, for that matter—make the commitment to save on their own for big-ticket purchases. If they lack the resolve and the resources to save for a long-term goal, then they are probably not yet responsible enough to make that purchase. I think it is great if you contribute to their goals, but I do not want you to bankroll anything in full. Sit down with your grandchild and ask him what he hopes to save up for in the future and then offer to become his co-saver. Think of this like a 401(k) match. Maybe for every dollar he puts in the down payment fund you can match 25 cents, or a dollar, or $5.

Give experiences, not things
. Recent studies have shown that happiness comes more from pleasurable experiences than from buying things. I think that’s a great opportunity for grandparents. Focus on gifts that you can experience together, whether it’s tickets to a ball game, a weekend jaunt to the city to hit museums and the theater, or a weekend getaway at your home just to spend some time together. In addition to the fun of the here and now of the experience, you are also building memories, and maybe passing along some legacies as well. That, after all, is the most precious gift you can ever give.

LESSON RECAP

• Stand in the truth together, as a family. The more you talk and share, the greater your ability to reach your new dreams.
  
• Raise your children to be financially honest. Teach the value of saving, but give them the space to spend as well.
  
• Choose a college that is a great financial fit. Cost matters.
  
• Know how best to help a family member in need. Are you solving a problem or providing a temporary patch that just delays the inevitable?
  

• Pay it forward. Grandparents can seed the dreams of grandchildren.
  

CLASS

HOME

THE TRUTH OF THE MATTER

There is no aspect more fundamental to the classic notion of the American Dream than homeownership. Ask anyone their definition of the American Dream and I have no doubt that the first thing out of their mouth will be “Home.” The postwar boom years of the last century and the rise of suburban life ingrained this notion in us that homeownership is not only something to strive for as an American but very nearly our right. There is no single image that speaks to our security so much as a family home. And there is no greater manifestation of how each successive generation has fared better than the previous one—that very American promise—than the way we’ve traditionally “traded up” in the area of real estate. And why shouldn’t we have come to believe in this? After all, as a general rule, home values have historically risen over time. Your parents or grandparents most likely bought their first house for less than what you might spend today on a new car, and that house probably increased in value dramatically over the years. No surprise, then, that we grew to expect that you would buy a house that in time would be worth significantly more than what you paid for it, and that house would provide for you and your children. The equity you had in the house would be a safety net, a way to help fund college costs, to bridge a shortfall, to ease some of the anxiety of an underfunded retirement account. And then over-night, everything seemed to change.

The implosion of the housing market has already resulted in more than five million foreclosure notices in 2008 and 2009 and another 2.8 million in 2010, according to RealtyTrac. To be sure, the epic proportions of this disaster were the result of lax lending standards that allowed unqualified borrowers to become homeowners. But also to blame was a kind of entitlement gone wild—the American Dream careening out of control, fueled by greed and recklessness and untethered to a genuine sense of fiscal responsibility. I’m not going to lecture and point fingers—I did that in my 2009 book,
Action Plan;
we all know what went into making that perfect storm and we know all too well that the damage and repercussions are far from over. But I will point out that the housing crisis has ruptured and twisted our view of the American Dream like nothing else in my lifetime.

And the truth is, greed is not the entire story. Many families that didn’t overreach during the bubble years are nonetheless suffering as well. As I write, more than six million Americans have been unemployed for more than six months. Nearly one in five of us is either unemployed or working part-time, because we can’t find a full-time position. Continuing to make a monthly mortgage payment under those circumstances is proving painfully difficult given those harsh realities and the jobless recovery that we are told is under way. The federal government’s mortgage modification program has been a massive disappointment; from its start in the spring of 2009 through late 2010 barely more than one-third of homeowners who were enrolled in the Home Affordable Modification Program (HAMP) were granted permanent modifications. And thousands continue to wait a year or longer to learn their fate.

And let’s not forget that millions of people who have dutifully and responsibly made their mortgage payments have been direly affected as well. Deflated home values have put an end to the prospect of a home as retirement fund or college fund and raised the question of whether homeownership in fact even makes sense anymore. I am shocked by the number of people I talk to who view their home as an albatross, who are underwater, owe more than their home is worth, and regret the day they thought a home purchase was a great idea. It still surprises me to hear so many of you tell me you can’t wait until you can unload your house, that you long for the days when you sent your landlord a rent check and slept soundly at night. I guess my surprise is a measure of how ingrained the desire to be a homeowner is in every one of us. Even those of us who know the steep costs and the pitfalls of buying real estate, can’t help but feel some sense of betrayal, deep down, that this form of security has been taken from us.

So where does that leave the American Dream? In desperate need of revision, I’ll tell you that much. If your home is no longer the rock-solid financial foundation of your net worth, then it is time to rebuild that dream from the ground up. And guess where we start? You got it: by letting go of beliefs and platitudes that may no longer be a part of your reality, looking deep inside, locating your truth, and standing firmly in it.

If we are going to create together a New American Dream that defines us and sets down values that are durable, crystal clear, and unimpeachable, for generations to come, then we need to agree on some fundamental truths at the outset. Interestingly, you’ll see that many of these ground rules are ones your grandparents would have embraced—another case of going back to the future. So maybe in the end, we are not rewriting the American Dream so drastically after all; we are just getting back in touch with it in its purest form.

Before we begin this class in earnest, I would like us to walk through some governing principles, to make sure we are in step in our views about real estate:

•
A home is not a stock
. Investing in a home because you think it will rise in value enough to finance other financial goals—your retirement, college tuition, expensive annual vacations—was never wise. I appreciate that for a decade or so, watching your home’s value rise at a double-digit annual pace and being able to tap into those gains with a home equity line of credit was simply too irresistible for many. But we now know where all that financial dishonesty led and we are not going back there.

As I will explain in this class, homeownership is still a viable and smart step for many families. But it must not be viewed exclusively in terms of an investment. It is a place to live, first and foremost, a place to raise your family. That is its primary function. And when purchased with the right financial strategy and expectations it will also be a solid investment. It is a long-term savings vehicle you live in, not a short-term asset you flip to pay for other financial goals.

•
Renting may work best for many Americans
. While the old American Dream was rooted in the notion that it always made sense to buy once you could afford a home, the new dream requires a more complex analysis of what honestly makes sense given your career and family situation.

•
Financing is cheap, but not easy
. As I write this in early 2011, mortgage rates are remarkably low. The fact that you can lock in a 5% interest rate on a 30-year mortgage is an incredibly great deal. But qualifying for that great deal is no easy task as lenders have tightened their standards. To obtain a conventional mortgage you must now come to the lending table with a higher credit score, a higher down payment, proof that you have ample savings to be able to keep paying the mortgage if you are laid off, as well as full documentation of all your income and assets. Refinancing now requires having at least 20 to 30% equity in your home; just a few years ago you could refinance with no equity.

For those of you looking at today’s low prices and thinking it may be a smart time to buy, I ask you to stand in the truth of whether it may make more sense for you to rent. For homeowners who are struggling to keep up with a mortgage I ask you to stand in the truth that letting go may be the most honorable way of moving your family forward. And for all of us, we must adapt to the fact that a home is not a liquid investment whose value will rise at a fast and furious pace. I want to be clear: I still think that homeownership can make great sense for many of you. But you must have a clear-eyed understanding of what a home is and what it isn’t. I ask you to read every word of this class carefully and leave your assumptions behind. The work of this class is absolutely critical to shaping our notion of what truly constitutes your New American Dream.

I have organized the Home Class into the following lessons:

• The Truth About Home Values
  
• When It Makes Sense to Rent
  
• The New Rules of Buying a Home
  
• What to Do If You Are Underwater
  
• How to Reduce Mortgage Costs
  
• The Dangers of Home Equity Lines of Credit
  
• Reverse Mortgages
  
• Investing in Real Estate
  

LESSON 1.
THE TRUTH ABOUT HOME VALUES

If all you know about the housing market is based on what happened during the past 10 years, then the truth is you know very little. The extreme gyrations in the market since 2000 are in fact exceptional. Therefore, this lesson must begin by making sure you understand that recent history was completely disconnected from the longer-term story. Whether you are a renter thinking of buying or an owner deciding whether to stay put, trade up, or trade down, understanding what happened during the housing bubble and its costly aftermath is the foundation of this lesson.

A DECADE OF EXTREMES

From 2000 through the spring of 2006, the S&P/Case-Shiller index of home values in twenty metropolitan areas more than doubled. The average annual gain of 12% during that stretch exceeded the 10% long-term average for stocks. But since that peak, the same index has shed more than one-third of its value through October 2010.

I am here to tell you that neither double-digit annual gains nor double-digit annual losses is in any way normal. The ride up was fueled by a confluence of unprecedented events we all know are unlikely—I hope—to ever occur again. Lax lending standards allowed otherwise unqualified borrowers to become homeowners, and many more qualified buyers to purchase more house than they could actually afford. And don’t get me started on the role of Wall Street and regulators in aiding and abetting the dishonesty.

The ride down of the past three years is the painful process of coming back to the truth. That truth, over many decades, is that home values rise at an average annual rate that matches or slightly exceeds the long-term average annual 3.5–4% rate of inflation. For all the pain of the bubble bursting I find it so interesting that the same housing index today is 43% above where it stood in 2000. That works out to about a 3.3% annualized rate. Not too far off the long-term rate, is it?

Of course, national averages do not tell the real story of what is happening in your area. In the regions that had the biggest boom, the bust has been the most painful, and it may be a few more years before we see prices stabilize in those areas, since the backlog of foreclosures must be winnowed down. But the point here is that whatever has happened to your market, whenever it reaches its bottom, I want you to know what you can rationally expect to happen going forward. And that is why I want you to focus on a rate of 3.5% or so, on average.

STAND IN THE TRUTH

That brings us to our central stand-in-the-truth moment for the Home Class: Be realistic about what your home is worth today and be realistic about what it may be worth five, 10, 20 years from now. A $300,000 home in 2006 that is now worth $200,000 might “get back” to $300,000 in about 12 years, assuming an average price gain of 3.5%. Even at a very strong 6% rate it would take more than six years to get back to 2006 levels.

The decisions you need to make—the housing dream you are in charge of re-creating—must be grounded in your personal truth of what you have today, not what you had at the peak of the housing bubble in 2006. And I am asking you to look toward the future with an expectation that housing prices will, at best, post gains that are more in line with their long-term historical trend of keeping pace with inflation. This brings me back to a point I introduced at the outset of this class:

A HOME IS A SAVINGS ACCOUNT, NOT A HOT STOCK

Even though a home can still be a very solid investment that over time should grow in value, it is never ever to be mistaken for a liquid investment. Your emergency fund at your bank or credit union is liquid; you have access to it 24/7 and you know exactly what it is worth. A stock or bond investment is also fairly liquid; you can sell it five days a week and have the money in your account typically within a few days.

Your home, on the other hand, is an illiquid investment. If you wake up tomorrow and decide to sell, the best-case scenario is that you might have the cash deposited in your bank account in sixty days, and that’s me being highly optimistic. In late 2010 the average time it takes to sell a home is three to six months in many markets. That’s a long time to wait for your money.

What about a home equity line of credit (HELOC)? As far as I am concerned the rise of the HELOC is one of the most costly tricks the financial services industry played on willing homeowners. I never advocated turning your home equity into an ATM you could tap at any time. And as I explain later in this chapter, I think HELOCs could be especially dangerous in the coming years.

So do I think owning a home is still a viable dream given my insistence on expecting moderate appreciation going forward? Absolutely. But so too is renting. Remember what I explained in the very first chapter of this book: The way you create lasting security for you and your family is to focus on creating entirely personal dreams that reflect what is right and honest for you and you alone.