Northern California Bankruptcy Lawyer

On The Bankruptcy Soapbox

The Soap Box

Is Home Equity A Substitute For Retirement Savings

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My house is my retirement plan.

If I had a dollar for every time a client said that, I could retire today.

But that approach to funding your old age only works if….

Sell your house to retire

The value in your house makes your balance sheet strong, but doesn’t put food on the table or gas in the car.

That home equity is illiquid.  You can’t write a check against it for the other necessities of life.

To get at that equity, you need to sell the house, or  borrow against it.

A traditional loan requires that you have cash to cover the monthly loan payments.  But hey, you’re not working.  Where does that money come from?

Reverse mortgage

The reverse mortgage was invented to allow seniors who can’t make monthly payments on a conventional loan to access the equity in their home.

But the fact that a reverse mortgage has no monthly payments does not mean that it’s cost free.

No, the interest on the money borrowed accumulates over the life of the borrower.  And the unpaid interest itself earns interest.  The cost is steep.

Dangers in reverse mortgages

Reverse mortgages top list of older consumer complaints

And a condition of a reverse mortgage is that you keep up insurance and property taxes.

Real property has carrying costs

Whether encumbered or owned free and clear, real property has its own set of expenses.

  • Hazard insurance,
  • property taxes,
  • repair and upkeep.

Gotta have cash for those things.  The average Social Security check is about $1300.

Where do you live if you sell

If you’ve benefited from rising home values over your lifetime as a homeowner, the cost to replace the house you’re selling has risen as well.

And buying less house in your community still has the carrying costs we talked about above.

Or you rent.  So housing still has a cost.

Or you move out of the community you live in to somewhere where your sale proceeds go further.

You move away from friends and support systems.  Or maybe you move back to somewhere where you have a support system.  It can work both ways.

Taxes shrink your equity

Capital gain taxes are triggered if you sell your home.  Current tax law excludes from taxable income $250,000 in gain for a single person and $500,000 for a married couple. (Watch for changes, here).

So taxation will deplete your sales proceeds only if you have experienced a lot of appreciation over your lifetime.

But if you’re sitting on lots and lots of equity, count on it shrinking if you sell.

Don’t hide behind your house

There are no easy or universal answers here.  Our lives are longer and our preparation for old age is woefully incomplete.

For too many people I meet, the “home is my retirement account” is an excuse for overpaying for housing at the expense of retirement savings.  It provides cover for failure to set aside any money now.

Diversification of your retirement assets is clearly best.  Have cash and home equity as you age.

But however you are situated, give some clear thought as to how you fund those decades of life when you aren’t working.

More

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What it costs to retire here

California homestead and senior debt

Image © Fotolia

Annual IRA Contribution: Use It Or Lose It

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IRA contribution

 

Tax day approaches. Only a few days remain to make an important decision.

You expect to live for decades after you’re eligible for Social Security, don’t you?

Then, you have only until April 15th to use the 2018 allowance for contributions to a tax-advantaged IRA.

Miss making that 2018 contribution and it’s gone for all time.

So, you miss out on that contribution growing, tax free, until you withdraw it.  You miss the miracle of tax-free compound-interest.

Do you really want to miss this opportunity?

Contributions have annual limits

For reasons that I’m sure made (some) sense at the time, Congress capped how much you can contribute to your IRA each year.

For 2018, the contribution cap is $5500, unless you are 55 or over, when it rises $6500.

These numbers are caps;  you can contribute less if that’s all you can manage.

Window for contributing closes

Whether or not you choose an IRA where you can deduct your contribution from your taxable income for the year or not, contributions for 2018 have to be made by the standard date for filing tax returns.

Even if you get an extension to file the return, the window to make a 2018 contribution closes on April 15th this year.

Once the standard date for filing tax returns passes, you can’t go back and add money to your IRA under the 2018 cap.

IRA doesn’t have to be complicated

It’s easy to get paralyzed by the choices you have for retirement savings:

  • banks or brokerage firms;
  • deposit accounts or stocks;
  • traditional IRA or Roth IRA.

If you’re overwhelmed, just open an IRA account and make a contribution.  There are no bad decisions when it comes to savings.

When the dust settles, you can evaluate what to invest the money in or whether to convert the account to a different flavor.

But snooze here, and you lose forever the chance to make a contribution to your old age.

Why I obsess about IRA’s

Why I’ve given up talking about “retirement”.

Too many people who need me for help with their debts have NOTHING saved for their old age.  Those who have saved something generally have under $10,000.

Hard times lie ahead for these folks:  lives are longer and Social Security rises only with the cost of living.  The average Social Security check is about $1300/month.

You don’t live well, anywhere, on $1300 a month.

Or you become dependent on your family, if you HAVE family.  Dependency is never appealing.

Take the first step toward taking responsibility for a better old age.

More

The strongest reason to file bankruptcy

Retirement savings are safe in bankruptcy

 

 

Double Dipping On Retirement Savings

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double dip retirement

Any time you can double your savings and protect your money from creditors is a good time of the year.

The period between New Years and Tax Day is my favorite time of the year, just for that reason.

You can make contributions to your IRA last year AND contribute to this year’s IRA allowance.

You get a scoop of last year’s tax benefits, topped with a scoop of this year’s tax break.

You don’t have to be filing bankruptcy for this to be important.   But, this trick is a favorite of mine when I have my bankruptcy-lawyer hat on.

IRAs in bankruptcy

My goal is to maximize the value a bankruptcy client can keep through the case.

Everyone in bankruptcy can protect over a million dollars in IRA  savings.  Not that I’ve seen an IRA anywhere near that number.  But Congress says IRA savings are a good thing, and beyond the reach of your creditors.

And I’ve never faced challenge from a bankruptcy trustee when a client contributed the maximum allowed by tax law to a retirement account, even if they sold other assets to make the contribution.

IRAs for all

Tax advantaged retirement plans are grounded in federal tax law and are available to the solvent as well as the insolvent.  

IRA’s are asset protection on the cheap

Too many Americans seem to want to live in a little bubble that tells us that old age will work out OK, (somehow) whether we take responsibility for making it happen or not.

That’s magical thinking at its worst.

Unless you expect to inherit a fortune, you need to take steps now so that you are financially independent then.

Tax break opportunity is fleeting

Old age is inevitable and the tax code has an annual limit for how much you can contribute to a retirement vehicle to grow tax free.  If you don’t make a contribution equal to the limit for last year, that unused tax break is lost forever.

Between now and April 15th, take two scoops of retirement savings.  Or seed your retirement account with any tax refund from this  year.

I’m Done Talking About Importance of Retirement Savings

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retirement planning

Shedding debt so you can save for retirement is the most compelling reason to file bankruptcy in my book.

Get rid of the debt that’s dischargeable so you can fund your retirement, I exhort.

Between the crippling cost of housing in the Bay Area and parent loans for college, there is so little margin for discretionary spending that I begrudge every dollar my clients spend on credit card debt.

I cringe when I see families paying American Express instead of their IRA.  I acknowledge the reality of the obligation to the credit card folks.  But the consequences of not paying are vastly different for an individual than they are for credit card issuers.

American Express, and every other consumer lender, built into its pricing model the fact that not everyone who borrowed money on their plastic card would repay.  They still make money whether you pay off your card or not.

American Express doesn’t have to retire, and you do.

With few exceptions, every client I meet without an employer funded or sponsored retirement program has only pennies set aside for retirement.

All that said, when I ask about what the client has saved for retirement, I’m met with one of two retorts:

My house is my retirement is one, superficially convincing in the land of runaway home values.  (Houses don’t make good retirement plans, however.)

But the second is:  I don’t plan to ever retire.

Sometimes the “I won’t retire” is an acknowledgment that they can’t support themselves without a job.  Other times, they are indulging in magical thinking that they will always be capable and valuable to an employer.

The facts of aging, of course, are different.  We’re living longer, markedly longer.  Dementia is on the rise.  The average Social Security check is around $1300.

No more pretty talk

old ageSo, I’ve had it with serving up polite talk about “retirement.”  In this era of blunt speaking, let’s take off the gloves:

My question to clients henceforth is “how are you going to pay for old age?’

We can dance around whether we’re ever going to “retire”; but presumably, we’d all like a long stretch before we die.

And that long stretch requires funds if old age is going to be comfortable.

So, my mantra going forward is discussion of funding old age.

The ugly truth is that savings for old age requires discipline and some degree of self denial.  And many of my clients demonstrate enormous amounts of discipline in making minimum payments and keeping all the financial balls in the air.

Yet none of that discipline is exerted to provide for their old age.

The images of impoverished elders are not pretty.  Don’t find yourself supplying another heartbreaking picture of failure to plan for old age.

 

 

 

 

 

643 Bair Island Road
Suite 403
Redwood City, CA 94063
Phone: (650) 694-4700

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