Regular readers know how concerned I am about the number of baby boomers and seniors who are financially unprepared for retirement. It's not like the downsides of aging are a secret. As we get older, our bodies wear out and we slow down. Unless we plan to work until the grim reaper shows up at the door, we need to save and invest quite a bit of money.
When we published our special report on reverse mortgages a few months back, I learned that the average age of seniors applying for a reverse mortgage had dropped by almost 10%. Many of these folks were drowning in debt, and they hoped to use the payouts to help keep them afloat.
Last week I made note of an Employee Benefit Research Institute (EBRI) study reporting that only 10% of eligible workers are making the maximum contributions to their employer-sponsored retirement plans. Of the 90% who were not, most said they needed that money to pay their bills… today.
Why can so many people spend, spend, and spend some more, but be unable (or unwilling) to save for retirement? A couple of personal events woke me up to the idea that, perhaps, the answer to that question is just so obvious that I never realized it before.
My granddaughter Corrinne has a young child, and she is fortunate enough to have a job where she can work from home. They live up in the frozen tundra of Appleton, Wisconsin – a stone's throw from Green Bay. This last winter, her old (and paid-for) car would not start, but they did not have the money for repairs. So it sat in the garage, and they functioned just fine as a one-car family.
When her mother and I discussed the issue, she mentioned that it wasn't such a bad thing. First of all, Corrinne's husband is a fine babysitter, and the grocery stores are open at night, so they could manage for a while. In fact, she was rather proud of Corrinne and her husband for waiting until their tax refund arrived to fix the car. Many folks in that position would have chosen to run up their credit card debt.
Then my daughter reminded me of one of my old sayings: “You never learn how to manage money until you don't have any.” She and her husband had learned that lesson the hard way when they were in their 40s. At the time, they had racked up quite a bit of debt, but eventually they turned their situation around. They cut up their credit cards, learned to live within their means, and dug themselves out of their hole.
How fortunate for Corrinne that her parents had learned those lessons. I grinned as I realized that one of the most important lessons I'd taught my children had been passed down to the next generation.
The Credit Card Crutch
When our youngest son was in college, he decided to stay on campus and work over the summer. We gave him an Amoco gas card for emergencies – not a Visa or MasterCard. At the end of the summer, he proudly announced he had saved $300, which he planned to use as personal spending money during the upcoming semester. I did notice, however, that the Amoco bills happened to be $300 to the penny. Apparently – like many college students – he thought an empty tank of gas on a Saturday night was an “emergency.” We promptly canceled the card and told him why.
I recently joined the Lending Club (with which Casey Research has an affiliate relationship) as an investor. In a nutshell, it's a way for an investor to lend money to consumers. Jo and I decided to invest a small portion of our nest egg with them. Personally, I limit my exposure to $25 per loan, and spread my investments over a large number of consumers. As part of the process, I review each applicant – including their credit history and credit score – and then decide if I want to lend them money. What an amazing learning experience the review process has been.
Do you know how to get a great credit score? Make a lot of money, borrow a lot of money, and pay it back on time. Investors can set their own lending criteria on the Lending Club website. I set my cutoff at a 700 credit score, which is pretty high. And yet, I see 50-100 new applications daily from folks who are bogged down with high-interest consumer debt, making minimum payments, and losing ground each month. They want to cut up their credit cards and use one Lending Club loan to consolidate their debt.
The number of folks with high credit scores who want a consolidation loan with payments in excess of 20% of their gross monthly income is simply amazing. However, I pass on lending to anyone whose payment would be over 10% of their monthly income.
These folks are happy to get a consolidation loan because they are reducing their overall monthly payments. A surprising number are actually thrilled to pay interest rates in the 10-15% range, because they have been paying almost double that to credit card companies.
So why do I pass if their payments are over 10% of their monthly income? Hmm… A person makes a certain amount of money each month. From that money, he has to pay taxes, a mortgage or rent, perhaps a car payment, and maybe a student loan. In addition to those regular payments, he wants to borrow money with payments in excess of 20% of his gross income to consolidate debt. Oh yeah, he also has to eat, pay utility bills, live from day to day, and perhaps even raise a family. How is anyone supposed to do all of that and make another payment of 20% of their income? It can be done, but I'm not going to bet on it.
Credit Card Epiphany
“Epiphany” carries a religious connotation for many folks, so I looked it up to make sure I used it properly. Here is what Mr. Webster has to say about the word:
- A sudden, intuitive perception of or insight into the reality or essential meaning of something, usually initiated by some simple, homely, or commonplace occurrence or experience.
- A literary work or section of a work presenting, usually symbolically, such a moment of revelation and insight…
I'm sure many of us have had a credit card epiphany at one point or another. Maybe you got to the point where you had several cards and were only making the minimum payments every month, but your debt level wasn't getting any lower. I sure know how it feels to spin your wheels like that.
At that point, maybe you found a friendly loan company to help consolidate your debt into one easy payment so you could pay off your bills. It's a great concept, but it only works if you cut up your credit cards. If you keep using them after you consolidate your debt, it's not much of a solution. Even if you promise yourself to only use a credit card for emergencies, you might find yourself wondering, “Is a new iPad an emergency?” No, it's not.
Last October, Bloomberg ran an interesting article, Consumers Paying Down Debt Helps Boost US Expansion. Here is a short excerpt that shows that some folks are getting it.
… Americans finally are getting their finances back into shape, Federal Reserve figures show. Household debt as a share of disposable income sank to 113 percent in the second quarter from a record high of 134 percent in 2007 before the recession hit. Debt payments on that basis are the smallest in almost 18 years, while the delinquency rate for credit cards is the lowest since the end of 2008.”
One of the people they outlined in the article had 27 credit cards and over $57,000 in debt – and that is not at all unusual. I guess as long as he had a credit card balance below his credit limit, he assumed he had money.
The Key to Independence
Many folks let the illusion of wealth fool them into thinking they're on track. Imagine I had brokerage account with a $1 million balance, but I also had $1 million in debt. People might think I was rich, but in reality my net worth would be zero. If that were the case, I'd sure have a lot of catching up to do. Unless I happened to buy a winning lottery ticket (no such luck), I probably couldn't go from debt-ridden to debt-free to wealthy overnight. Turning things around is a process.
A financial turnaround is often triggered by an epiphany about carrying way too much debt. It happened to me and my wife, as well as many of our friends. I realized that I earned a good salary, but it was all going to this or that payment, and we really didn't have any money. If that sounds familiar, don't panic. There is a way out.
The first step is to be brutally honest with ourselves about our priorities. If wealth accumulation and a comfortable retirement are at the top of our list, we need to get out of debt and stay that way… period. Only then can we start accumulating real wealth.
True wealth gives us options. It lets us decide how we want to spend our time. If we want to retire comfortably sometime before our 100th birthday, we are going to need it. Social Security alone won't cut it, and no one wants to spend their golden years working at Walmart.
A singer named Johnny Paycheck was a one-hit wonder. His hit song went something like, “Take this job and shove it, I ain't working here no more.” Hopefully the royalties from that song have allowed him some financial independence. If not, he's probably had to rethink his attitude.
Perhaps the recession has revived some basic, commonsense values in the baby-boomer generation. Living within our means and saving money is not old fashioned; it's the key to independence. The sooner folks remember that, the easier their lives will be.
I'm sure we have all told our children and grandchildren that an education is one thing that can never be taken away. For seniors, a financial education can keep us independent and in the game.
While I'm no expert in household budgeting, I can help you generate income, whether you're already retired or years from it. Take the Lending Club, for example; we're always on the lookout for unique, innovative, and reasonably safe investments (remember, this is retirement money we're talking about, so we are ultra-conservative with how much we invest or lend) for generating income.
Our current subscription rate is affordable – less than that of a typical morning newspaper. The best part is you can take advantage of our 90-day, no-risk offer to make sure it's right for you. You can cancel for any reason or no reason at all, no questions asked, within the first 90 days. As you might expect, our cancellation rates are very low, and we aim to keep it that way.
On the Lighter Side
I hope everyone enjoyed Memorial Day weekend. For the Chicago area, this is the weekend a lot of the summer pools open, which is a nice way to mark the beginning of summer. It's too bad the unpredictable Chicago weather – which is something of a local joke – delivered a bit of rain.
I always thought being a weather forecaster would be a cool job. They can say there is a 50% chance of rain and be right most of the time. How cool is that? At Money Forever, we have a bit of a higher standard. We won't research a stock and conclude something like, “It has a 50% probability of going up or going down.” After all, we plunk down our hard-earned money right along with you, and if we weren't confident in our recommendations, we wouldn't make them.
Once again, our dear friend Toots shared some clever sayings about the winter of life:
- Going out is good. Coming home is better.
- You realize you're never going to be really good at anything…. especially golf.
- The things you used to care to do, you no longer care to do, but you really do care that you don't care to do them anymore.
- You sleep better on a lounge chair with the TV blaring than in bed. It's called pre-sleep.
- You miss the days when everything worked with just an “ON” and “OFF” switch.
- Now that you can afford expensive jewelry, you don't go anywhere where you could wear it.
- It seems everybody whispers… and then shouts when you turn up your hearing aids.
- You have three sizes of clothes in your closet, two of which you will never wear again.
- “Old” is good in some things: old songs, old movies, and most of all, old friends.
And my favorite:
- It's not what you gather, but what you scatter that tells what kind of life you have lived.
I asked Toots if she thought we were in our winter years. She smiled and said, “No, late autumn.” On that we agree.
Until next week…