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Economics 101
"Spike in Foreclosures Despite Talk of Recovery"
Financial Times, December 30, 2010
As
we enter 2011, this is a good time for a sober reality check. By
many measures, 2010 proved to be a much better year than most would
have expected. The economy grew, if a little timidly. The
rate of decline in home prices slowed significantly. The
unemployment rate, though still stubbornly high, also appeared to have
hit a plateau.
It
may have been a far cry from the go-go years of the mid-2000s, but 2010
gave us all a little hope in the prospects for economic recovery.
It's important to avoid getting carried away, however. As the
headline above makes clear, the housing market is not out of the woods
yet. And remember, the financial crisis and recession were
directly tied to the bursting of the housing bubble and the debt bubble
that made it all possible.
According to the Financial Times,
foreclosures spiked in the third quarter of 2010 as fewer borrowers
qualified for loan modifications that would have lowered their monthly
payments and kept them in their homes. New foreclosures jumped by 31% over the second quarter and 3.7% over the previous year. And lest we forget, the rate was already exceptionally high the year before!
What does this actually mean for homeowners and investors? Per the Financial Times,
"The newly foreclosed homes will add to a growing backlog of 1.2
million properties already in some stage of foreclosure... As these
properties come on the market for sale, they are expected to depress
home prices between 5% and 10% over the next twelve months, economists
said."
A
5-10% decline in your stock portfolio can be written off as just
another routine correction or perhaps just statistical noise. But
a decline of that magnitude on your home is huge and will potentially
push millions of additional American homeowners underwater on their
mortgages...thus giving them the temptation to "strategically default"
and add yet more homes to the foreclosure pool.
This
would be bad enough, but the news actually gets a little worse.
Of the millions of homeowners who took advantage of the government's
HAMP modification program to lower their payments, fully 40% are
expected to default again within five years, according to the Financial Times.
While their payments may have changed, the economics have not-their
homes are still worth less than their mortgages and their ability to
pay is still hampered by a weak employment market.
To
avoid starting this New Year with too much negativity, remember that by
many measures, things really are getting better, albeit slowly.
But, as you sit down to make your financial goals for 2011, keep the
precarious state of the housing market and its affect on the economy in
perspective. |
Steps to Retirement Planning
This month's column continues with the next 3 steps you'll need to take to ensure you're ready for retirement.
1. Develop a Withdrawal Strategy
Retirees
need a plan for drawing down their assets. Most financial advisers say
that you can safely spend 4 percent of your nest egg each year.
Withdrawals from tax-deferred retirement accounts become required after
age 70 1/2. The withdrawal amount is calculated by dividing your IRA
and 401(k) account balances by the Internal Revenue Service's estimate
of your life expectancy. The penalty for failing to take out the
correct amount is 50 percent of the amount that should have been
withdrawn, in addition to regular income tax.
2. Minimize Taxes
Your
entire nest egg isn't available for spending in retirement. When you
take money out of tax deferred 401(k)'s and IRAs in retirement, regular
income tax is due on the withdrawals. If your tax bracket fluctuates
from year to year, you can time your retirement account withdrawals to
minimize taxes. It can make sense to take
withdrawals or convert to a Roth when you are in a low tax bracket and,
if you can, withdraw less when you are in a higher tax bracket.
3. Maximize Social Security
Retirees
can sign up for Social Security beginning three months before their
62nd birthday. But annual payments increase for each year you delay
claiming until age 70. Retirees who sign up at age 62 get smaller
payments over a longer period of time. But retirees who delay claiming
will get higher payments as they age when they are less able to work
and more likely to develop health problems.
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Home Sweet Home
Of the 51 million households that own a home and have a mortgage, the average outstanding debt is $200,000. There are another 24 million households that own their home free-and-clear (source: Census Bureau). |
BRRR - Pay Freeze
As referenced in "Alphabet Soup" above, the two-year pay freeze is on everyone's mind. This month's quiz wants to know
when the last time there was not an increase for current federal employees.
Be the first to reply to the email in the Contact section below and win a prize to help you get warm.
Be the first to respond to the email address in contacts and win a prize. |
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Contact Us:
John M. Sklenar
Premier Financial Services, Inc.
202 West 7th St.
Carroll, IA 51401
Email:
federal.info@sklenar.com
phone:
866-792-6668 (toll free)
712-792-6400 (local)
fax: 712-792-6670
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Alphabet Soup
The Chilling Effects of a Pay Freeze Word
of President Obama signing a two-year pay freeze for federal employees
on December 22 spread like a cold front through the northeast. Saying
that many Americans would be called on to do their part, the President
asked federal workers to be on the leading edge of those making
sacrifices. The pay freeze is expected to cut $2 billion from the fiscal 2011 budget and $28 billion over the next five years. How do those billions of dollars affect you and your pension? Initially, of course, you have less money in your paycheck. Although your pay is frozen, many of the goods and services you continue to purchase are not. A prime example is the cost of your federal employees health benefits (FEHB). New premiums for 2011 include an average increase of 7.2%, depending on your plan. Typically, the annual cost-of-living increase (COLA) helps to offset this increase. Without the COLA, you'll see your take-home pay decrease. However,
if you are a CSRS Offset or FERS, you'll get a reprieve on your Social
Security contributions, which will be lowered to a 4.2% withholding
rate from the normal 6.2% rate for 2011. CSRS employees do not pay into Social Security, so they will not benefit from the reduction. What about the long-term effects to your High-3? If
you remember Fred the Fed from last month's column, let's assume Fred's
salary was $75,000 in 2010 and he is covered under FERS. By retiring at the end of 2011, his High-3 is only $500 less than it would have been had a 2% increase been awarded. If Fred is retiring with 30 years of service, the $500 would amount to $150/year less in his annuity or $12.50/month. The real impact is seen for those who won't retire until 2012 and beyond. If Fred's 30 years weren't completed until 2012, there would be $1,510 difference in his High 3. This affects his annuity by making it $453/year lower than if he had received the 2% increase each year - or $37.75/month. The
greatest impact will be if Fred doesn't retire with his 30 years of
service until the end of 2014 when the difference in his High-3 is
$3,091! This causes his annuity to be $927/year lower than if he'd
received annual COLAs or $77.25/month. While
the pay increase is out of your control, there are things you can do to
minimize its effects. Since step increases and promotions are not
affected by the pay freeze, you'll still be awarded salary increases
for those events. You may not have looked for
promotions or a new position in the past. By keeping your eyes open
within not only your own agency, but other agencies, as well, other job
options may present themselves at higher GS levels. OPM projects that 637,645 federal workers are eligible to retire in 2011. Retirements alone should allow for some opportunities to manage your High-3 during the final years of your career. |
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Public Service
1 out of every 6 American workers is employed by the government, either at the federal, state or local level. (source: Department of Labor) |
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TSP Returns
The
final numbers are in for 2010 with every fund reflecting a positive
return. This is great news for participants who had significant losses
in 2008 although a buy and hold strategy would still have left you
short of getting back to your original balance at the end of 2007.
G Fund
December - .0009%
YTD - 2.81%
F Fund
December - .0477%
YTD - 6.71%
C Fund
December - (.0031%)
YTD - 15.06%
S Fund
December (.1017%)
YTD - 29.06%
I Fund
December - .1059%
YTD - 7.94%
L Income Fund
December - .0052%
YTD - 5.74%
L 2010 Fund
December - .0056%
YTD - 5.65%
L 2020 Fund
December .0108%
YTD - 10.59%
L 2030 Fund
December - .0109%
YTD - 12.48%
L 2040 Fund
December - .0116%
YTD - 13.89%
Returns courtesy of :
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Still Working On It
52% of retirees are still making monthly payments on home mortgage debt. (source: Society of Actuaries). |
You're A Mean One Mr. Grinch
Last month's quiz asked you to name the state where Christmas was banned in the late 1600's. Martha
Myles with GSA, Nebraska Field Office, was the first to answer
with "Massachusetts" and won a gift card to Starbucks. |
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Letter from the Editor
Happy New Year! I hope you survived the holidays and are back at work in good cheer and ready for 2011. There
is a Chinese saying (sometimes quoted as a curse), "May you live in
interesting times." We are certainly experiencing that today.
With so much focus on the federal workforce and your pay and benefits, it can be unsettling to try to make any kind of plan. For those of you who've been around awhile, you've seen the pendulum swing in this direction before. Wasn't it less than two years ago we were talking about increasing the federal workforce by 240,000?
Knowing
that the government workforce grows and shrinks based on circumstances
out of your control, you might resolve to plan for the worst, hope for
the best, and expect something in between. Yes, interesting times call for more of your attention, but there are often opportunities that would not otherwise be available.
Here's to making 2011 the best it can be.
Cordially,
John M. Sklenar
CPA, PFS, CFP - Certified Financial Planner
ChFEBC - Chartered Federal Employee Benefits Consultant
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