Early Retirement Mistakes

Early Retirement is not easy as some folks make it seem to be.  The problems may not manifest themselves until you are far older.

Early retirement is held out as a dream for many.  And many folks are retiring earlier than ever before.  The problem with early retirement is that you may not be able to tap into your 401(k) or IRA or pension money, and certainly not your Social Security.   So you have to live on some after-tax savings, and that can be tricky.   When you first retire, it may seem like a lot of fun, but mistakes you might make could cost you down the road.

1.  Not Having a Budget:  Making a budget and sticking to it sucks.   It takes a long time to sit down and figure out where all your money went.   Some programs like Quickbooks, allow you to create budgets, but it is time-consuming.  The good news is, since you are retired, you have all the time in the world to work on your budget and monitor it.   However, before you retire you need to figure out how much you are spending and realistically come up with a workable budget which you can live with.   An unrealistic budget is as useless as no budget at all.

2.  Not Having Enough Money:  There are a number of retirement calculators out there, such as this one from Vanguard which can give you a good idea if you'll have enough money to last through retirement.   One problem many folks have is that they think $100,000 is a lot of money and not just enough to live on for a year or two.  Even a million dollars can be run through in short order, if you you spend it too fast.   Work out your budget and then think about how your money is going to fund that budget.

3.  Not Planning for "What If?":   Shit happens, as they say, but some shit is predictable.   You will need to buy new glasses every couple of years.  You may need dental work every five to ten years, depending on the health of your teeth.  Your car will need tires and a battery after about five years.  Household appliances last about 15 years, roofs about 15-30.   You can estimate the cost of these things and then amortize them over the appropriate number of years (remaining, in some instances) and then add this number to your budget.   If you fail to do so, you may think you have more money to spend than you do, and when a nasty unexpected expense comes, it will drain your finances.

Other times there are other expenses which can't be quantified.   Hopefully with Obamacare, you won't be bankrupted by health care costs - but even so, the deductible and out-of-network care can add up very quickly.   Have a buffer for such expenses.

4.  Giving Away Your Money:  Parents love to lord over their children by doling out cash.  They get to feel like parents again and in charge.   But if you dole out cash to "needy" children (or siblings, or parents!) they won't likely dole it back to you when you are in need.   In a recent posting I noted how a couple ran into financial trouble when they had to pay for "burial expenses for relatives."   Why anyone should have to pay for a relative's burial expense is beyond me, and why that should be a major expense is also questionable.   Burn and Scatter - it costs less than a thousand dollars, often far less.

5.  Risky Investments:   Your short-term spending money (after-tax money for early retirees) should be in safe harbors.  You are going to spend it in the next few years, until you reach 59-1/2 and can tap your 401(k) or 62 and tap Social Security.  It is tempting to put your retirement money into something that will "grow with time" but if it happens to tank in the short-term, it can put a real dent in your retirement planning.  At this stage in your life, you are not going to make much money from your money.  This is not to say you should keep all your money in a mattress or a low-interest savings account, only that you should be moving away from stocks, particularly high-risk volatile stocks (such as tech stocks) and into more stable things.

6.  Big-Ticket Purchases:   It may be tempting to buy a $250,000 motor coach with all that IRA money you have saved up.   After all, you've got over a million dollars saved up, right?   What's $250,000?   Well, it is a quarter of your net worth and that is a lot to spend on something that will be worth only $125,000 in five short years.  And no, despite what the salesman said, they don't "hold their value".   Ditto for large boats, vacation homes, and fancy cars.  Just because you have the money doesn't mean you can really afford it.  Even if you can "afford" the monthly payments from your pension plan, if you are "upside-down" on the purchase (as I have seen happen more than once!) you may find yourself tens of thousands of dollars in the hole and unable to get out from under an albatross.

7.  Retiring Too Soon:  All of these things, particularly Item #2 can fall under the category of "retiring too soon".   If you retire too soon, you will burn through your savings too quickly and end up broke.  Living here on Retirement Island, I have seen this firsthand and it is heartbreaking - people who spend large early on or retire in their early 50's, only to be destitute in their 70's - living on Social Security alone.

8.  Retiring Too Late:  On the other hand, we've seen the sad classified ads in the RV magazines that read: "For sale, dream motorhome, used only once, must sell due to illness."   People retire and then die within weeks or months, never enjoying their retirement because they felt that they had to work until they were 70, slowly killing themselves in the process.  Indeed, many today say, "I'll just work until I'm 70!" as if this was a special treat - or that they will let you.   If living paycheck-to-paycheck is something you find relaxing, then more power to you.   But financial stress can lead to physical stress, which in turn can lead to an early grave.

9.  Staying in the Home:  In a recent posting, I noted that a couple got into trouble with a reverse mortgage.  They wanted to "stay in their home" in a high-tax and high-cost-of-living area, when they had enough equity to cash out and buy something that was paid for.  The emotional desire to "stay in the home" often driven by fantasies of holiday homecomings should not cloud your financial reason.   When you get older, owning a big house and lots of empty rooms is not a special treat, but an onerous and expensive chore.

10.  Not Having a Plan B:   Again, the story with the couple with the reverse mortgage, I was shocked that they could not find part-time work or some other means of raising money to pay for their insurance and property taxes.   Mark had a part-time job (three days a week for eight months of the year) that paid over $6000 - enough to cover our food bill or pay most of our housing costs.    There is nothing wrong with taking on a part-time job in retirement to supplement your income and pay a few bills.   Living in an area where there are jobs, of course, is helpful.

11.  Not Talking About Money:  This is probably the biggie.   In planning retirement and going over our budget and spending, I was shocked at how much we spent last year - we kind of lost a lot of the discipline we've tried to build up since 2009.  Talking about this with your spouse is hard - people get anxious and defensive and lash out or retreat and withdraw, even if they appear to be reasonable or to be listening.   If you say, "We need to spend less money on restaurant meals" they might reply, "Well, you waste all that money getting the oil changed in the car!" - that sort of nonsense.    Being able to sit down and talk about it - or even argue about it - is important.   If people don't talk about money, both parties assume that there is money to spend, and they spend it in a classic "race to the bottom" relationship, where each party spends in retaliation to the other.   Have a budget and work on it together and then monitor spending throughout the year and compare it to your budget.  If you see one category going beyond what was allocated, then talk about how you can both economize to make up the shortfall.

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These are just some of the issues I am grappling with as I wind down my practice, which will take at least a year from now.   And maybe that is a 12th item - if you are going to retire early, start planning more than a year in advance, to make sure it is really possible.

The bad news is, I realized in budgeting that we were spending more and more each year, and we need to cut back (more about that my next posting).    The good news is, when retired, you have more time to more accurately track your spending and thus keep to a budget.

So, once again, it feels like we are starting over, re-learning a lot of stuff we learned the hard way back in 2011 or so - how to cut back on spending, budget ourselves, and save money.   With the prospect of no further income coming in, this time it is a pretty serious business.   It seems that in retirement you still have to worry about - or at least be cognizant of - money.

Such a Thing as Too Stingy?

Saving money, spending less, and living more is a good thing.  But like anything else, it could become an obsession.

I recently had some negative feedback from some readers about my decision to retire.   One told me that once you retire, you have nothing to look forward to but death, which I thought was a pretty bleak outlook on life - and also wrong.   We all have death to look forward to, regardless of whether we retire or not.   For some, working is a way of drowning out the deafening silence in their lives, so they don't have to think about death.

Another chastised me for having such an extravagant retirement budget.  My target is to live on an amount equal to or less than the median income in the United States, about $50,000 a year.  (UPDATE 2021:  So far, we've lived quite comfortably on $30,000 a year!) I don't think this is a terribly fanciful budget, and in fact, I probably would come in far less.   But they thought I was spending too much on housing ($850 a month) and too much on groceries, restaurant meals, and liquor ($1000 a month).   I should live in a tiny house and eat raman noodles!  I could retire on $7000 a year like the "early retirement extreme" guy says!

Well, I doubt anyone could live on $7000 a year, and if you did, well, you'd qualify for a lot of government assistance, and thus really have a larger income than that.   But aside all of that, is there a point where trying to "save money" stops being a reasonable proposition and becomes an obsession like hoarding or OCD?

I think so, and perhaps the three are related.   The hoarder is also often very stingy (hence the reluctance to throw anything away - it is "worth something").   My goal in starting this blog was to try to figure out ways to live a more enjoyable life on less money, not how to live like a monk.   The local monastery has that whole thing sewn up.  If I wanted to do that, all I need do is don the robes and join.

What I found in my wanderings is that it is possible to pay 2x, 3x, or even 4x the amount of money for the same level of enjoyment in life.   Yes, you can "save money" by simply not doing anything at all.   But that sort of defeats the purpose of life.   You can reach a point where you are just warehousing yourself and indeed, merely waiting for death.  Life should be about something more than that.

For example, I discovered that the cost of tea was about 1/4 to 1/10th the cost of coffee.   So I switched to tea and found it also easier to deal with and clean up.  I also appreciate a good cup of coffee now, on the occasions I have it.   Of course, I could really save money by drinking tap water but that is such an obvious choice it is not worth exploring.

What are most Americans doing?  Buying a $199 single-serve coffee maker and paying up to $1 a cartridge for stale coffee.   It simply makes no sense - to take a part of your life and just make it more expensive for the sake of convenience and status.   But that is what most Americans are doing - going to restaurants instead of making their own meals.  Leasing cars instead of buying them.  Padding the price of everything in their lives for the sake of convenience and status.

I discovered in my journeys that the major problem with Americans these days (in my opinion) is that they simply spend too much, want too much, and don't want to sacrifice as our forebears did, in order to get ahead.   The "shrinking middle class" in America didn't shrink because of nefarious schemes promulgated by others, but because of our actions in pissing our money away and pissing our jobs away.

For example, whose fault is it that the most popular car sold in America is Japanese?   Was it the assembly line worker at GM in 1975 who thought it would be "funny" to put a coke bottle in the door panel of a Monte Carlo so the rattle would drive the owner nuts?   And when his job "went overseas" was that the fault of the company or the worker - who showed up hung over or outright drunk and put only half the frame bolts on each passing car?

You think I am making this shit up, I was there and saw it happen.   People sabotaging the assembly lines and then saying, "they'll never close this place, they have too much invested" and "I'm underpaid, I'm going on strike!"

Greedy management or Wall Street didn't kill off those middle-class union jobs, the unions did and the workers did.  The rest of us got sick and tired of shitty overpriced products.

Similarly, when Mr. and Mrs. Middle-America decided their tract home was a bank account and re-financed it three or four times to "take out cash" to buy shit they didn't need, was that the fault of "greedy bankers" or the fault of greedy homeowners?

Again, please don't tell me this didn't happen, because again, I was there and saw it.  Indeed, I did it myself.  I pissed away a lot of equity in my home by refinancing.   It was stupid.   But I was not as stupid as some were, which was my only saving grace.

We spend too much on shit.    We want status items and we pay extra for them.   People today are paying well over $50,000 for cars and trucks and SUVs and convincing themselves that they are "affordable" when you can buy a similar vehicle for a hell of a lot less that not only costs less, but provides a better service life and is more reliable.   But right now, sales of Volvos and Jaguars are through the roof, and no one seems to remember how horribly unreliable those cars were just a few years ago - or that both companies now have foreign owners from India and China.

Status is what we blow our money on - status for things that are not substantially different than ordinary things, but are branded or marked or logo'ed with some Trademark that we convince ourselves will impress others.

And that right there is where you can save a lot of money.

On the flip side, there are folks who are taking stingy living to a whole new level - obsessing about spending money the way couponers obsess about their BoGos and double-coupon days.  The want to make a game to see how little they can live on.   And if you are really poor, then I suppose that is more than just a game - it is a matter of survival.

But life is about more than living in the most efficient manner possible.   It is about experiences and doing things.   Yes, I could live a much less expensive life by moving into my camper and spending all day reading library books while my battery recharges from my solar panel.   But I think I would get rather bored by that in short order.

I want to do things and see things.  I want to take a transatlantic cruise to Europe and rent an apartment in Spain for a month (who knows, maybe live there for a year or two - it is a cheaper place to live than the United States!).   There are ways to do these things for not a lot of money.   You can take the QEII to Europe and stay in a hotel and spend a lot of dough.  Or you can take a "transitioning cruise" across the ocean for less than a thousand dollars and rent an apartment for a week for about the cost of a night in a high-end hotel.

An that is the trick, I think.    Not to do with out and live with nothing.   But to have more and live on less - the mission statement of this blog to begin with.    You can blow a lot of dough showing off in a restaurant buying a $300 bottle of Champagne - and not really appreciating it.   Or you can have a nice inexpensive Spanish Cava every day of your life instead.   Um. Spain again.   They really know how to live in Catalonia.

And so on down the line.   When I had my 1974 BMW 2002, I enjoyed tinkering with it.  And what I really enjoyed about meeting people with those cars was how resourceful many of them were.   We went to a car show once, and a guy showed up with a 1975 model (not the best year) and with him were his mechanic, his body man, his paint guy, his upholstery guy, and so forth.   He just wrote checks and had a very nice car and won trophies.   Not a lot of talent in that.

Another fellow, who came in second, had a wife and kids and a job and a budget.   It took him years and years to scrounge parts at swap meets and to make things himself and to do a lot of late-night wrenching, but he restored the car to a beautiful condition (perhaps not as nice as Mr. Checkbook) but something far more interesting to me.   He actually made something with his hands and I find that far more creative and worthwhile than simply buying stuff.   It also illustrates how you can really have more while spending less.

The least satisfying experiences in life are where you simply hand someone your credit card and they hand you goods or services.   It is just spending and it is not very satisfying.   Finding that special deal or putting something together yourself or working on something or whatever - that is a far more satisfying experience for most people.   It satisfies the need to create and make and produce that our brains are programmed to do.   Mere consumption leads to depression, no matter how many nice toys you have.

Making Stinginess into a hobby I suppose could be satisfying.  But I think there reaches a point where it is no longer satisfying and more annoying.   And a lot of "stingyness" things can backfire in a big way and end up costing you more money in the long run.   Sure, you may think you are saving money by putting off having a new roof installed on your house, but the resulting water damage could double or triple the eventual cost of replacement.   There is a happy medium.

Living a middle-class lifestyle in America is not, I think, an extravagance.   Doing it on a budget is the real challenge.   Trying to get by at the poverty line as some sort of stunt strikes me as kind of pointless.   Leave that to the people who really have to get by that way.

There is such a thing as too stingy.   Obsessions are never healthy things!

Imaginary America

The political candidates on the right and left have convinced Americans that America is a rotten place to live.   They have to do this to get elected, as no one will vote for change if everything is going OK.

There are two Americas, the real one and the imaginary one.   And the folks living in Imaginary America are all voting for Donald Trump - or Bernie Sanders.

What is Imaginary America?  And where is it?   Imaginary America is a doppelganger America that exists largely on the Internet and on cable television, particularly Fox News.  It is a shadowy place of fear-inducing rumors and outright lies.

In Imaginary America, Muslim terrorists are lurking around every corner, ready to bomb the local playground.

In Imaginary America, crime is running rampant and criminals (read: black folks) are going to invade your home any minute now.  Better buy a gun!

In Imaginary America, transgender queer folks are going to invade your bathroom and your child's kindergarten.

In Imaginary America, fundamentalist preachers and Catholic Priests are being forced to perform same-sex wedding ceremonies.

In Imaginary America, "all the good jobs" are being taken by Mexicans, who when they aren't job-taking, are raping and selling drugs (busy folks, those Mexicans!).

In Imaginary America, the founding fathers were all devout Christians who wanted to found a "Christian Nation" based on biblical teachings.

In Imaginary America, kids are being taught the Muslim faith in elementary school.

In Imaginary America, there is a real threat of "Sharia Law" being the law of the land and in fact, it is already the law in Dearborn, Michigan!

In Imaginary America, we can "bring all our jobs back" by telling our largest trading partners to go fuck themselves - without any negative consequences, of course.

In Imaginary America, the "good old days" were better than today, and today, things are just awful!

It goes on and on.   Now granted, some of the aspects of Imaginary America have some relevance in Real America.   Yes, we have had terrorist attacks - and unhinged people who have gone on shooting rampages claiming their Muslim faith instructed them to do so.   But far, far more people have gone on far more shooting rampages just based on general insanity.   The problem isn't Muslims, it's shooting rampages and how easy they are to arrange these days.    But that's real America - in Imaginary America, all shooting rampages (other than those done by Muslims) were fake and used hired actors in order to provide a pretext to "take our guns away."

The sad thing is, a lot of people really believe this, just as lot of people believed that Obama was a Muslim and wasn't born in the USA (and thus not qualified to be President) but that Ted Cruz, who actually was not born in the USA, is qualified to be President.   In Imaginary America, double-standards simply don't exist.

Sadly, there is a second Imaginary America that is populated with a whole host of other folks, whose perception of reality is distorted in another way.   In this Other Imaginary America, things are also in the toilet (it goes without saying) but instead of blaming Mexicans, it is the big banks and Wall-Street Fat Cats who are to blame for "taking away" their money - even though they had no money to begin with and the money they owe they signed the papers on.

In Left-Wing Imaginary America, people are actually suffering from malnutrition!

In Left-Wing Imaginary America, Americans have a lower standard of living than in the Great Depression!

In Left-Wing Imaginary America, Corporations are "evil" - as are Banks and Wall Street!

In Left-Wing Imaginary America, it doesn't matter how much money you make, but rather how much more someone else has!

And so on and so forth.

You see the common denominator here - I've fucked up my life and it ain't my fault, it has to be the fault of someone else!  Other people are making more money than me, and that ain't fair!

The other common denominator is a total disconnect from reality.   As people drive their overwrought SUVs to the all-you-can-eat buffet, they whine about how awful they have it in this country, texted of course, on their new smart phone (while driving, natch).    Everyone else but them has it so easy!  Who took all their money away?  Why do they have to work when everyone else has a private jet?

And yes, every aspect of Left-Wing Imaginary America also has some small basis in reality, sometimes (only supermodels suffer from malnutrition in Real America - the rest of us are on food stamps).   Some bankers and corporations do bad things.   People on Wall Street seek out profit - at your expense if you let them do so.   You have to look out for your own interests - expecting the government to protect you in all instances is a fool's strategy.

But the panderers never fail to tap into this nerve bundle in American Politics.   Huey Long knew about it.   "Every Man a King!" he said - once he was in power, you'd never have to work again.   Both Trump and Sanders know this too.

It's call demagoguery.   What is demagoguery or a demagogue?   The dictionary definitions are quite succinct:

Full Definition of demagogue

a leader who makes use of popular prejudices and false claims and promises in order to gain power.

demagoguery play \-ˌgä-g(ə-)rē\ noun

demagogy play \-ˌgä-gē, -ˌgä-jē, -ˌgō-jē\ noun

http://www.merriam-webster.com/dictionary/demagogue

 * * * 

Demagoguery is an appeal to people that plays on their emotions and prejudices rather than on their rational side. Demagoguery is a manipulative approach — often associated with dictators and sleazy politicians — that appeals to the worst nature of people.

demagoguery - Dictionary Definition : Vocabulary.com

https://www.vocabulary.com/dictionary/demagoguery

It ain't hard to see that both Trump and Sanders are playing to the crowd this way - particularly Trump.   But Sanders is no babe-in-the-woods here.   The prejudices he plays to are not against the Mexicans, Chinese, or Muslims (as Trump does) but to the "Bankers" and "Fat Cats" and "1%'ers" who are basically whipping boys for the financial malfeasance of the middle class, who for too long has borrowed far too much money to have it all now, without thinking of how things will play out later.

What scares me about Imaginary America is that when people's perceptions of reality become so distorted it is like pulling back on a rubber-band.   Eventually it snaps back, and that hurts.

We saw this with the housing crises in 1989 and 2009.   People started believing their houses were worth millions and borrowed against them or tried to "buy and flip" houses.   Middle class people did this.   But in Imaginary America, it was poor people buying million-dollar mini-mansions on spec - all goaded on by Bill Clinton and the CRA!

The problem with living in fantasy worlds is that not only does the rubber-band snap back, but people never learn from their mistakes and as a result repeat them over and over again.

It is also concerning in that if you look at history, this sort of wishful thinking has caused all told amounts of horror and misery in the past.   Imaginary Germany, for example, was full of people who really thought that they could take over the world or that Jews were the cause of all their problems.   Imaginary Cambodia believed that people could be flushed out of the cities and an agrarian paradise-on-earth built, with just a little genocide in the process.

Folks in the Imaginary Soviet Union even knew they were living a lie at the time - "We pretend to work, they pretend to pay us" was the slogan of the "workers" of the Communist party.   Sadly today, in Imaginary Russia, people are saying that Soviet technology was so far superior to that of the West, and the collapse of the Soviet Union was, well, a fluke of some sort.   The good old days of the Soviet Union are only one invasion away.  Sadly, this fantasy is not working out well for them so long as the price of oil is in the toilet.    That's the reality of Russia - like Canada, its entire economy is based on exporting raw materials.  And when the price of those raw materials goes down, things get bad.   But no one wants to talk about that reality, of course.

You see this sort of unreal thinking all over the world, at different levels of intensity.   In good economic times, people's perception of reality is closer to actual reality (which does in fact, exist).   The problem is, of course, that as an economy expands, people start to believe in the something-for-nothing and too-good-to-be true mentality, and the cycle starts all over again.

Economic shocks can be a dose of reality for some folks, who suddenly realize the fruits of their folly.  But for others, it is just an impetus to delve into even more fantastical thinking.   After 1929, many folks believed that what was needed was a wholesale overhaul of our society along Socialist or Communist lines.    In Europe, Communism or Fascism was viewed as the "answer" even as economies started to recover.

No one, it seems, pointed out that the cause of these economic collapses was the indulgence in fantastical thinking to begin with - and that more of this was not the answer.

So, what is REAL AMERICA really like?   Well, Real America today is not such a bad place to live, really:

In Real America, housing prices have stabilized, and other than a few isolated overheated markets, are increasing only incrementally over time - as it should be.

In Real America, you can get a mortgage for about 4.5% or less, 30-year fixed, which is pretty much an historic low.

In Real America, unemployment is around 5% which is normal, and has been decreasing for a number of years.

In Real America, the stock market has been on an historic bull run since 2009.  Many companies are doing well and paying dividends like clockwork.   (not the companies that the media talks about, though).

In Real America, taxes are the lowest in the industrial world.

In Real America, no one is starving, and in fact, we are mostly overweight and overfed.

In Real America, Muslims make up a tiny minority of the country and are less a threat to society than insane people with guns (and the Muslims who are a threat, are often insane Muslims).

In Real America, even the poorest and most "unfortunate" has some form of safety net to rely on.

In Real America, crime is at all-time historic low levels and has been decreasing for decades.

In Real America, the Police actually do protect people.

But of course, no one wants to hear any of this.   And politicians realize that you don't get elected unless you can convince people things are awful.    So long as people are content, they won't vote for change, and both parties know this.

So, we are told that Washington is "broken" and that we need "outsiders" to come in an fix it.   Never mind that the outsider "tea party" candidates, such as Ted Cruz, when elected, basically caused all of the gridlock and problems that have plagued Congress over the last six years.    It is not that the "insiders" are unwilling to compromise and get things done, but rather that this new wave of folks, hell-bent on destruction, who are messing things up.

And destruction is what is on the agenda, for both Trump and Sanders.   They want to throw out what we have for some new unknown.   And that might not be a bad idea, if what we have was pretty rotten.   But what we have is pretty damn good, if you sit down and think about it and are not distracted by cries of "Muslims" or "Income Inequality!" or whatever.

It would be sad to see our Republic fall over basically nothing.  But that is what is going to happen, if we keep living in these dreamworlds.

Reverse Mortgage Nightmares

The loan that pays you - and then forecloses on you!

I have written about reverse mortgages numerous times:

Should You Get a Reverse Mortgage? No.

Reverse Mortgages Revisited.

Another Reason Not to Get a Reverse Mortgage.

Yet Another Reason Not to Get a Reverse Mortgage.

The Retirement Meltdown is Here.

Get Out of the House!

Of course, any idiot could spot these as a bad bargain simply from the way they are marketed - on cable television ads featuring quasi-celebrities or old has-beens (e.g., Henry Winkler).  It is like the ads for "Life Insurance for folks over 50!  No medical questions!"  - if you can't see that as a con-job from 500 yards away, I can't help you.

Here's the Reader's Digest version:  Anything that sounds too good to be true probably is.

I would have to put Reverse Mortgages right up there with co-signing loans as the sort of stupid idiotic shit that lower middle-class people do that makes them poor.   Just don't do it.  If you are struggling with debts, then acquiring more debt is not the answer.

And a reverse mortgage is a mortgage and thus is a debt.   Getting a reverse mortgage is just throwing gasoline on the fire of debt.   You will get burned.

Two stories in the news today concern reverse mortgages.  Both illustrate how people with little or no financial common-sense end up getting burned by them.

This first article describes how some Seniors are being foreclosed upon when they don't meet the obligations of their reverse mortgage.

Foreclosed upon?   By the mortgage that pays you?  How does this work?

Well, these mortgages are Federally insured, and they are subject to Federal regulations as well (as a lot of crooked operators were out there fleecing seniors).   However, just because there are Federal regulations in place doesn't mean these are a good deal for seniors.   And in fact, it is these regulations that often bite seniors on the ass.

If you have a reverse mortgage, you still have to pay your homeowner's insurance and property taxes.   If not, you have defaulted on the obligations of the note.   And oddly enough, the banks are not the heavies in this case - often overlooking such defaults.   The Feds, however, insist that these notes that they are guaranteeing be sound.  And if an uninsured house burns down or is taken for back taxes, the loan is at risk and you and I (the taxpayer) are on the hook for it.

Now a lot of people would say, "Gee, who would forget to pay their property taxes or homeowner's insurance?"   And the answer is, they didn't forget but rather they just couldn't afford it.   Some of these borrowers were in such marginal straits - often owing money on the home before they got the reverse mortgage that they can barely make ends meet.  The couple profiled in the article got nothing in terms of "the mortgage that pays you!" other than a one-time payment of $580, and their first note paid off.

And that illustrates the problem with retirement today - seniors are retiring in debt, with no realistic way to pay it off.   The couple profiled would have been better off selling the home and perhaps taking some cash out, and either buying a smaller, more affordable home in a less-expensive area, or by renting an inexpensive apartment or even a park-model in a retirement community (in tax-free Florida with no snow to shovel!)  Sadly, it sounds like their retirement plans were never really in place, and like so many people, had retirement thrust upon them a decade earlier than anticipated.

When the Millers took out the reverse mortgage about a decade ago, they were looking for financial help after Kenneth was laid off from a local defense company. They hoped the new loan would help them pay off their old mortgage, while avoiding monthly loan payments and getting some extra income to boot.

They say they realized only too late that the reverse would net them only a one-time lump sum in cash of $580 after paying off the old loan, money they quickly spent. With $532 in accrued interest added each month to the amount they owe on their loan, their debt has climbed to more than $115,000.

The Millers said they knew they were supposed to pay taxes and insurance but fell behind after several deaths in the family requiring burial costs. They worked with their loan servicer to come up with a payment plan, amended last year to cover unpaid taxes, their records indicate.

I am not sure about the burial cost thing.   Shove me in the oven and flush the ashes down the toilet.  Once I'm dead, I'm dead.  Throwing money at a funeral home won't change things for me - it will just make the living that much poorer.

This quote also illustrates the other problem with a reverse mortgage - it not only allows you to "stay in the home" but might force you to live there.   Since the balance on the loan goes up over time, you could end up in a situation where even selling the house is no longer an option, particularly if home values have declined.   Of course, not mentioned (conveniently) in the story is how much their home is worth.  If it is worth $250,000 then I have no sympathy for them - they could sell the house and move elsewhere.   But hey, it ain't a "woe is me" story if we talk about facts like that.

But hey, this is the Internet and with a few clicks, I found their home address in Massachusetts.  According to Zwillow, their "Zestimate^®" of the value of the home is $163,650 - so they still have some positive equity in the house.  According to the tax authorities, the house is assessed for $122,900.   Actually, it is frightening how much information I could download about these folks. I gave up after reading the deeds and mortgages.   Point is, a better option that "staying in the house" would be to move somewhere cheaper and cash out - perhaps even paying cash for a home outside of tax-intensive Massachusetts.

And no, no one has a "right" to live in an expensive area just because they'd like to.   I run into this all the time with Liberals - some even arguing that homeless people have a right to housing, even in a resort community!  Thankfully that sort of nonsense is largely confined to Key West.

But taxes and insurance can add up, particularly if you are already financially stressed.  And your "golden years" are no time to be financially stressed.   My insurance and taxes top about $4000 a year already.  In some areas, property taxes can be even more onerous, even if you have "tax relief" as a senior.  One reason we left New York was an $8000 property tax bill.

So the Catch-22 conundrum of Reverse Mortgages - if you are already financially stressed, a reverse-mortgage may not offer any relief, but in fact make matters worse.   If you are not financially stressed, well, you don't need a reverse mortgage. 

But the upshot is, there is no point in owning "things" in life - a house, a car, or whatever, if they ultimately make you unhappy due to financial stress.  And the sob stories in the article are about people who thought they could keep their home even though they were in debt over their heads - the life-ring of the reverse mortgage turned out to be made of lead.

This second article tells another tale of woe from seniors who not only fell behind on their insurance and taxes, but failed to keep up their house.   You see, one of the other terms of a reverse mortgage is that you have to keep the house in good repair.   You can't just let it fall down around you and say, "Screw it, I'll be dead anyway and the reverse mortgage people can go fuck themselves!"

And people who are older and infirm and broke, who are having trouble paying their property taxes and homeowner's insurance - often fail to do basic maintenance such as gutter cleaning and whatnot.   Severe damage can occur to a home over time if basic maintenance is not performed, which is why abandoned houses often need to be bulldozed if they are not occupied for more than a few years.

The second problem is big-ticket items like new roofs, new HVAC systems, and new appliances.   As I have tried to emphasize in this blog again and again, a house is just a thing you own not some mystical "home" or "homestead".   It is a complicated and expensive thing as well (without people making it unnecessarily complicated with fancy shit, either!).   Appliances, including hot water heaters, HVAC systems, stoves, refrigerators, etc., have a design life of about 15 years.  A roof may last 15-20 years before it too, needs to be replaced.  

These "sudden" expenses of thousands of dollars may take a homeowner by surprise - but they really shouldn't, as any responsible homeowner should budget for them.   And I've seen firsthand, neighbors and friends who spend thousands of dollars on yard tchotchke but fail to set aside a rainy day fund for the roof.

People simply don't think about this stuff.

The second article regards a lawsuit, as the mortgage company ordered "inspections" of the home in question, once the borrower (and you are a borrower with a reverse mortgage!) fell behind on taxes and insurance.  Each "inspection" was charged to the borrower by increasing the balance on the loan.

This related video also explains the problems with these reverse mortgages.

The more I learn about reverse mortgages, the less enthusiastic I am about them.   There are so many pitfalls and so few advantages.   People are succumbing to emotional thinking when they get a reverse mortgage - holding the value of a "home" (which is just a house) over their own financial well-being.

Better to sell, if you are stressed financially.   Better to move to a different house than to be unhappy and worrying about money in retirement.

A house is just a thing.   Getting attached to it emotionally is a recipe for financial disaster.  So many instances of financial struggle revolve around houses - people hanging on to them too long out of pride, people buying a fancy house to show off, people thinking their houses are some sort of Fort Knox gold vault.   Get out of the "home" mentality and into the "house" one - it will save you a world of woe.

Mini Split System HVAC

Do split systems make economic sense for general HVAC applications?  In most cases, no.  They are a specialized system that works well for specialized applications.

A reader writes, after reading my posting about hydronic heating, asking whether it would make sense to build a new house with resistive electric radiant heat in the floors (for emergency heat) and a number of split-system HVAC heat pump units for regular heating and cooling.

Such a system can work, but it is very expensive to purchase, install, maintain and run.  And the perceived benefits, in my mind, are fleeting.   And I have had a lot of experience with these systems, having owned them, worked on them in the lab, and having installed them as well.   They have particular specialized applications, but beyond that, a more convention system is far cheaper to install and own.

What is a split system or "mini split system" HVAC unit?   Well, most air conditioners are split into an inside and outside unit, so the term "split system" is a little broad.   A window air conditioner is an example of an un-split system, with both "sides" of the HVAC unit in the same box.   Our Japanese friends took this design and cut it in half, basically, making an inside portion that hangs on a wall and and outside portion that can be mounted on a slab or platform.

Here are two of the three Hitachi grey-market split systems (outdoor portion) that I installed in our New York home.  We had a total of four of these systems!  Note the refrigerant pipes going up the side of the house - I covered these with some used gutter downspouts to hide them.  The manufacturers make covers for these, but they are kind of ugly.  Putting the pipes in the wall is problematic from a service standpoint.

From a technical standpoint, mini split systems are great.  I tested one in the labs at the large air conditioning company in 1983 and we had an option to sell the units under license.  The suits at the company came in and looked it over, and said, "Americans like window units!" and took a pass.  True story.  (They changed their mind later on and  now carry them, of course).

They were much nicer than window units, as befits the Japanese sense of design aesthetic.  They were quiet and very well made - with a lot of attention to detail.  And at the time, they had a revolutionary infrared remote control - very cool (literally).

Mini-split systems are not, as my superiors had thought, a substitute for window units.  In Japan in the small houses they have there, they work well for cooling and heating in their relatively mild climate.

In the USA they are particularly useful for remodeling older historic properties or adding A/C to houses without central air systems.    Drill two holes in the wall, hang the inside unit like a picture, and then run the pipes outside (it is a little more complicated than that, of course).  But you can add A/C to a house without ductwork.

Our house in New York had no central A/C (!!!) and it was a hothouse.   So the split systems were really the only option and I was able to do them cheaply because of the deal I got.   The alternative would have been to tear out closets and walls and ceilings and run duct work or (ugh!) use window units, which would have been hard with casement windows.

So they have really specific applications where they work well because they are the only option.  If you already have ductwork, though, it is a lot easier to go with a central system heat pump or central A/C.  If you are looking at new construction, a central system is also cheaper to install by a large factor.

The house in New York came with one Mitubishi mini-split system unit in the main room (added after construction when the owners realized their mistake), but that was not enough to cool the other rooms of the house.  I added three grey-market Hitachis  (instructions in Japanese only!) and they worked well.  But since I got a "deal" on them, they were cheap - an astounding $600 apiece.   Most today are in the thousands, with installation.

(I also added two portable A/C units in the top floor.  They are not efficient, but the rooms were rarely used - so the trade-off of installed cost versus operating cost came into play.   Adding split systems to the top floor was problematic because of the long runs for the refrigerant lines and new electric lines.   The lower levels were much easier.  Since the top floor bedrooms were guest rooms, it made more sense to go with the portable A/C units for the few days a year we had guests AND needed air conditioning.)

The split systems are quiet and efficient, but as heat pumps, they only can heat the house when the outside temperature is above about 40 degF.  So you have to have another source of "emergency heat" to supply the house when the temperature goes below 40 degrees.

A traditional whole-house heat pump has a "strip heat" (resistive coil) that can kick in when the temperature is too low for the heat pump to work.  It works, but is horrifically inefficient.  In the South where the weather is rarely cold, this solution works OK.   In more northern climes, you may want to have a "dual fuel" system where you can use a gas furnace (as part of the heat pump installation) to supply the supplemental heat when it is too cold for the heat pump to operate.   This "dual fuel" system was what we had in our home near Mt. Vernon, and it worked very well.   It was cheap and easy to operate, and when the time came to replace the furnace portion (a vintage Chrysler AirTemp) it cost only a few thousand to replace.

The problem, from a cost perspective, is that mini-split systems (as sold today in the USA) are so expensive.  Even one system can cost as much as a whole-house central HVAC heat pump (which has built-in emergency resistive heat).  I am not sure why this is, but some contractors have told me stories about price-fixing.   The units do all tend to look the same, and indeed, regardless of "brand" you may be buying the same unit as another brand.    I had contractors quote me $3000 to $5000 a unit to install, which is kind of ridiculous for what is a glorified window unit.

I thought about replacing my existing heat pump here in Georgia with split systems, as they are quieter, allow for zoning and whatnot (although it means having a big ugly box on the wall in every room I want to heat/cool).  But sadly, since I don't have access to those grey-market Hitachis (that was sort of a one-time under-the-table kind of deal, with no warranty, of course) I would have to pay over $10,000 (or more like $20,000) to set up the whole house with split systems.   A new Heat pump would be maybe half that.

And then there is the problem of emergency heat if I went split system.  I would have to keep my existing air handler and resistive coil system (and ductwork) to heat the house if it went below 40 degrees, which it does here in Georgia on occasion.

If money is no object, it is not a bad idea.   But the extra cash to go that route would pay my utility bills in their entirety for about eight years at least.   And the payback in increased efficiency would be negligible - over the life of the units I would not likely recover any savings due to reduced energy consumption, if indeed there were any at all.

And I am looking at retirement, so it is not an option for me.  I want to spend less, not more.

A contractor suggested to the reader that they install resistive heat in the floor.  Basically this is a lot of heat cable running through the floor of the house to provide radiant heat.  It is like hydronic radiant heat without the water, but it is horrifically inefficient, as all resistive heat is.

We had electric radiant heat in the basement of our office building at 917 Duke Street in Old Town Alexandria.  There were three problems with it.

First, electric heat is the most inefficient heating source available - you are taking a KW of electricity and converting it into a KW of heat (unlike a heat pump, which takes a KW of electricity and uses to pump 2 KW of heat into your home).

Second is the hysteresis effect.  It takes a long time to heat up the floor and by the middle of the day, the room is overheated.   In the cold North where it is cold all day, this might work out OK except during the spring and fall.  In Georgia where it is rarely cold for long periods of time, you might find yourself over-heating the house and wasting a lot of money on electricity.

Third, right before we bought the property a pipe burst and flooded the basement.  It cleaned up OK (they had rose slate flooring) but it shorted out the electric radiant heat and it never worked again.   Jackhammering up the concrete (and all that lovely rose slate) didn't seem like it would be worthwhile, particularly in Virginia where cooling, not heating, was the main issue.  We put some space heaters in the basement and it was fine for the few cold months we had there (The basement was ducted for HVAC, but since there were open stairwells, the heat tended to rise, making the basement feel cold in colder weather).

So resistive radiant heat has its own set of issues.   I am not sure that the combination of these two expensive systems would result in a cost-effective HVAC system.  When you add up the cost of all those individual split systems, plus the cost of electric radiant heat, you end up with an installation bill that is 2x to 4x higher than a basic heat pump forced air system.   In order to recover those costs, it would take years - if ever.   The ultimate operating costs might be a wash or even higher when you have multiple expensive systems to repair.

We didn't have many problems with the split systems, of course.  But since we had four systems, that was 4x the chance of failure.  The Mitsubishi system that came with the house ("Mr. Slim") worked well even though it was about 10 years old.  The cylindrical fan on the inside unit did shatter in places and I was lucky to be able to find the parts diagram online, google the part number, and find a replacement fan for fairly cheap and install it myself (once the blades broke, the fan would wobble at high speeds and make noise).  So I can't say these are maintenance-free units.  And since you didn't work as an A/C tech, maybe this level of maintenance is not your bailiwick.

One argument made in favor of split systems is zoning.   You can shut off the units to rooms not in use and thus save energy and money.   That sort of works, of course, but it is the same argument made about electric fireplaces - you only heat part of the house.  This does not mean the underlying method of heating is more efficient, of course.  And in fact, with electric fireplaces, just the opposite (resistive heat, again, literally burning electricity to make heat).

You can just close ducts (registers) in your home to achieve the same effect with a central HVAC system.  So I am not sure the zoning thing is really a selling point - or one to justify a 2x-4x price delta.

So why do people use them?   Well, if you have an historic house that you cannot cut up to put in ductwork, they make sense.  If you have a house with no central air (as I had) they might make sense (particularly if you get them grey-market for 1/4 retail and install them yourself, again not recommended for the unhandy).  If you have an addition or converted garage (as my neighbor has) with no ductwork installed, a split system can be an easy way to add A/C.

But absent these compelling reasons, the split-system makes less and less sense.   Today, many contractors are pushing these as a high-end HVAC system, much like the built-in refrigerators and restaurant-grade stoves (or their lookalikes).   The idea is selling status and luxury.   And many people are buying them, convinced that "more expensive is better" or at least is more impressive to show off to friends and neighbors.

It is like the folks who ride a bicycle once or twice a year and go down to the boutique bike shop and buy an expensive racing bike costing thousands of dollars.  It is a "better bike"?  Yes, for certain applications.  When Mom puts her flowered basket on the front of the handlebars, however, and uses it to ride to the corner store, it is kind of ridiculous.   Like delivering pizzas in a Ferrari.

There is such a thing as appropriate technology.

Would such a convoluted HVAC system "add value" to the house?   Maybe, maybe not.  Generally, the value of homes is determined by the location and number of bedrooms, period.  You can fancy up your house all you want to, but if it is in a bad neighborhood it will not be worth much.  Similarly, a basic house in a good neighborhood is going to be worth about what the fancy houses are, particularly if it has more bedrooms.   You can always add fancy.   But for every dollar you spend on fancy, you would be lucky to get back 50 cents in added retail value.

Expensive HVAC systems are like any other expensive home appliance - you don't necessarily get more for your money, other than bragging rights.   And it is kind of hard to brag about an HVAC system, unlike say, a fancy stove or whatever.

And quite frankly, having a big box hanging off the wall in every bedroom of the house is kind of ugly.  Oh, and be sure to change the air filters on all of those units on a monthly basis, right?

Sometimes less is more!


EDIT:  Prices for split systems have gone way up since I installed mine.  A basic unit these days is $1000 online, and that does not include installation.  This is a cooling only unit:

http://www.compactappliance.com/friedrich-9000-btu-single-zone-cool-only-mini-split/M09CJ.html

Larger units are $2000 and up:

http://www.compactappliance.com/lg-standard-30000-btu-single-zone-inverter-mini-split-white/LS307HV3.html

Again, not including installation.   So to cool your basic house, with a unit in each room (some units have more than one "head" of course) is going to run at least $10,000 or more, particularly if you have a multi-story house with long refrigerant runs.

They are lovely HVAC units.  The Lexus of air conditioning.   I drive a KIA and it works just as well.