The stock market is hitting new highs. What should we make of this?
This week, the S&P 500 reached yet another record high — marking its fourth consecutive day reaching a new all-time high.
Last Friday (the first of these four consecutive trading days) marked the first time in two years that the S&P 500 finished at an all-time high.
Here’s an 11-minute video recapping what happened:
After two years of not achieving any new highs, the S&P 500 is now breaking records daily.
How do we interpret this? Here are a few things to keep in mind:
(1) The high is comprehensive.
The S&P 500 — which tracks 503 stocks — represents about 80 percent of the overall market.
It’s a more comprehensive indicator of the overall market than the Dow Jones, which tracks only 30 large companies. The Dow took a slight dip today, but both the Dow and the NASDAQ hit new highs in December.
The Dow is an excellent indicator of how large companies are faring. But the S&P 500, by virtue of tracking a much bigger basket, is a better reflection of how the overall market, including small and medium sized companies, are also performing.
(2) The tech sector dominates the all-time highs.
Tech companies make up the largest chunk of the S&P 500. Here’s a chart of the top ten companies by weight for SPY, an exchange-traded fund that tracks the S&P 500:
Source: slickcharts
The top ten companies in SPY are nearly all in the tech sector. This stands in contrast to the wider, more expansive range of sectors that comprise the top ten Dow Jones companies by weight:
Translation: while the overall market (including small and mid size companies) is doing well, the bulk of the gains are still being driven by tech.
The same small group of megacap companies — the “Magnificent Seven” (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla) — that drove much of last year’s growth continues to lead the way, fueled by hopes of an artificial intelligence boom.
But what’s interesting is that the equal-weighted S&P 500, in which every company within the index gets the same weighting, is only slightly lagging the standard S&P 500. Yes, equal-weighted is behind, but not by much. Translation: even without the oversized influence of the Magnificent Seven, the index is running strong.
The market has also priced in the expectation that the Federal Reserve will lower interest rates this year, which leads to the next point …
(3) The Fed will send new signals at the end of January.
The next Fed meeting is Jan 30-31, at which point we’ll know whether the Fed is ready to start cutting interest rates yet.
The Fed held rates steady during their last two meetings, held in September and November 2023.
They’re widely expected to cut rates in 2024, but the debate that economists and market-watchers are holding is when? — could it be as early as next week? (Unlikely, but possible.) Or will it happen during one of their following meetings on March 19-20 and April 30-May 1st?
Many analysts expect that the Fed will hold rates steady this winter and begin cutting in the spring or summer, but the substantial improvement in inflation data has some people feeling optimistic that these cuts might come sooner than later.
The Fed rate cuts are expected to unleash pent-up demand for everything from cars to houses and make capital more accessible for companies.
Homebuying, in particular, is expected to rise as interest rates drop, leading to a projected minor climb in home prices this year. (Mortgage interest rates are at their lowest point since last May.)
Summary: Big Tech is fueling record-high market growth, inflation is under control, and the overall economy looks resilient.
The average person is starting to feel better about their wealth.
The U.S. Consumer Sentiment Index is at its highest point since July 2021. As the name implies, this index measures how confident and optimistic people feel about their finances.
This survey, conducted by the University of Michigan, shows huge gains in households feeling more confident that inflation is behind us, jobs are strong, and income can keep up with expenses.
The index climbed a cumulative 29 percent over the last two months. That’s the biggest two-month leap since 1991.
That said, we’re still no where close to our 2018-2019 confidence levels.
What’s the takeaway from all of this?
Economic data is strong. Markets are on a tear. Consumer sentiment is improving. The year ahead has plenty of cause for optimism.
Blackstone CEO Steve Schwarzman, at the World Economic Forum in Davos, mentioned that he thinks “animal spirits” — the role emotions play in the markets — will be strong this year.
Given how much is riding on consumer confidence in this (almost) post-inflationary world, that’s particularly apt.
For more detail, watch the latest YouTube breakdown.
“OMG I missed it. I should’ve bought two years ago.”
“Am I too late? Are all the good deals gone?”
“Look at how much cheaper it used to be. I’m priced out now.”
“Isn’t my best bet to wait for a crash?”
Oh my dear friend.
Those sound like remarks made today … right?
Well, they’re not.
Those are the remarks I heard in 2015, even everyone was lamenting how much real estate prices had climbed, relative to 2012.
“Damn I should’ve bought back then! It’s too late now. Everything’s expensive again. I’ll just wait for prices to come down.”
I know, that seems silly in hindsight.
But put yourself in the shoes of an aspiring real estate investor in the year 2015. They had been thinking about buying a rental property for a year or two. But they hadn’t. And while they sat on the sidelines, prices skyrocketed.
The chart above covers January 2010 to December 2015.
In 2015, this was a prospective investors’ experience of the last 5 years. They saw home prices dip slightly from 2010 to 2012, and it scared them — “maybe there will be another crash!!” — so they sat on the sidelines.
Then the market boomed from 2012 to 2015, and by the end of that three-year period, they were kicking themselves to “waiting too long.”
“It’s too late!!!!!”
“The good deals are gone!!”
With the Great Recession in such recent memory, they comforted themselves with the idea that they could just kick back and wait for the next housing crash.
Nearly nine years later, they’re still waiting. And missing out on gains.
Here’s what the market did from January 2016 through May 2023:
Up, up, up, up, up.
Sliiiight dip for a few months in late 2022. Then up again.
The people who lamented that they’d “waited too long” and “it’s too late” psyched themselves out. They sidelined themselves. They missed those returns.
You see, pessimists get to make excuses. Pessimists get to validate themselves.
Pessimists get to be right.
Optimists get to be rich.
“The irony is that by trying to avoid the price, investors end up paying double,” Morgan Housel writes in his book, The Psychology of Money.
In that passage, he’s discussing stock investing, but the principle applies to real estate as well. Those who lament that real estate is too expensive, relative to its previous values, are the same people who eagerly buy an index fund without complaining that it, too, is substantially more expensive than it was a few years ago.
I’ve never heard anyone say: “VTSAX is 50 percent more expensive than it was five years ago! It’s too late to buy. The good deals are gone. I’ll wait for the next crash.”
Yet they’ll say that about real estate.
Sure, people might debate whether the stock market is overvalued. But if you’re a long-term investor, you dollar-cost average into the market.
You understand that a share of VTSAX will cost significantly more today than it did five years ago, because, well, assets appreciate over the long-term. That’s the point.
Ideally, real estate investors would be best-off viewing their properties through the same lens through which an index fund investor views their holdings.
Sometimes you’ll buy high. Other times, you might hold through a decline. But over the long-term, based on historic trends, both asset classes (real estate and index funds) significantly rise in value.
Yet often, would-be real estate investors seem to forget historical trends.
When the topic turns to rental properties, many would-be investors sideline themselves because they’re convinced that “I’m too late” and “the good deals are gone.”
Sure, you can’t blindfold yourself, throw a dart at a list of houses, and find one with an amazing cap rate, like you could in 2012.
Sure, you have to actually, erm, what’s that word … WORK.
Good deals are available for those willing to find them.
Back in 2015, I often heard people lament that they were “too late” because real estate prices had risen so much in the past three years. “I should’ve invested in 2012! The run-up has already happened. I’m too late. I’ll wait for the next crash.”
Nearly nine years later, they’re still waiting.
The question is: are you going to be one of those people who says “it’s too late! the good deals are gone!” and then sit on the sidelines for the next 30+ years? Or are you going to train and compete?
If you choose to leave the sidelines and get into the game —
The first step is to understand: It’s not too late.
The prices that existed five years ago are irrelevant.
The only question that matters: “Is this a good deal today?”
It’s easy to substantiate the belief that you’ve missed out on all the good returns — you can see how much home prices have appreciated over the past three years. You can see all the capital appreciation you could have had, if only you’d gotten started sooner.
Just like if you’d bought a ton of index funds in 2018. Or better yet, March 2009.
Assets appreciate.
Sometimes there’s volatility, and they drop a little bit. But historically, in the U.S., major asset classes — including stocks and real estate — have always risen over time.
We seem to have accepted this reality in the world of stock investing. We don’t reflexively lament *not* buying more index funds at 2012 prices.
We might occasionally joke about it — “awww man I shoulda bought Amazon in 1997!” — but we know that when we buy a stock, we’ve evaluating today’s fundamentals. Past is prologue.
When we evaluate stocks, we ask: “Is this stock a wise purchase at today’s price?” But we forget to ask this question when we’re dealing with a tangible asset class like real estate.
Real estate often fills people with fear:
It’s a single six-figure transaction; a larger dollar amount than an index fund.
You borrow money to get into the deal; leverage increases risk.
You assume you can’t dollar-cost average into real estate, like you can with stocks. (In reality, many rental investors *do* dollar-cost average into real estate by investing in one property per year, or one property every-other-year … some type of periodic pace.)
Real estate’s tangibility also makes it an inherently emotionally-charged asset class. We can touch it, smell it, see it, hear its creaks and noises.
And when emotions are involved, we rationalize rather than reason.
“Assuming that something ugly will stay ugly is an easy forecast to make,” Housel writes. “And it’s persuasive, because it doesn’t require imagining the world changing.”
Pessimism is tempting, but it’s also limiting — and its intellectually lazy.
It keeps you broke and uncreative.
Optimism, by contrast, keeps you asking “how can I?” — it keeps you solving problems, rather than lamenting them.
“How can I find properties with a solid cap rate and good cash flow located within a two-hour drive?”
“How can I improve my skills as a negotiator?”
“How can I analyze and cross-compare across multiple markets?”
“How can I save for a downpayment?”
“How can I get approved for a mortgage if I’m self-employed / if I don’t earn much?”
Ask “How can I?” rather than lamenting “I can’t because …” and you’ll find your world switch.
And if you want answers to the above questions, you’ll find them in Your First Rental Property, our flagship course.
Fifty-five percent of surveyed baby boomers plan to remain in their existing homes as they age, but less than a quarter of those surveyed have any plans to renovate their homes to more safely and easily accommodate natural changes that come with aging.
This is according to a new report from home improvement services company Leaf Home and market research firm Morning Consult, which enlisted responses from 1,001 baby boomer homeowners (aged 59–77) and 1,001 millennials (aged 27–42) in late December 2023 and early January 2024.
The report describes homes owned by baby boomers as “time capsules,” since most of the surveyed boomer cohort (73%) said they have lived in their homes for 11 years or more. This is combined with the finding that “over half of their homes were built in 1980 or earlier with many never investing in renovations,” according to the results.
For millennials and younger generations who could eventually purchase these homes in the future, this creates a “looming underinvestment crisis that promises a future of deferred maintenance for their millennial inheritors,” the report said.
But for those who are aging in place in these homes today, there is also a notable deficit of renovations and added safety features, which could prove problematic for those who will naturally develop vision, mobility or cognitive impairments as time progresses, the report said.
Another recent report found that the current housing inventory is ill-equipped to facilitate aging in place safely for older Americans.
Just 24% of baby boomers are preparing their homes for aging, and even fewer are adding other safety features. Roughly 75% of baby boomer respondents report that they “have never added safety or accessibility features in their homes,” while 81% of the cohort report planning to leave an inheritance of some kind when they pass away.
Roughly half of millennial respondents (51%) expect to receive no inheritance.
“The housing market is caught in a generational tug-of-war. Boomers will soon face aging-in-place hurdles, while millennials will face the surprise of homes in need of major upgrades,” said Jon Bostock, CEO of Leaf Home, in a statement accompanying the report.
“With an aging and ignored inventory of homes available in the next decade, we may see a crisis that will overwhelm the home improvement industry and strain the budgets of inheriting millennials, impacting the housing market,” Bostock added.
The city of Laguna Beach, Calif. recently offered details of its city-sponsored aging-in-place program, dubbed “Lifelong Laguna,” in a profile published by CNBC. It provides new insight into the measures cities can explore to more easily facilitate aging-in-place goals for older residents.
2021 research from AARP indicates that 77% of adults at or over the age of 50 want to stay in their homes as they get older, but the figure in Laguna Beach is much higher. There, the figure is closer to 90% according to Rickie Redman, director of Lifelong Laguna.
Originally piloted in 2017, Lifelong Laguna is a program that enlists a local area nonprofit to encourage support for aging in place.
“Lifelong Laguna is based on the Village movement, where aging in place is encouraged with community support,” the story reads. “The Laguna Beach program aims to fulfill a specific need for a city where approximately 28% of residents are age 65 and over, while local assisted living and memory care services are scarce.”
Much of the city’s older population has lived in Laguna Beach since they were in their 20s and 30s. Now in their 70s and 80s, they simply do not want to be displaced to live somewhere else, even if another area or dedicated facility could more easily attend to their needs as they age.
“They make this city unique,” Redman told CNBC, saying many of the older residents can trace their journey here to the city’s “artistic roots,” the story explained. “They’re the placeholders for the Laguna that we now know.”
The program currently serves about 200 older residents, and there is no direct cost to them for participating. It is entirely funded by grants and local fundraising efforts, according to Redman.
“Its services address a wide range of needs, including a home repair program the city operates in collaboration with Habitat for Humanity, nutrition counseling and end-of-life planning,” the story explained.
Other cities and communities have adopted similar systems, as aging-in-place preferences have increased dramatically since the onset of the COVID-19 coronavirus pandemic. Data from Genworth Financial indicates that roughly 70% of the 10,000 baby boomers who will turn 65 every day until 2030 will require long-term care at some point in their later lives, CNBC reported.
“There definitely is a mindset change, where people are saying, ‘I do want to stay put, I don’t necessarily want to move into a nursing home or into assisted care,’” said Jessica Lautz, deputy chief economist and vice president of research at the National Association of Realtors (NAR) to CNBC.
One beneficiary of the Laguna Beach program told the outlet that her needs have been attended to very promptly, from assistance with yard clean-up to the organization of end-of-life services for her recently deceased husband.
“Anything that I’ve needed, I’ve gotten help,” said Sylvia Bradshaw, an 84-year old Laguna Beach resident when describing her membership in the program.
Let’s discuss the proper way to account for inflation in retirement and FIRE planning.
I lurk in some online personal finance forums, and what I see scares me. I see “the blind leading the blind” discussing how to account for inflation as part of your retirement or financial independence plan.
These mistakes can be gut-wrenching. If you double-count inflation, you’ll assume a worse-than-real future and mistakenly believe retirement is impossible. But if you improperly discount inflation, you’ll assume a better-than-real future and torpedo your retirement with false hopes.
We’re going to fix that today.
What’s the Problem in the First Place?
The problem is that it’s challenging to understand if/when/how to apply inflation. It’s entirely understandable. Inflation is a weird phenomenon and the math isn’t intuitive.
Should you inflate your current salary into the future? What about your current spending? What about investment returns? You’ve probably heard of the 4% Rule; but how does inflation affect its usage?
All great questions. We’ll answer them all today.
The True World vs. The Convenient World
I’ve heard intelligent people tackle this concept before. It’s tough. Lots of numbers are involved. There are mysterious rules about when to apply those numbers and when not to. My friends Cody Garrett and Brad Barrett expertly tackled this topic on a recent episode of ChooseFI. :
As I listened to Cody and Brad, I thought: a few visual aids and analogies might help here.
My preferred analogy is what I call “The True World” vs. “The Convenient World.”
“The True World” involves numbers as they actuallyexist in our society and economy.
“The Convenient World” involves shortcuts that financial experts frequently use.
I’ll explain both worlds below.
Good news: you can do math in either world and get correct answers for your life. Hooray! This is wonderful. It shows the power of smart mathematics.
Bad news: you cannot flip-flop between worlds. You must do all your math in “The True World” or do all your math in “The Convenient World.”
The problems I see every week arise when DIYers flip-flop between worlds. So I say again: you cannot flip-flop between worlds!
Let’s describe these worlds.
The True World
Let’s talk about The True World a.k.a. our actual society and economy.
Inflation: inflation exists in the True World, typically varying between 2% and 4% per year. We don’t know what future inflation will look like. But it’s reasonable to use a benchmark like 3% per year.
Stock returns: stock returns vary in the True World and can do so by significant amounts. Still, a pattern emerges when we zoom out to large time scales (20+ years). On average, a diversified stock portfolio has returned ~10% per year over long periods. It’s reasonable to use that 10% benchmark for the future. $100 this year turns into $110 next year.
Bond returns: bond returns also vary in the True World, though typically by smaller amounts than stocks. Over the past 100 years, intermediate-term, high-grade bonds have returned ~5% per year. It’s reasonable to use that 5% benchmark for the future. $100 this year turns into $105 next year.
In the three bullets above, I made an interesting assumption: that the future will closely resemble the past. You’re allowed to disagree with me and say, for example, that you want to assume inflation will be 4% ongoing and stock returns will be 8% ongoing. That’s fine.
The critical point is that all your numbers occur here in the True World. Inflation is above zero. Stocks and bond returns are measured using the actual amount of dollars. When we combine these factors, we conclude:
Your future income will be higher than your current one, increasing with inflation.
Your future raises will be greater than current, increasing with inflation
Your future spending will be higher than current, increasing with inflation.
Your future annual savings will be higher than current, increasing with inflation.
Your future nest egg will grow by some mix of true-world return percentages (assuming you build a diversified portfolio).
Keep those four components in mind: income, raises, savings & spending, and investment growth.
If you do all of your future planning using “True World” numbers, your analysis results will show reality as it is. That’s the goal.
The Convenient World
In the True World, as we’ve seen, it seems everything gets adjusted up by inflation. Lame! And also a bit tedious. Can’t we just do a mathematical trick to remove inflation from the equation entirely?
Yes. That’s exactly right. Some intelligent people wanted to make The True World more convenient for us. We’re here today (discussing a confusing financial planning topic) because of that desire for convenience.
…which, in my opinion, is a great idea! Unfortunately, those good intentions paved the road to our present confusing situation. Those intelligent people said,
“Three of our four main components (income, raises, spending & saving) are adjusted by annual inflation. To make the math easier, let’s remove inflation. No more adjustments! But to even out all facets of the equation, we must also decrease the investment growth by the inflation rate.”
The Convenient World contains no inflation! Here in the Convenient World, our four components are:
Your future income will equal your current income (assuming no merit-based raises).
There are no raises (at least, no “cost of living” or “COLA” raises)
Your future annual spending & saving will equal your current values.
Your investments will grow by a mix of true-world return percentages minus the annual inflation rate.
There’s no inflation in any of the four factors. While we’ve decreased our future spending needs, we also decrease the amount we save in the future and the rate at which our investments grow. Everything is a bit muted in The Convenient World.
But because we’ve discounted inflation in both positive ways (less future spending) and negative ways (less investment growth), you can do future planning using these “Convenient World” numbers and your results will show reality as it is.
Don’t Believe Me?
“But Jesse! How can the math work if we remove inflation in retirement and FIRE planning?! We’re ignoring a very real phenomenon!”
Trust me. Trust the math. Take a look at this simple spreadsheet.
The True World tab uses true world data. The Convenient World tab removes inflation entirely as I’ve described above.
Both tabs yield the same exact retirement savings results (Column I).
What About “The 4% Rule?”
The famous 4% rule throws an important question at us.
As my 4% rule explainer article details, the 4% rule builds inflation into its math. The creators of the 4% rule told us, “Hey future retiree – don’t you worry about inflation in retirement, we’ve already built it into our mathematical construct. All you need to worry about is hitting your 4% or 25x nest egg goal at your retirement date.”
What’s that sound like? What world washes inflation away? The Convenient World!
Now, the 4% Rule applies starting Day 1 of Retirement and extends until the day you meet Charlie Munger (RIP). That stretch of time is covered by the 4% rule (or whatever retirement rule/simulation you choose to utilize).
How should you get from today to Day 1 of Retirement? I recommend continuing to do all of your math in The Convenient World. Remove inflation from your numbers altogether.
Can you mix and match? While dangerous, the answer is technically yes!
To get from Today to Your Retirement Date, you can either:
Do all your math in The Convenient World, where both your future annual spending AND your future nest egg need will be muted values, but the ratio of those two will be 4% or 25x.
Do all your math in The True World, where both your future annual spending AND your future nest egg will reflect reality, and the ratio of those two will be 4% or 25x.
You can technically use True World math to get from Today to Your Retirement Date, and then let the 4% Rule (which is Convenient World math) take over from there.
But you CANNOT mix-and-match True World and Convenient World math when determining how to get from Today to Your Retirement Date.
In this example, both True and Convenient math get us to a place we can start using the 4% Rule.
But – Those Future Nest Egg Amounts Are Different?!
We’re sitting here in 2024. The True World tells us we’ll need $3.75M to retire in 2040. The Convenient World tells us we’ll need $1.875M. Those two numbers are vastly different…so which one is right?
The way to think about that is:
We’ll need $1.875M to retire as measured in 2024 dollars
We’ll need $3.75M to retire as measured in 2040 dollars
Either way, the most important takeaway from these types of planning analyses is to understand what we need to do right nowin 2024 to hit these future goals. Then we can revisit in 2025, 2026, etc.
Thankfully, both True and Convenient math will inform us precisely what we need to do here in 2024. Both methods would tell us, for example, “You need to save $30,000 in 2024 to stay on track for your retirement goal.”
What About “Real” vs. “Nominal” Returns
You might have heard of “real returns” and “nominal returns” before. I use those terms regularly here on The Best Interest, but I’ve intentionally excluded them so far in our discussion of inflation in retirement and FIRE planning.
The reason is that “real returns” confuses my analogy of “The True World.” Ugh.
Investment professionals use the term “nominal returns” to describe the actual dollar amounts that investments are increasing/decreasing by. If $100 turns into $110, the nominal return is 10%. In other words, nominal returns exist in The True World.
Investment pros use “real returns” to describe whether investments increase your purchasing power. In other words, have the investments outperformed inflation? If $100 turns into $110 but there was also 4% inflation, the real return is ~5.77%. “Real returns” exist in The Convenient World.
Yes, it’s confusing. You’ve been warned. Good luck.
Lessons and Takeaways
What have we learned?
Inflation in retirement and FIRE planning is a touchy topic. It’s not intuitive or easy. In fact, it requires great attention to detail.
You can use True World numbers and get all the answers you need.
You can use Convenient World math that excludes inflation, and you’ll also get the answers you need.
I recommend against mixing and matching. That said, if you’re very comfortable with the math, you can mix-and-match and end up fine.
You don’t want to mess this up. Misapplying inflation (a ~3% annual mistake) compounded over decades will lead you to a dark place.
Talk to an expert if you need to. CFP financial planners know how to handle this. Modern financial planning software takes care of the math for you.
Go get ’em!
PS: Here’s a straightforward financial independence and 4% rule calculator where you can input your own data.
PPS – you’ll notice my calculator does all its math in The Convenient World!
Thank you for reading! If you enjoyed this article, join 7500+ subscribers who read my 2-minute weekly email, where I send you links to the smartest financial content I find online every week.
-Jesse
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The Consumer Financial Protection Bureau (CFPB) is sounding the alarm about an accelerating rate of scams that most commonly target older Americans, where a bad actor will pose as an official representative of the Bureau or another federal agency.
The CFPB published a blog post on Tuesday describing details of the scam, including the lengths that the bad actors will go to convince their targets of the deception.
“This week, we confirmed that scammers are using CFPB employees’ names to try to defraud members of the public,” the blog post said. “We’ve heard from people, specifically older adults, who received phone or video calls.”
The Bureau, the post said, will never solicit personal information or money from members of the American public.
“This includes never asking you to pay an upfront fee or taxes, or telling you that you’ve won a lottery, sweepstakes, or class-action lawsuit,” the post said. “We also won’t ask you for personal or sensitive information before you can cash a check we’ve issued.”
The Bureau outlined three common variations of the scam, including an imposter posing as a government or Bureau official in a phone or video call; calls or messages informing the scam target of a class action lawsuit that could award them money, or some other kind of unexpected direct cash payment; and being told that to collect money, the target must first “pay taxes or another upfront fee to collect the money.”
Scammers will persistently seek to find “reasons” for the target to pay more money to them in “fees or taxes,” but it “is all part of the scam,” the Bureau said.
For anyone contacted by someone claiming to be a CFPB or government official, consumers are directed to reach out to the Bureau’s consumer call center. It can be reached at (855) 411-2372 and operates from 8 a.m. and 8 p.m. Eastern time, Monday through Friday. That center can assist a caller with verifying the authenticity of government communication.
“Scammers could reach out to you by phone, mail, email, text message/SMS, social media, messaging apps, or through other online channels,” the CFPB advised. “Scams can also occur in person, at home, or at a business.”
Older Americans are commonly the targets of scammers, as noted by prior CFPB research and public advisory notices. Because of the demographics and involvement in financial services, some scammers have also chosen to falsely identify themselves as members of the reverse mortgage industry.
The U.S. Department of Housing and Urban Development (HUD) Office of the Inspector General has previously warned the public about such scammers, saying that reverse mortgage product complexity could allow certain scammers to sew confusion among their targets and make them vulnerable to bad actors.
A reverse mortgage may be a viable financial instrument to help pay for older Americans’ long-term care priorities, but they — and their implications on entitlement eligibility — need to be fully considered.
This is according to a new column at MarketWatch, comparing reverse mortgage product features to other potential options and enlisting commentary from an eldercare attorney.
A reader concerned about their parents’ cash reserves in retirement wrote to the outlet asking about ways they may be able to cover the costs of long-term care, which they say will be needed by their parents soon.
“They’re not on Medicaid at the moment, but they have a house that has been in a trust for only three years, and their children are named as beneficiaries,” the reader said. “Will we need to sell the house, or can they get a reverse mortgage to pay for their long-term care? Will they need to go on Medicaid?”
While Medicaid may be one of the more viable options, a reverse mortgage is a tool worthy of consideration according to Brian Tully, founder and managing partner at Tully Law Group which specializes in eldercare law.
“You never want a family to run out of money,” Tully told MarketWatch. “You always want them to have some money left, whether it is a retirement account, proceeds from a reverse mortgage they’ve moved to children or a well spouse. You always want to have access to money. Spending everything down is a mistake.”
The column describes selling the home to access equity as an option that “should be the very last resort,” since the home is a valuable asset they need not give up.
“Medicaid rules vary state by state, but in New York, for example, a primary home is exempt from total assets while the individual receiving care is living there, or intends to return there after their time in a nursing home,” the column said.
Limitations on other assets could come into play, however, and selling the home may end up disqualifying the parents from Medicaid. A reverse mortgage could present similar issues, the column said.
“You could get money from a reverse mortgage through a single lump sum, or regular fixed monthly payments, but that again can disqualify your parents from Medicaid eligibility — or require them to spend down those assets quicker than they otherwise would have,” it reads. “Look for a qualified and trustworthy estate or eldercare attorney who can help you make sense of your state’s specific rules.”
With much of the U.S. retirement conversation often focused on the increasing challenges of maintaining a quality of living into older age, a law passed by Congress in 2022 could be a positive sign.
The Securing a Strong Retirement Act of 2022, known by its moniker “SECURE 2.0,” includes provisions including automatic enrollment of more workers into retirement savings plans, matching certain student loan payments in a 401(k) plan and tweaks to required minimum distributions (RMDs) in existing retirement plans.
“[A]s pensions become rarer and Social Security benefits lose purchasing power, SECURE 2.0 could be the foundation modern workers need to save for retirement while covering their everyday expenses,” according to an overview of the law published by personal finance website Money.
The automatic enrollment provision could have a notable impact on U.S. retirement. While not expected to kick in until the final day of the year, “most new 401(k) and 403(b) plans will automatically enroll employees unless they opt out,” the overview explained. “This is expected to drastically expand the number of people enrolled in employer retirement plans.”
Starting this year, borrowers of certain qualifying student loans can have those payments matched in a 401(k) or 403(b) account by their employer. This provision is not a requirement but could assist those aiming to establish a more secure retirement in the future.
“Instead of matching workers’ contributions to retirement accounts, participating employers match the same amount of money that workers pay toward their student loans,” the overview said. “All workers have to do is make sure they opt for the new benefit (if applicable) and make timely payments.”
Those with tax-deferred retirement accounts who must make RMDs — annual withdrawal thresholds — will also see the starting age for RMDs rise from 72 to 73 this year. By 2033, that age will rise again to 75.
“The law also reduced the penalty for not withdrawing the required minimum from 50% to 25% of an account holder’s RMD (and, if corrected within two years, to 10%),” Money said.
Retirement challenges persist, however. Recent data shows that older Americans are at risk of becoming their adult children’s biggest expense, and a January survey from AARP shows that over 60% of seniors have not sought out retirement advice from a financial professional due to trust issues.
Generation X’s savings levels will fall short of what is required according to recent data from Schroders. Observers and aging advocates continue to detail why aging in place could be an important element for stabilizing retirement finances.
Just over 60% of U.S. seniors at or over the age of 50 have not sought out professional retirement planning advice, despite data indicating a general lack of retirement preparedness among the older population according to a survey published this month by AARP and conducted by the National Opinion Research Center (NORC) at the University of Chicago.
Using a sample size of about 1,000 U.S. adults, the survey found that roughly 621 respondents have never “used a financial professional to help plan for retirement.” Among the respondents who answered that way, 41% said that they either preferred to handle it themselves or to let a spouse take care of it if they were married.
Another 35% of respondents answered that they simply do not have enough retirement savings to justify seeking out professional retirement advice. In comparison, 30% said that affordability concerns prevented them from seeking such advice.
Roughly 20% of respondents also said they were unsure whether they could trust retirement professionals.
A recent development on paid retirement advice led to the creation of the survey, AARP detailed.
“On October 31, 2023, the U.S. Department of Labor announced a new rule concerning professional financial advice related to retirement savings accounts, such as 401(k) plans and IRAs,” the group explained. “The proposal would clarify the circumstances during which financial advice related to retirement plans must be in an account holder’s best interest.”
Those who do enlist financial professionals for retirement advice believe in the stated goals described by both the Labor Department and the White House in October.
“The survey reveals that adults ages 50-plus use the advice they receive to make important financial decisions, and they not only expect that professional financial advice will be in their best interest but also believe that this should in fact be required,” AARP said of the results.
While the majority of respondents say they have never sought out professional retirement advice, nearly four in ten (38%) of respondents who have used such advice largely responded that they expect it will be in their best interest.
Roughly three in ten respondents (29%) also said they “expect to use a financial professional for this purpose within the next five years,” according to the survey results.
The seniors who are often the parents of Generation X and Generation Y (millennials) could become a pronounced expense for their kids in the coming years, but adult children also want to see their parents successfully age in place.
This is according to a commentary from Sarita Mohanty, president and CEO of elder financial advocacy organization The SCAN Foundation in a commentary published by Fortune.
There will be 16 million “middle-income” seniors in the U.S. by 2033, Mohanty said, citing a 2022 study from the National Opinion Research Center (NORC) at the University of Chicago.
“As NORC’s research summary explains: ‘Many will struggle to pay for the health, personal care, and housing services they need. […] Even with home equity, nearly 40% will not be able to afford assisted living,’” she cited.
These kinds of expenses have only become more burdensome over time, Mohanty said.
“In 2002, adults over 65 spent $48,000 (adjusted for inflation) a year on average, according to data from the Bureau of Labor Statistics,” she wrote. “Today, the average is $58,000, a more than 20% increase. The average rent and medical costs for those in assisted living currently stand at $65,000 a year.”
The far and away preference for both U.S. seniors and their children is for the seniors to age in place in their own homes, Mohanty said. Citing a survey from Today’s Homeowner, 89% of Americans at or over the age of 55 want to remain in their homes.
But a late 2023 survey by CNBC found that nearly 60% of Americans feel they are not on track to retire comfortably, Mohanty pointed out, and that lack of assurance in their own retirement security means the younger generations are often unprepared to assume any support position for their parents.
“Something has to give,” she said. “If you’re in the sandwich generation – Gen X and older millennials – and want to share in the responsibility for their parents’ retirement, you should begin by thinking of your parents’ retirement plans in the context of your own.”
In December, the U.S. Department of Housing and Urban Development (HUD) announced a $40 million notice of funding opportunity to connect seniors in affordable housing with resources that could help them age in place.
The reverse mortgage industry often describes its product as a vehicle that can help older Americans remain in their homes since a core requirement of any reverse mortgage is for the borrower to remain in the property as their primary residence.