As detailed in the first article in this series
, bad thinking creates bad habits. The myths that prevail in today's thinking about managing personal finances and building personal economies lead to financial disaster. In this article, we'll examine the next two myths in the series.
Myth No. 2 -- My home will keep me secure"
Let me tell you a story.1
Abigail had been in the military for 19 years when a stroke put her out of commission at the age of 52. She only qualified for a small military pension and a small monthly Social Security disability/retirement income.
"But," she thought, "all is well. I own my home in a very nice neighborhood in a very nice city, my small income is more than I need for food, clothing and entertainment, and my VA benefits take care of my medical expenses."
Fast-forward from age 52 to age 72. Abigail's home is still in one of the nicest neighborhoods and is quite valuable, but the myth is shattered. Her home is in need of significant repair; however, it had a $60,000 first mortgage on it that she borrowed to pay bills, make prior repairs, purchase a handicap-equipped car and pay off her credit card debt. The mortgage payment consumed over half of Abigail's monthly income so she skimped on everything else and ran her credit cards up again. Her security -- not to mention her comfort and peace of mind -- were at risk, and the picture wasn't very rosy.
Fortunately, I was able to introduce Abigail to an ethical reverse mortgage specialist who helped her obtain a reverse mortgage. She paid off the $60,000 first mortgage, funded the needed repairs, and freed up her entire retirement income for monthly expenses. She was also able to leave over $40,000 in the reverse mortgage for future emergencies and opportunities.
Now, we have to wait and see if she outlives this strategy, which allows her a modicum of security. If Abigail lives beyond age 84 or 85, she may be right back where she was when I met her in 2004, and may not have the equity in her home to support a refinance of the reverse mortgage.
Abigail is not an exception. There are hundreds of thousands of older Americans who have homes that are paid for (some say as high as 77 percent), but little or no monthly income to pay for essentials. So, the equity to debt cycle continues for them. Eventually these brave Americans, who have given their lives to their families, churches and country, either find a compassionate and informed advisor who guides them out of their turmoil or they end up as discouraged, disparaged and depressed welfare wards of the state.
Many Americans had foresight enough to anticipate the possibility that a paid-for home would continue to be an expense, and put aside extra money to deal with that reality. They were savers.
Myth No. 3 -- I'm a saver
"That'll never happen to me," you say. "I'm a saver and have money in CDs and other investments."
Meet Edgar and Edith Smith. Edgar had worked for decades and saved a part of what he earned every paycheck. He did not have a retirement plan, because the small company he worked for cancelled it years earlier and, although he received a small settlement amount at that time, he and Edith were receiving no significant income from it.
Edith was a stay at home mom and had never worked outside the home so she did not have her own retirement or Social Security. Even so, the Smiths were doing OK on Edgar's Social Security and the earnings off their CDs -- or so it seemed.
Then, Alzheimer's Disease attacked Edgar. In less than two years, the savings were gone, as was the income from the savings. Within another year, Edgar was in a nursing home on welfare and Edith, who had never had to deal with money issues or home repairs, and certainly not with a completely debilitated Edgar, was herself in serious condition from stress, depression and near poverty.
Events that happen to people every day destroy the myth that savings are in some way secure: illness, uninsured losses, the needs of children and grandchildren, and the ravages of addiction to alcohol, gambling, or drugs that afflict people of all ages, both genders and every social condition.
Savings are also subject to market risk. Interest rates like those we experienced in the past few years (1999 - 2004) dropped from about 7 percent to as low as 1 percent and decimated the income derived from savings. Folks who were used to getting about $600 per month from their savings ended up with less than $100.
The savings rate in America in December 2005 was a negative .05 percent of net earned income. It doesn't take a genius to realize that such a low rate of savings will never equate to any sort of future security. Even careful savers who might exceed the average could never accumulate enough money to offset the unrelenting onslaught of inflation and unforeseeable events.
In the next article, we'll examine myths four and five.
I've used aliases in all stories to protect the privacy of the subjects. The stories are all true and accurate in every detail.
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