Lukas Gage’s viral video audition haunts the ‘hot labor summer’ actors’ strike sweeping Hollywood

In November 2020, the actor Lukas Gage was auditioning for a role via video link when he heard the producer make some disparaging remarks about the size of his apartment. 

“These poor people who live in these tiny apartments,” the producer said. “I’m looking at his background and he’s got his TV and …”

Gage, who at that time had had a four-episode arc on HBO’s “Euphoria” among other small roles, interrupted the producer — British director Tristram Shapeero, who later apologized for his remarks — to let him know that he was not muted and that Gage could, in fact, hear him. 

“Yeah, I know it’s a sh—y apartment,” Gage said. “That’s why — give me this job so I can get a better one.”

Shapeero replied, “Oh my god, I am so, so sorry … I am absolutely mortified.”

Putting together an audition tape can often take up an entire day and involve setting up a studio space for sound and lighting.

“Listen, I’m living in a four-by-four box, just give me the job and we’ll be fine,” Gage responded. 

Gage kept his sense of humor, but he also decided to post the video on his Twitter account to show how actors are sometimes treated from the moment they audition for a role — and perhaps to remind people to make sure you’re on mute if you’re trash-talking someone on a Zoom
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+1.76%

call.

It’s three years later, and members of the Writers Guild and Screen Actors Guild are on strike, looking for more pay, better working conditions and stricter rules around things like the use of actors’ images in the age of artificial intelligence and the lack of residuals from streaming networks. 

The perils of the online audition

Meanwhile, Gage’s 2020 online audition is resonating again. 

For a working actor — who, like the majority of SAG-AFTRA members who may not be an A-list star — simply getting in front of a producer as Gage did can be a long and difficult process. And since the start of the pandemic, the nature of auditions has changed dramatically. This has come to symbolize the uphill struggle actors face from the moment they hear about a role. 

In May, Ezra Knight, New York local president of SAG-AFTRA, asked members to authorize strike action, saying contracts needed to be renegotiated to reflect dramatic changes in the industry. Knight cited the need to address artificial intelligence, pay, benefits, reduced residuals in streaming and “unregulated and burdensome self-taped auditions.”

In the days of live auditions, actors would read for a role with a casting director. But several actors told MarketWatch that it’s become harder to make a living in recent years, and that it all starts with the audition tape, which has now become standard in the industry. 

By the time Gage got in front of producers, for instance, he had likely either already delivered a tape and was put on a shortlist to read in front of a producer, or the casting director was already familiar with his work and wanted him to read for the part. 

But an audition tape can often take up an entire day to put together, actors say. When the opportunity to audition arrives, actors typically have to drop everything they’re doing — whether they’re working a side hustle or taking time off or even enjoying a vacation.

Cadden Jones: “All the financial responsibilities have fallen on us. The onus is on us to create our auditions.”


Cadden Jones

They need to arrange good lighting and a clean backdrop — Gage’s TV set became a distraction for the producer during his audition — set up the camera, and scramble to find a “reader” — someone to read the other roles in the scene, preferably another actor. 

Then the actor has to edit the audition to highlight their strongest take and upload it. There are currently no regulations on the amount of pages a casting director can send to a candidate, and actors say there’s often not enough time to properly prepare.

“Unfortunately, it’s been going in this direction for some time now,” said Cadden Jones, an actor based in New York who has credits on shows including Showtime’s
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“Billions” and Amazon Prime’s
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“The Marvelous Mrs. Maisel.” 

“This was the first year I did not qualify for health insurance in decades,” she told MarketWatch. “I just started teaching.”

To put that into perspective: Members of SAG-AFTRA must earn $26,470 in a 12-month base period to qualify for health insurance. The median annual wage in the U.S. hovers at around $57,000, based on the weekly median as calculated by the Bureau of Labor Statistics.

Jones and her partner, Michael Schantz, an actor who works mostly in theater, are starting a communications consulting company to increase their income.

“Most if not all of my actor friends have had to supplement their income since the pandemic,” she said. “We’re in trouble as a community of actors who used to make a good living doing what we do. It’s not like any of us lost our talent overnight. I, for one, am very glad that we’re striking.”

But Jones said that, with the auditioning process taking place mostly online since the onset of the pandemic, casting agents — who work for producers — are able to see more people for a given role, making the competition for roles even more intense.

‘This was the first year I did not qualify for health insurance in decades.’


— Cadden Jones, an actor based in New York

“We don’t go into casting offices anymore,” Jones said. “All the financial responsibilities have fallen on us. The onus is on us to create our auditions. It’s harder to know what they want, and you don’t have the luxury to work with a casting director in a physical space to get adjustments, which was personally my favorite part of the process — that collaboration.”

She added: “Because the audition rate accelerated, the booking rate went down dramatically for everybody. But don’t get me wrong. Once the strike is officially over, I want all the auditions I can get.”

SAG-AFTRA has proposed rules and expectations to address some of the burden and costs actors bear when it comes to casting, including providing a minimum amount of time for actors to send in self-taped auditions; disclosing whether an offer has been made for the role or it has already been cast; and limiting the number of pages for a “first call” or first round of auditions.

Before the negotiations broke down with the actors’ union, the Alliance of Motion Picture and Television Producers, which represents over 350 television and production companies, said it offered SAG-AFTRA $1 billion in wage increases, pension and health contributions and residual increases as part of a range of proposals related to pay and working conditions.

Those proposals included limitations on requests for audition tapes, including page, time and technology requirements, as well as options for virtual or in-person auditions, AMPTP said. The producers’ group characterized their offer as “the most lucrative deal we have ever negotiated.”

Michael Schantz: “How does the broader culture value storytelling and the people who make stories?”


Michael Schantz

Jones said she doesn’t blame the casting directors. It’s up to the producers, she said, to be more mindful of how the changes in the industry since the advent of streaming, the decline in wages adjusted for inflation, and poor residuals from streaming services have taken a toll on working actors.

Bruce Faulk, who has been a member of SAG-AFTRA since 1992, said that for work on a one-off character part or a recurring role on a network show, he might receive a check for hundreds or even thousands of dollars in residuals. And — crucially — he knows how many times a particular show has aired. 

Residuals are fees paid to actors each time a TV show or film is broadcast on cable or network television. They are based on the size of the role and the budget of the production, among other things. For shows that air on streaming services, however, residuals are far harder to track. 

What’s more, residuals decline over time and can often amount to just a few cents per broadcast. 

Actor Kimiko Glenn, who appeared on episodes of Netflix’s
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-2.27%

“Orange Is the New Black,” recently shared a video on TikTok showing $27 in residuals from her work on that show.

Faulk sympathizes. “A lot of checks from HBO
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-1.37%

for ‘The Sopranos’ or ‘Gossip Girl’ I get are for $33,” he said. “I never know how many people watched me on ‘Gossip Girl’ in the three episodes I’m in. All we know is whatever the streaming services decided to announce as their subscriber numbers.”

Like Jones, Faulk said this will be the first year he won’t qualify for SAG-AFTRA health insurance, which covers him, his wife and his son. This is despite him having worked enough over the past 10 years to qualify for a pension when he turns 67. “Mine is up to $1,000 a month now,” he said, noting that the pension will keep increasing if he keeps getting acting work.

Schantz, who had a three-episode arc on NBC’s
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“The Blacklist” in addition to his other TV, film and theater credits, finds the recent shifts in the landscape for actors somewhat difficult to reconcile with the way people turned to TV and film during the loneliest days of the pandemic.

“One of the most concerning things I can think of right now is the conversation around value. How does the broader culture value storytelling and the people who make stories?” he said. “The arts always tend to fall to the wayside in many ways, but it was striking during the pandemic that so much of our attention went to watching movies and television. There’s obviously something inside of us that feels like we’re part of the human story.”

Actors battle other technology

While big companies like Disney
DIS,
+1.13%
,
HBO, Apple
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-0.62%
,
Amazon and Netflix make millions of dollars from films and TV series that are watched again and again, Schantz said that actors are unable to make a living. “No one wants to go on strike,” he said. 

Those five companies have not responded to requests for comment from MarketWatch on these issues.

Since his audition tape went viral, Gage has booked regular work, and he found even greater fame when he went on to star in Season 1 of HBO’s “White Lotus.” In 2023, he will star in nine episodes of “You,” now streaming on Netflix, and in the latest season of FX’s “Fargo.” 

Earlier this year, he told the New York Times: “I had never judged my apartment until that day.” He added, “I remember having this weird feeling in the pit of my stomach afterward, like, why am I judging where I’m at in my 20s, at the beginning of my career?”

‘There’s enough Bruce out there where you could take my likeness and my voice and put me in the scene.’


— Bruce Falk, a member of SAG-AFTRA since 1992

But advances in technology are not just hurting actors in the audition process. A debate is raging over the use of AI and whether actors should be expected to sign away the rights to their image in perpetuity, especially when they might only be getting paid for half a day’s work.

“AI is the next big thing,” Falk said. The industry is concerned about companies taking actors’ likenesses and using AI to generate crowd scenes. 

“Even an actor at my level — that guy on that show — there’s enough Bruce out there where you could take my likeness and my voice and put me in the scene: the lieutenant who gives you the overview of what happened to the dead body,” he said. “At this point, I could be technically replaced. We have to get down on paper, in very clear terms, that that can’t be done.”

The Alliance of Motion Picture and Television Producers also said it agrees with SAG-AFTRA and had proposed — before the actors’ strike — “that use of a performer’s likeness to generate a new performance requires consent and compensation.” The AMPTP said that would mean no digital version of a performer should be created without the performer’s written consent and a description of the intended use in the film, and that later digital replicas without that performer’s consent would be prohibited.  

“Companies that are publicly traded obviously have a fiduciary responsibility to their shareholders, and whatever they can use, they will use it — and they are using AI,” Schantz said. “Yes, there are some immediate concerns. Whether or not the technology is advanced enough to fully replace actors is an open question, but some people think it’s an inevitability now.

“To let companies have free rein with these technologies is obviously creating a problem,” he added. “I can’t go show up, do a day’s work, have my performance be captured, and have that content create revenue for a company unless I’m being property compensated for it.”

Schantz said he believes there’s still time to address these technological issues before they become a widespread problem that makes all auditions — however cumbersome — obsolete. 

“We haven’t crossed this bridge as a society, but God only knows how far along they are in their plans,” he said. “All I know is it has to be a choice for the actors. There has to be a contract, and we have to be protected. Otherwise, actors will no longer be able to make a living doing this work.”



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‘I’m 62 and ready for my golden years’: I’ve $1.7 million in annuities, Roths and index funds. Can I afford to never work again?

I’m going to preface this by saying that I know I am in a great long-term position. It’s the short term that is of concern.

I am 62, single with no dependents. I own my smallish home outright and it’s worth $1 million due to the location. I own my car outright and I have no debt. My IRA and small Roth accounts have about $350,000 with an additional $840,000 in two guaranteed-income deferred annuities rolled over from a couple old 401(k)s in 2020. There’s $520,000 in my regular brokerage accounts (mostly Vanguard Index funds). I have $42,000 invested in two eReits and $10,000 in Series I Bonds. I have $71,000 in a higher-yield savings account and $12,000 in a checking account.

I had always planned to retire at 65 and live off my savings until filing for SSI between 67 and 70 (approx $3,400 to $4,100, depending on when I file). A year ago at 61, I abruptly quit a good-paying new job due to a bad work environment, and a week later, my elderly parent had a serious medical issue. I decided to take time off to help navigate care, and just be present — without all of the stress of a pretty demanding job. A year after quitting, I figured out that I have no desire to go back to what I was doing and, quite frankly, have to desire to work at all! 

‘I’m not afraid of running out of money long term. It’s the next 5 to 7 years that are really causing me heartache.’

So here (finally) is my concern. My expenses are at least $3,000 per month give or take. Given what I have in savings and no plans to file for Social Security Insurance for at least five years, what do I continue to live on, especially if I don’t go back to work? I most likely have some house expenses (new roof, garage door, etc.) in the near future, plus, I want to travel sooner than later so $71,000 won’t last that long especially with this inflation. Do I sell off some of my mutual fund shares to boost my savings? 

At some point (most likely in the next two years) there may be about $75,000 of inheritance, but I’m not factoring that into the equation for now. I think I’ve done almost everything right, and I’m ready for my golden years. I’m not afraid of running out of money long term. It’s the next five to seven years that are really causing me heartache. What are your thoughts?

Short-term Angst

Dear Angst,

Life is short, but we all hope for a long retirement, and it’s easy to lose sight of what’s important when we are “nose-down” in the rat race. We only have one life, and most of us, if we’re lucky, have two parents and/or sometimes one good parent. If we are blessed with one or both, it’s a gift if we can afford to take that time with them, especially if they have pressing medical issues. Thankfully, you had planned ahead, and you were able to do just that.

Many people reevaluated their relationship to work in recent years. You did so because you became a caretaker. The most fortunate among American workers were allowed to work from home from 2020, and where their work was the umbrella that protected their financial life and gave them the funds to live their life, by the end of the pandemic, that umbrella became their life which gave them the ability to work. It’s a profound change.

I’m going to take a wild guess here — well, not so wild — and say that a lot of people are reading your letter with their mouths agape, with not a small amount of envy. Some may see a touch of humble bragging to your financial achievements, but you acknowledge that you are in a healthy financial position, and have endeavored to do everything right. That, I’m sure, involved sacrifices along the way. So bravo to you. From a gratitude point of view, your financial list is a good one.

There are a couple of wrinkles, which may be useful for others to be aware of. Robert Seltzer, founder of Seltzer Business Management in Los Angeles, said he would not recommend a client to roll their 401(k)s into annuities due to their higher fees and lack of flexibility. Without working, your only taxable income would be derived from retirement account distributions and investment income — but if your taxable income is less than $41,675, therefore, you would pay no capital gains tax. 

Is it a good time to liquidate some stocks? You’ve played the long game. The S&P 500
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-0.29%

is up 2.7% over the past year; many people close to retirement have been spooked by stock-market volatility since 2020, but the S&P has increased more than 30% since the last trading session of 2019 — before the pandemic. Assuming you’ve been investing for the past three decades or more, and have experienced the miracle of compounding over that time, the time to enjoy your life is nigh. 

‘Assuming you’ve been investing for the past three decades or more, and have experienced the miracle of compounding over that time, the time to enjoy your life is nigh. ‘


— The Moneyist

Something to consider as you age: “As you transition from the accumulation stage of life to the distribution stage, it is important to recognize that your risk tolerance is changing,” says Mel Casey, a senior portfolio manager at FBB Capital Partners. “If the brokerage account index funds are all in stock funds, this should be addressed. A rebalancing over time to reduce stocks and increase bonds may lower the risk and prepare the account for eventual distributions.”

Meet with a financial adviser and work out your short- and long-term needs: what your income looks like before and after you tap your Social Security benefits. The good news is you have a healthy income awaiting you when you finally start drawing down money from your retirement accounts. It helps enormously that you have paid off your home — property taxes, insurance, food prices, car payments, gas, health insurance, etc. notwithstanding.

About that health insurance. No doubt you are already aware that this will be an extra expense before you qualify for Medicare at age 65. The average annual health-insurance premium for 2022 was $7,911 for single coverage, up slightly from $7,739 in the prior year, according to KFF, formerly known as the Kaiser Family Foundation, a nonprofit headquartered in San Francisco, Calif. (You can read more about signing up for Medicare and what it will cost here.)

Casey also has thoughts on healthcare costs as you get older. “You have three years until you can apply for Medicare and that will be an important time in terms of choosing the appropriate path,” he says. “In the meantime, some form of health insurance is advisable, if only to eliminate the ‘tail risk’ of a serious injury or illness which could erode this healthy savings very quickly.”

Withdrawing money for retirement

You could cover a substantial part of your expenses from your brokerage account and Roths ($870,000) or annuities ($840,000). While you have done a great job in growing long-term assets, there are relatively few liquid, short-term assets (emergency reserves), says Randall Watsek, financial adviser with Raymond James. “For someone in retirement without earned income to draw on for living expenses, having at least five years of reserves might greatly lower their stress level,” he adds.

Ideally, you want to take Social Security between 67 and 70. “From an average life expectancy basis, it works out roughly the same, whether you take Social Security at 62 or 70,” Watsek says. “You get more small payments if you take it earlier, or fewer large payments if you take it later. It makes most sense to delay Social Security if you have a family history of living into your 90s or 100s or if you’re still working.”

But if your parents have a history of living a long life, and you currently have good health, Seltzer said he would be open for more discussion about what age you should start claiming Social Security, and he would explore whether you are comfortable waiting until you reach 67 or 70 years of age. (This would warrant further discussion with your own financial adviser, and you can reevaluate your position every 12 months.)

As my colleague Alessandra Malito points out, help comes in many forms: financial consultant, wealth manager and investment adviser. Choose a fiduciary who is required to act in your best interests (rather than giving you advice with one eye on your needs and another eye on their commissions). In order to become a certified financial planner or CFP, you must complete a certificate or degree program, 6,000 hours of related experience and have passed an exam. 

“Broker-dealers are advisers who primarily sell securities and often charge commissions on their recommendations. Commissions aren’t inherently bad, but clients should understand what they’re being charged for and feel comfortable with those fees before proceeding with the advice,” Malito writes. Certified public accountants, chartered life underwriters, certified employee benefit specialists respectively deal with accounting, life insurance and benefits.

“The rule of thumb for taking distributions during retirement is 4%,” Seltzer added. “If you took a very conservative distribution rate of 3%, it would amount to $52,500 which is almost 50% higher than your expenses of $36,000. So, by living off of a mix of savings, distributions from the annuities and capital gains from your brokerage account, you should meet his cash-flow needs with paying very little tax.”

You’re doing just fine. Your $75,000 inheritance will also give you some freedom for the next year or two, and help you get over the finish line. If you travel, think about Airbnb-ing
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+1.69%

your home, which would cover your accommodation costs. It may also encourage you to try living in a place for a month or more. As a cardiologist might tell a patient when they’re putting them on medication for the first time, “Start low, go slow.” Take your time. Don’t make any big decisions.

As one member of the Facebook
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-0.50%

Moneyist Group said, “If you’re a man please marry me!” I’ll leave that with you with God’s and your fiduciary’s blessings.

“Assuming you’ve been investing for the last three decades or more, and have experienced the miracle of compounding over that time, the time to enjoy your life is nigh.”


MarketWatch illustration

Readers write to me with all sorts of dilemmas. 

You can email The Moneyist with any financial and ethical questions related to coronavirus at [email protected], and follow Quentin Fottrell on Twitter.

By emailing your questions, you agree to have them published anonymously on MarketWatch. By submitting your story to Dow Jones & Co., the publisher of MarketWatch, you understand and agree that we may use your story, or versions of it, in all media and platforms, including via third parties.

Check out the Moneyist private Facebook group, where we look for answers to life’s thorniest money issues. Readers write to me with all sorts of dilemmas. Post your questions, tell me what you want to know more about, or weigh in on the latest Moneyist columns.

The Moneyist regrets he cannot reply to questions individually.

More from Quentin Fottrell: 

‘He’s content living paycheck to paycheck’: My husband won’t work or get a driver’s license. Now things have gotten even worse.

My wife wants us to spend $5,000 to attend her cousin’s destination wedding. I don’t want to go. Am I being selfish?

‘I feel used’: My partner stays with me 5 nights a week, even though he owns his own home. Should he pay for utilities and food? 



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#ready #golden #years #Ive #million #annuities #Roths #index #funds #afford #work

‘I worry about outliving my money’: I’m a 65-year-old widow in good health. Should I wait until 70 to collect my pension?

I am a 65-year-old widow in good health, and just started collecting my late husband’s Social Security benefit of $4,000 per month. When I turn 70, I will switch to my benefit since it appears it will be around $100 higher every month at that time. My current expenses are running high at about $10,000 per month due to some house maintenance projects I am doing. My son and his family will inherit everything when I’m gone.

I estimate my monthly expenses will drop to $5,000-$6,000 within the next year. I supplement my monthly income by drawing off interest, dividends and some profit-taking from my traditional IRA account which is worth about $2.5 million. I also have a Roth IRA of about $60,000 and bank CDs of $200,000. I also have another traditional IRA account worth $350,000, which I have designated as my long-term healthcare account in case I have to go into a nursing home at some point. 

‘I’m not sure if it makes sense to wait two to five years to collect my pensions if I am going to be drawing my RMD just a few years later.’

I have two pensions that I am debating about when I should start collecting. If I collect now, I will receive $1,400 per month. If I wait until I am 67 it will be $1,620 and at 70 the pension will pay $2,100 per month. However, when I turn 73 and start my minimum required distributions from my IRA, the annual RMD along with my Social Security should be more than enough for me to live on. 

I’m not sure if it makes sense to wait two to five years to collect my pensions if I am going to be drawing my RMD just a few years later. If I collect my pensions now, then it would reduce the amount of money I need to siphon off of my investments and could leave them relatively untouched for a few more years.

‘Money was always tight for us growing up and a struggle for my parents as they got older and needed healthcare assistance.’

So the question is, should I collect my pensions now and reduce the amount of money I am currently drawing off of my IRA? Or wait a few years and get the higher monthly payout? Everything I read encourages people to wait as long as they can to collect their retirements. My calculations show that if I collect now, my break-even point is about age 82. If I live longer than that, then waiting to collect would pay me more over the long term. Both my parents lived into their early 90s so longevity is a potential concern. 

I realize that I’m in a good financial situation, which is the result of my husband and I working extremely hard all of our lives and consistently saving and investing during good times as well as during recessions, job losses, and raising a family. But money was always tight for us growing up and a struggle for my parents as they got older and needed healthcare assistance, so I don’t think I will ever shake that off. I worry about outliving my money. I just want to make the right decision.

Thank you for your help.

To Withdraw or Not Withdraw

Dear Withdraw or Not Withdraw,

Let’s start with the good news. Whatever you do — start withdrawals now or wait — you are in a pretty strong financial position. If you can afford to wait — and you can — and you expect to live into your 90s, do that. That extra $700 a month will give you comfort as you age. You have $2.5 million in your IRA, and you will pay tax on those withdrawals regardless, but you can afford to use that as a buffer before your higher pension payments kick in. 

A financial adviser will help you crunch your numbers, but $4,000 a month in Social Security is a good start. Cutting your $10,000 monthly expenses to $6,000 is smart, and an adviser can help you see where you could make further cuts in your expenses, especially as you age. For some perspective: This survey found that working Americans ages 45 and older on average believe it will take $1.1 million to retire comfortably, yet only 21% say they’ll reach $1 million. 

Another reason to withdraw from your IRA now? Gains from an IRA, as you know, are taxable. Gains from a Roth IRA are not taxable if the account has been up and running for five years and you are over 59½. One of the big advantages to a Roth is the flexibility it affords. If you have a medical emergency, you could use your Roth IRA as a backup. (CDS are not typically useful for this as cashing out early results in a penalty, which could negate your interest earned over the period of the CD.)

‘Whatever you decide will be the best decision for you at this time.’

Dan Herron, a partner at Better Business Financial Services in San Luis Obispo, Calif., agrees you should wait. “Since longevity appears to be on your side thanks to good genes from your family, it is probably beneficial to postpone taking benefits as long as you can to maximize your pensions,” he says. “The reason being is that given the uncertainty surrounding Social Security, your pension may be your best hedge against any potential Social Security cuts down the road.”

He also sees the tax benefits in siphoning funds from what is already a very healthy IRA. “While you draw from your IRA now, you are reducing the balance of the IRA, which then (potentially) reduces the required minimum distribution amounts,” he says. “This could potentially be beneficial from a tax perspective.” And he suggests staggering your pension benefits, making withdrawals from one in two years, while leaving the other until you hit 70.

Whatever you decide will be the best decision for you at this time. No future is guaranteed, but your No. 1 priority right is peace of mind to secure a long and healthy retirement.


MarketWatch illustration

Readers write to me with all sorts of dilemmas. 

You can email The Moneyist with any financial and ethical questions related to coronavirus at [email protected], and follow Quentin Fottrell on Twitter.

By emailing your questions, you agree to have them published anonymously on MarketWatch. By submitting your story to Dow Jones & Co., the publisher of MarketWatch, you understand and agree that we may use your story, or versions of it, in all media and platforms, including via third parties.

Check out the Moneyist private Facebook group, where we look for answers to life’s thorniest money issues. Readers write to me with all sorts of dilemmas. Post your questions, tell me what you want to know more about, or weigh in on the latest Moneyist columns.

The Moneyist regrets he cannot reply to questions individually.

More from Quentin Fottrell: 

‘How to travel for free’: I spent $500 hosting my friend for a week. Should she have paid for food and utilities?

‘I’m 63 and desperately hate my work’: Should I pay off my mortgage, claim Social Security and quit my job?

‘He’s content living paycheck to paycheck’: My husband won’t work or get a driver’s license. Now things have gotten even worse.



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#worry #outliving #money #65yearold #widow #good #health #wait #collect #pension

Mortgage points may help homebuyers lower monthly costs amid high interest rates. How to know if this strategy is right for you

As interest rates have climbed, homebuyers have been confronted with higher borrowing costs.

That has led more home purchasers to opt for one strategy, purchasing mortgage points, as a way to defray higher monthly payments.

Mortgage points let buyers pay an upfront fee to lower the interest rate on their loans. In some cases, sellers will help to buy down rates to help ease transaction costs.

Almost 45% of conventional primary home borrowers bought mortgage points in 2022 to reduce their monthly mortgage payments, a trend that has continued into this year, according to recent research from Zillow.

That is up from 29.6% in 2021, when interest rates were lower.

More from Personal Finance:
Social Security cost-of-living adjustment may be 2.7% in 2024
Here’s the inflation breakdown for May 2023, in one chart
The rich often misjudge the potency of their retirement savings

The 30-year fixed-rate mortgage currently averages 6.7% according to Freddie Mac, up from 5.8% a year ago. The 15-year fixed-rate mortgage now averages about 6%, up from 4.8% a year ago.

This week, the Federal Reserve decided to pause the interest rate hikes it has put in place to combat high inflation.

As rates stay higher, those who are in the market for a home lose purchasing power. Some experts have urged buyers to consider purchasing mortgage points to lower their monthly payments.

Stephanie Grubbs, a licensed real estate agent at the Zweben team at Douglas Elliman Real Estate in New York, recently did exactly that when one of her clients lowered their asking price.

“This fabulous apartment just had a price reduction, which means you can use those savings to buy down your rate,” Grubbs wrote in the updated ad.

Grubbs, a former financial advisor, said her firm started bringing up the strategy more when the Fed started hiking interest rates.

“In an effort to try to be creative, we talk to sellers about offering to buy down a rate,” Grubbs said.

Other experts say buyers purchasing mortgage points can be a great strategy for the right situation.

That goes particularly if a buyer can afford the extra upfront costs.

Being able to lower that monthly payment can really help give some more wiggle room in people’s budgets and help them reach affordability.

Nicole Bachaud

senior economist at Zillow

Mortgage points refer to the percentage amount of the loan. Typically, one point is worth 1% of the loan value, according to Nicole Bachaud, senior economist at Zillow.

If the loan value is $300,000, one point would typically cost $3,000 and lower the interest rate 0.25 percentage points, she said.

“Being able to lower that monthly payment can really help give some more wiggle room in people’s budgets and help them reach affordability,” Bachaud said.

In addition to higher upfront costs, home buyers should also weigh other factors before buying mortgage points.

Set a timeline for living in your new home

“For most instances, it is definitely a considerable cost savings to be able to buy down on points,” said Kamila Elliott, a certified financial planner and co-founder and CEO of Collective Wealth Partners, a boutique advisory firm in Atlanta. Elliott is also a member of the CNBC Financial Advisor Council.

However, if you buy points and then refinance, that will not allow enough time for your upfront payment to appreciate, Elliott said.

Another important consideration is your timeline for how long you plan to live in the home.

With rates and home prices high, that means closing costs are also elevated, Elliott said.

Consequently, if you move before three to five years, you may take a bigger financial hit, she said.

“There could be a huge loss if you can’t stay in that property long enough to have those expenses amortized out over the time that you’re there,” Elliott said.

Consider other alternatives

If you have extra money when buying a home, you may instead choose to increase the size of your down payment.

This can be advantageous because it creates more equity in the home, Bachaud noted. It may also lower your monthly payments.

If that extra money is enough to bring your down payment to 20% of the home purchase price, that would eliminate the need for private mortgage insurance, which adds to monthly costs for mortgage borrowers who put down less than those sums.

However, you may see more of an effect on your monthly expenses by buying points rather than increasing your down payment, Elliott said.

It costs less for a seller to buy down somebody’s mortgage than it does for them to take a price reduction.

Stephanie Grubbs

licensed real estate agent at Douglas Elliman Real Estate

A point may cost $3,000 to $4,000, for example. But putting those sums toward a down payment likely will not make much of a difference on your monthly costs, Elliott said.

If you want to make sure your mortgage payment doesn’t exceed one-third of your take home income, then paying down on points could be the better option, she said.

In some situations, a seller may offer to buy down the rate, a concession to help offset costs for buyers. Grubbs said she has discussed employing this strategy with clients in her real estate practice.

“It costs less for a seller to buy down somebody’s mortgage than it does for them to take a price reduction,” Grubbs said.

Collective Wealth Partners CEO on how to start investing in real estate

Homebuyers may want to consider pursuing a 2-1 buydown, a mortgage that provides a low interest rate for the first year, a slightly higher rate in the second year and a full rate for the following years.

A 2-1 buydown may also sometimes be seller financed, according to Bachaud.

Talking to a loan officer can help you decide the best decision for your situation, Bachaud said.

Factor in the unknowns

How well any homebuying strategy fares in the long run depends on one big unknown: how the Federal Reserve will handle interest rates going forward.

The latest projections from the central bank call for two more rate hikes this year.

While today’s rates feel high, Elliott said she often reminds people that homebuyers in the 1980s would have loved to have had access to 6% mortgage rates.

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Confronting aging: How LGBTQ+ seniors can tackle their special caregiving challenges

Margaret Roesch, 67, and her wife, Pat McAulay, 68, wanted to have a supportive community around them as they grew older. So they helped to create a cohousing development for LGBTQ+ seniors and allies, making it easier to offer support to one another. 

“We said we don’t want to have to go back in the closet when we get older,” Roesch said from the front porch of her home in Durham, North Carolina. 

Opened in 2020, the Village Hearth is a neighborhood of 28 one-story accessible homes for residents ages 55 and up — and one of the few housing developments in the country specifically designed with LGBTQ+ people and allies in mind.  

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“We decided that we were going to be better in community, after having spent eight lonely years in Florida,” McAulay said. “It’s so rewarding to know there’s 30-some people here who have our backs.” 

“I find it very refreshing,” Roesch added.

“We’re all … going to die. People will get sick,” she said. “These things are going to happen, but we also find that we are really good at taking care of each other.”

How to avoid ‘the closet’ while ensuring good care

Older adults in the LGBTQ+ community are twice as likely to be single and four times less likely to have children as their non-LGBTQ+ peers, according to SAGE, a national advocacy organization for LGBTQ+ elders. They may also be estranged from members of their family who don’t accept their sexual orientation and/or gender identity.

“A lot of people in their 70s and 80s who have been closeted, they don’t feel safe and they remain closeted while going through care — that’s a stress,” said certified financial planner Stephanie Lee, founder of East Rock Financial in San Francisco. “You’re trying to get a caregiver, and you’re hiding who you are or hiding your relationship.”

The Village Hearth is a 55-plus cohousing community for LGBTQ+ adults, friends and allies located in Durham, North Carolina.

CNBC

Experts say that makes it especially important to have an aging plan early. 

“As with any stage of life, planning is unique and personal to the individual,” said CFP Kyle Young, a senior vice president at Morgan Stanley Wealth Management in New York. “The key is to start a conversation, educate yourself and finalize plans to assure your wishes are made clear.”

Get legal documents to ensure wishes are followed

At Village Hearth, residents have taken steps to prepare their finances, arrange for care and consider end-of-life planning. They have held workshops on choosing financial and health-care powers of attorney, having an advance directive for medical decisions and finding an attorney to help draft those key legal documents. 

When you’re in the hospital or a care facility, “if you’re heterosexual, the spouse automatically gets visiting rights,” Lee said.

That’s not always the case for same-sex couples, even if they’re legally married. In a hospital or care facility, “if a couple has kept their relationship private from others, advance health-care directives and visitation authorization forms are critical to having the patient’s wishes upheld,” Lee said.

“It’s really critical to get the legal papers to get those visiting rights,” she said, “so you can make those decisions.” 

Develop a caregiving plan early

The earlier you start planning, the easier it is to take steps to follow your plan and meet your goals.

“Having the benefit of time on your side will allow you and your loved ones to make sound, clearheaded decisions while considering cost, tax and broader estate implications of your plans,” said Young, who works with many LGBTQ+ clients.

Having the benefit of time on your side will allow you and your loved ones to make sound, clearheaded decisions.

Kyle Young

senior vice president at Morgan Stanley Wealth Management

Use the time between retirement and needing services to identify your support network, consider your financial situation, and educate yourself about care options that are available, recommends Allison O’Shea, founder of Openly Aging, an advisory firm in Durham.

“A lot of people don’t think about that in-between time,” said O’Shea, who works with clients as a so-called aging advisor after running senior living centers for many years. “There’s a really big piece missing when it comes to what you could be doing to prepare.” 

Create a network of support

Build a support group — neighbors, family, friends, loved ones and professionals whom you know you can lean on. 

If you’re single or not sure if you have people around you who are willing and able to step in, O’Shea recommends hiring a geriatric care manager. These professionals, who may also be social workers, nurses, psychologists or gerontologists, deal with elder-care issues regularly. They can be your advocate, make sure you’re able to access resources, and organize the support you’ll need. 

Consider the range of care options available

It is critical to understand what options you can afford and where to find assistance. “Don’t let your finances scare you,” O’Shea said. “You can create a plan that fits around your finances.”

Getting a handle on your monthly income and assets in retirement can help you determine where and how you’ll receive care later on — whether aging in place in your home or downsizing, or moving into some type of senior living arrangement. 

Local senior centers can be a valuable resource for older adults to find community and information, and many are working to serve a more diverse population. FiftyForward, which has seven community centers in central Tennessee to support older Americans, is working to build more inclusive community, conducting research and hosting cultural competency training. 

“Our country is unprepared for the burgeoning older adult group,” said Gretchen Funk, FiftyForward’s chief program officer. Issues of service access and isolation affect seniors overall, but discrimination can exacerbate those challenges for the LGBTQ+ community. 

“As a society, we need to look at this for all of us, because we will all be facing that,” said Funk. “And there should be power in advocating together.”

Some care services may be free based on your income but have long waiting lists. Knowing where to apply and when could help you mitigate costs. 

“If you have a plan or if you’re educated in what the options are, you’re not stressed over these big life decisions when you’re in a … crisis,” O’Shea said. “You have a step-by-step plan already laid out which will only save you time and money.”

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Bank of America execs blew $93.6 billion. Here’s how they did it.

In several notes to clients this month, Odeon Capital Group analyst Dick Bove has pointed out that Bank of America’s big spending on stock buybacks over the past five years has been a waste for its shareholders, with the bank’s stock price declining slightly during that period.

The idea behind repurchasing shares on the open market is that they reduce a company’s share count and therefore boost earnings per share and support higher share prices over time. This doesn’t seem to be a bad idea, especially for a company such as Apple Inc.
AAPL,
+1.01%
,
which has generated excess capital and has appeared to be firing on all cylinders for a long time. For a company that is continuing to expand its product and service offerings while maintaining high profitability, buybacks can be a blessing to shareholders.

But for banks, for which capital is the main ingredient of earnings power, a more careful approach might be in order. The data below show how buybacks haven’t helped the largest banks outperform the broad stock market over the past five years. And now, banks face the prospect of regulators raising their capital requirements by 20%, according to a Wall Street Journal report.

Before showing data for the 20 companies among the S&P 500 that have spent the most money on buybacks over the past five years, let’s take a look at how share repurchases are described in a misleading way by corporate executives — and by many analysts, for that matter. During Bank of America’s
BAC,
-0.79%

first-quarter earnings call on April 18, Chief Financial Officer Alastair Borthwick said the bank had “returned $12 billion in capital to shareholders” over the previous 12 months, according to a transcript provided by FactSet.

Borthwick was referring to buybacks and dividends combined. Neither item was a return of capital. In fact, Bove summed up the buybacks elegantly in a client note on June 9: “The money that the company uses to buy back the stock is simply given away to people who do not want to own the bank’s stock.”

It is also worth pointing out that the term “return of capital” actually means the return of investors’ own capital to them, which is commonly done by closed-end mutual funds, business-development companies and some real-estate investment trusts, for various reasons. Those distributions aren’t taxed and they lower an investor’s cost basis.

Dividends aren’t a return of capital, either, if they are sourced from a company’s earnings, as they have been for Bank of America.

One more thing for investors to think about is that large companies typically award newly issued shares to executives as part of their compensation. This dilutes the ownership stakes of nonexecutive shareholders. So some of the buybacks merely mitigate this dilution. An investor hopes to see the buybacks lower the share count, but there are some instances in which the count still increases.

How buybacks can hurt banks

Banks’ management teams and boards of directors have engaged in buybacks because they wish to boost earnings per share and returns on equity by shedding excess capital. But Bove made another industry-specific point in his June 9 note: “If the bank buys back stock it must sell assets that offer a return to do so; it lowers current earnings.” Buybacks can also hurt future earnings. Less capital can slow expansion, loan growth and profits.

According to Bove, Bank of America CEO Brian Moynihan, who took the top slot in 2010 and saw the bank through the difficult aftermath of its acquisition of Countrywide and Merrill Lynch in 2008, “is one of the brightest, most capable executives for operating a banking enterprise.”

But he questions Moynihan’s ability to manage the bank’s balance sheet. Bove expects that Bank of America will need to issue new common shares, in part because rising interest rates have reduced the value of its bond investments.

In a June 5 note, Bove wrote: “Mr. Moynihan indicated twice [during a recent presentation] that the bank has excess cash that apparently could not be invested profitably. Possibly he is unaware that the cost of deposits at the bank in [the first quarter of] 2023 was 1.38% while the yield in the Fed Funds market can be as high as 5.25%.” In other words, the bank could earn a high spread at little risk with overnight deposits with the Federal Reserve.

That is a very simple example, but if Bank of America had grown its loan book more quickly over recent years while focusing less on buybacks, it might not face the prospect of a near-term capital raise, which would dilute current shareholders’ stakes in the company and reduce earnings per share.

Top 20 companies by dollars spent on buybacks

To look beyond banking, we sorted companies in the S&P 500
SPX,
+0.51%

by total dollars spent on buybacks over the past five years (the past 40 reported fiscal quarters) through June 9, using data suppled by FactSet. It turns out 11 have seen prices increase more quickly than the index. With reinvested dividends, 12 have outperformed the index.

Company

Ticker

Dollars spent on buybacks over the past 5 years ($Bil)

5-year price change

5-year total return with dividends reinvested

Apple Inc.

AAPL,
+1.01%
$393.6

279%

297%

Alphabet Inc. Class A

GOOGL,
+0.84%
$180.6

116%

116%

Microsoft Corporation

MSFT,
+0.87%
$121.5

221%

239%

Meta Platforms Inc.

META,
+1.58%
$103.4

42%

42%

Oracle Corp.

ORCL,
+6.11%
$102.6

140%

161%

Bank of America Corp.

BAC,
-0.79%
$93.6

-2%

10%

JPMorgan Chase & Co.

JPM,
-0.18%
$87.3

27%

47%

Wells Fargo & Co.

WFC,
-1.01%
$84.0

-24%

-13%

Berkshire Hathaway Inc. Class B

BRK.B,
-0.80%
$70.3

70%

70%

Citigroup Inc.

C,
+0.09%
$51.4

-29%

-16%

Charter Communications Inc. Class A

CHTR,
+1.09%
$48.5

20%

20%

Cisco Systems Inc.

CSCO,
+1.00%
$46.5

15%

34%

Visa Inc. Class A

V,
+0.75%
$45.6

66%

72%

Procter & Gamble Co.

PG,
-1.26%
$42.1

89%

116%

Home Depot Inc.

HD,
+1.01%
$41.0

51%

71%

Lowe’s Cos. Inc.

LOW,
+1.92%
$40.8

111%

131%

Intel Corp.

INTC,
+4.67%
$39.0

-40%

-31%

Morgan Stanley

MS,
+1.04%
$36.7

67%

93%

Walmart Inc.

WMT,
+0.33%
$35.6

82%

99%

Qualcomm Inc.

QCOM,
+2.12%
$35.1

101%

130%

S&P 500

SPX,
+0.51%
55%

69%

Source: FactSet

Click on the tickers for more about each company or index.

Click here for Tomi Kilgore’s detailed guide to the wealth of information available for free on the MarketWatch quote page.

The four listed companies with negative five-year returns are three banks — Citigroup Inc.
C,
+0.09%
,
Wells Fargo & Co.
WFC,
-1.01%

and Bank of America — and Intel Inc.
INTC,
+4.67%
.

Don’t miss: As tech companies take over the market again, don’t forget these bargain dividend stocks

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Would reparations lead to irresponsible spending? Studies on other cash windfalls suggest not, new report says.

The perception that people often succumb to misfortune and bad decision-making after suddenly receiving large amounts of cash isn’t based in fact, researchers said in a report published Thursday by the Roosevelt Institute, a progressive think tank.

That means potential reparations payouts to Black Americans are unlikely to result in reckless spending, financial ruin and reduced labor productivity, the report’s authors wrote after undertaking a review of prior research concerning consumer behavior after lottery windfalls and inheritances, as well as more minor cash transfers through tax refunds and guaranteed-income programs. 

“There’s what we really describe as kind of an urban myth … that people who receive lottery winnings squander the money very quickly,” reparations scholar William “Sandy” Darity, a Duke University professor of public policy and economist who co-authored the report, said in an interview. “The best available evidence indicates that that’s not the case.”

Whether Black residents and descendants of enslaved people in the U.S. are owed reparative payments has been debated for centuries. But as the country has grown more economically unequal while a stubborn racial wealth gap persists, the reparations movement has picked up traction.

In California, a first-of-its-kind state task force on reparations approved a slate of recommendations for lawmakers this month that, if implemented through legislation, would potentially provide hundreds of billions of dollars in reparative monetary payments to Black Californians to address harms caused by factors including racial health disparities, housing discrimination and mass incarceration. San Francisco, which has its own reparations task force, is also considering one-time reparative payments of $5 million for eligible people.

Read more: California task force approves sweeping reparations potentially worth billions of dollars

Still, detractors say that granting reparations to Black Americans — as was done for Japanese Americans incarcerated in internment camps during World War II and, on a state level, for survivors who owned property in the town of Rosewood, Fla., before a race massacre destroyed it — is unwise.

Some argue that giving people reparative payments without requiring certain parameters or personal-finance courses could result in irresponsible spending behavior, or that reparations proposals are themselves racist in suggesting that Black people need “handouts.”

‘One of the important things that lottery winners do with the money is that they frequently set up trust accounts or the equivalent for their children or their grandchildren.’


— William ‘Sandy’ Darity, a leading reparations scholar

The authors of the Roosevelt Institute report, for their part, said the assumption that Black Americans would be unable to handle sudden windfalls is rooted in racism — noting the racial wealth gap wasn’t created through “defective” spending habits but through policies that pumped money into white households, including unequal land distribution and subsidies for homebuyers.

“Widely held, inaccurate, and racist beliefs about dysfunctional financial behavior of Black Americans as the foundation for racial economic inequality leads to a conclusion that monetary reparations will be ineffective in eliminating the gap,” they wrote. “According to this perspective, if eligible Black Americans do not change their financial mindset and behavior after receiving financial reparations, the act of restitution will be empty.”

How people spend lottery winnings and inheritances

Even so, there’s not really “any carefully drawn-out study of what has happened to folks who have received reparations payments,” Darity said. It’s “impossible to understand” the impacts of such programs, because there haven’t historically been “systems in place that give money directly to individuals” — allowing “anecdotal cynicism and urban mythology” to drive the narrative, the report’s authors wrote.

“The best that we could do is try to think about other types of instances in which people have received windfalls where there has been some follow-up on what the consequences have been,” Darity said.

To see how people really react when they’re granted new amounts of money, the authors examined outcomes both from people who had received “major” windfalls — ones that immediately and majorly change a person’s wealth status, like winning the lottery — and “minor” windfalls, or those that affect a person’s income but don’t meaningfully shift their wealth status, like the stimulus checks doled out earlier in the COVID-19 pandemic. 

Darity, who directs Duke University’s Samuel DuBois Cook Center on Social Equity, worked alongside the report’s lead author, Katherine Rodgers, a former research assistant at the Cook Center who currently works as a senior associate at the consulting firm Kroll, as well as Sydney A. Grissom, an analyst for BlackRock. Lucas Hubbard, an associate in research at the Cook Center, was also an author of the report. 

They found that while a person’s behavior can vary based on the windfall amount and how it’s framed to the recipient, as well as their previous economic status, their reactions tend to buck stereotypes. 

For example, only 11% of lottery winners quit their job in the findings of one 1987 study that examined 576 lottery winners across 12 states — and none of the people who got less than $50,000 left work, according to the Roosevelt Institute report. However, people were more likely to quit their jobs if they won a sum worth $1 million, had less education, were making under $100,000 a year, and hadn’t been in their job for more than four years.

Studies of lottery winners in other countries have found similarly muted labor responses, the report said. A separate U.S. study from 1993 of the labor effects on people who had received inheritances ranging from $25,000 to $150,000 or more also found that only a “small but statistically significant percentage of heirs left their jobs after receiving their inheritance,” with workers most likely to leave their jobs if they got a big payout. 

But it’s still “less than what the stereotype would say,” Hubbard said in an interview: 4.6% of individuals quit their jobs after receiving a small inheritance of less than $25,000, compared to 18.2% of workers who got an inheritance of more than $150,000, he noted.

Instead, studies have shown that people who get windfalls may be more likely to become self-employed, participate in financial markets, save, and spend money on necessary goods like housing and transportation, the report’s authors wrote. 

“One of the important things that lottery winners do with the money,” Darity said, “is that they frequently set up trust accounts or the equivalent for their children or their grandchildren.”

Small windfalls, including those offered through monthly checks from guaranteed-income pilot programs, have also been shown to be used for essentials like food and utilities without negative effects on employment. The framing of the money received can also have an effect on how it’s spent, the authors said: People who get a payout from bequests or life insurance tend to have more negative emotions about the money and will use it for more “utilitarian” purposes, according to one 2009 study

From the archives (March 2021): Employment rose among those in California universal-income experiment, study finds

Reparations wouldn’t unleash ‘flagrant spending,’ researchers say

Despite their findings, “windfalls are not magical panaceas for all financial woes,” the authors emphasized.

For example, a 2011 study cited in the report found that among people who were already in precarious financial positions, lottery winnings delayed, rather than prevented, an eventual bankruptcy filing. Another report from 2006 found that “large inheritances led to disproportionately less saving,” the researchers noted in the Roosevelt Institute report.

“Research over the past two decades has demonstrated that their bounties are not limitless, and, crucially, that informed stewardship of received assets is still necessary (albeit, not always sufficient) to achieve and maximize long-term financial success,” the authors wrote.

But they added that reparations, particularly if “framed not as handouts but rather as reparative payments” to Black Americans, would not unleash “flagrant spending on nonessential goods” based on studies on windfalls, and could instead improve recipients’ emotional well-being and financial stability. 

“Of course, the merits of making such payments should not be assessed solely on the basis of the anticipated economic effects,” the authors said. “Moreover, using the absence of evidence of this type as a justification for delaying reparative payments, such as those to Black descendants of American slavery, is inconsistent with the fact that other groups previously have received similar payments in the wake of atrocities and tragedies.”

From the archives (January 2023): How to pay for reparations in California? ‘Swollen’ wealth could replace ‘stolen’ wealth through taxes.

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There may never be a better time to create a retirement plan

Small businesses have new incentives to help their employees plan for retirement, thanks to Secure 2.0, a sweeping retirement reform bill signed into law late last year.

The incentives, which include tax credits that are especially attractive to businesses with 50 or fewer employees, are designed in part to encourage small companies to create retirement plans for their employees — especially the smallest firms, among whom less than half (48%) offer a retirement plan, according to research by Anqi Chen and Alicia Munnell of the Center for Retirement Research at Boston College, which uses 2019 U.S. Bureau of Labor Statistics data. 

But that’s changing, in part inspired by more attractive tax breaks and a highly competitive labor market in which every benefit matters more in the war for talent. Among companies not offering a 401(k) or similar plan, 42% say they are likely to begin sponsoring a plan in the next two years, according to a new survey report published May 2 by nonprofit Transamerica Institute and its Transamerica Center for Retirement Studies. Among those that are not likely to sponsor a plan in this time frame, 31% cited cost concerns. 

Before discounting plan sponsorship — especially for cost reasons — small businesses should consider the potential financial benefits Secure 2.0 has to offer. There are eligibility requirements and specific variables that can affect these benefits, so it makes sense to consult a tax advisor to help weigh the various options.

But as a general rule, these credits “add up to sizable benefits for employers looking to start plans,” said Amy Vaillancourt, senior vice president of workplace product, strategy and architecture at Voya Financial.

Here are some basic features of the legislation and points to consider in balancing costs and benefits — to both employer and employee.

A big tax credit can cut down on plan setup costs

Secure 2.0 created a souped-up credit to offset administrative costs associated with starting a qualified retirement plan. For businesses with between one and 50 employees, the legislation increased the percentage of coverage up to 100% of qualified start-up costs, up from 50%. There’s a $5,000 per year cap that’s available for three years. Larger businesses — those with 51 to 100 employees — are still eligible to receive up to 50% of plan start-up costs.

Employer contributions also generate tax advantages

Additionally, Secure 2.0 offers a new tax credit for five years to businesses with up to 100 employees who make employer contributions to a new defined contribution plan. This credit is designed to encourage small businesses to contribute to their employees’ retirement savings. The exact amount of the credit depends on factors such as the number of eligible employees and the number of years since the plan began.

The credit is especially beneficial to employers with 50 or fewer employees. For these businesses, the credit is up to $1,000 per year for each employee earning less than $100,000, and the amount of the credit reduces 25% each year starting in the third year, said Marc Scudillo, managing officer of EisnerAmper wealth management and corporate benefits. 

For larger businesses — those with 51 to 100 employees — the tax credit is based on a sliding scale.

Small businesses using the credit should talk to their tax preparer to understand how deductions for employer contributions will be reduced, said Kelly Gillette, a partner with accounting firm Armanino.

A smaller auto-enrollment credit can offset some costs

A $500 tax credit is available to small companies that add an automatic enrollment feature, available for the first three years, to a new or existing 401(k) plan. While this feature isn’t required until 2025, small businesses could choose to do it now and get the credit earlier, Gillette said. While auto-enrollment tends to increase participation, and thus add costs for a small business, the credit could help offset these added costs.

Starter 401(k) plan doesn’t require an employer match

Employers can now offer a starter 401(k) plan that allows them to take advantage of the applicable administrative tax credits even though they aren’t making contributions on their employees’ behalf, Scudillo said. Many small businesses don’t want or can’t afford to offer an employer match, but having this option can be a significant boon for employees. 

Seventy-one percent of respondents said they expect their primary source of income in retirement to come from what they save on their own in an employer-sponsored defined contribution plan, according to a recent survey from Natixis Investment Managers.

This new type of plan can be useful for recruiting purposes and for helping employees prepare for retirement, Scudillo said. The option is available to small businesses that do not have a plan in place.

Military families receive extra attention in legislation

Military spouses often lose out on the ability to save for retirement because they may not stay at a job long enough to qualify for retirement benefits or become vested. Secure 2.0 offers eligible employers a credit of up to $500 credit per military spouse that participates in the company’s defined contribution plan, provided certain conditions are met.

For instance,  military spouses must be immediately eligible to participate in the plan within two months of hire. Also, upon plan eligibility, the military spouse must be eligible for any matching or nonelective contribution that he or she would have been eligible for otherwise at two years of service.

The credit applies for three years and does not apply to highly compensated employees.

New Roth IRA options for small businesses

Secure 2.0 allows business owners to offer a Roth version within SEP IRAs and SIMPLE IRAs. These are often used by small businesses because they tend to have less administrative responsibilities than a 401(k),” said Eric Bronnenkant, head of tax at Betterment. The ability to offer a Roth option in these plans could benefit the owner directly, but it is also helpful for recruiting and retention purposes, Bronnenkant said. 

The self-employed are not left out of legislation

The retirement legislation also has multiple benefits available for all individuals, including the self-employed. One of these benefits is the increased ability to contribute more money to retirement after age 50. For 2023, the catch-up contribution limit is $7,500, compared with $6,500 in 2022 for people ages 50 and above. Under Secure 2.0, the catch-up contribution limit will increase even more for participants between the ages of 60 and 63 starting in 2025, Gillette said.

Additionally, the age at which people must take required minimum distributions from their traditional 401(k) or traditional IRA has increased. Beginning in 2023, Secure 2.0 raised the age that a person must start taking RMDs to age 73. What’s more, starting in 2024, there is no RMD requirement for Roth 401(k) and Roth 403(b) plans, so it puts them on par with a Roth IRA, which can also be a significant benefit, Gillette said.

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‘We’ve become a renting nation’: Landlords benefit from high house prices, but millions of renters find themselves trapped

When Nashville, Tenn., native Stephen Parker recently listed a mobile home that he owns on the rental market, he received about 30 applications in one week. “I priced it competitively,” he said.

Parker, who is also a real-estate agent, said that he sees rent growth staying strong as many people find it too expensive to purchase homes, a situation made worse by low inventory and high interest rates.

He bought his first investment property in 2020, and his portfolio of rentals has since grown. He owns various properties, including a small mobile home park, a duplex and several single-family homes. 

“We’ve become a renting nation,” Henry Stimler, an executive in the multifamily capital-markets division at the real-estate firm Newmark, told MarketWatch.

Renters have more flexibility and fewer of the responsibilities that come with home ownership, Stimler said, and they can more easily move to other cities and states. “I don’t think it’s a bad thing,” he said.

Nashville, for its part, was ranked one of the hottest real-estate markets of 2023 by Zillow
Z,
-0.72%
.
But with the surge in interest rates and demand, new residents may find buying property in that city expensive.

Stephen Parker, a landlord and real-estate agent from Tennessee, said demand for his rentals has been strong.


Stephen Parker

With homeownership continuing to be out of reach for many, landlords like Parker are poised to benefit. “You may be better off renting, especially if you don’t know if Nashville is where you’re going to be forever,” Parker told MarketWatch. 

Mortgage rates began climbing after the U.S. Federal Reserve began raising interest rates in early 2022. On Wednesday, the Mortgage Bankers Association said the 30-year rate was averaging 6.48%, up from 3.22% in early 2022.

Higher rates have added hundreds of dollars in interest costs to home buyers’ monthly payments. Buyers have subsequently seen the amount they can afford to pay for a house shrink, even as there are fewer homes for sale.

The U.S. economic outlook remains unclear — a situation compounded by the crisis in the banking sector. Many Americans are worried about job security and financial stability and are reluctant to purchase a home, according to Fannie Mae
FNMA,
-1.41%
.

Some good news: Rents appear to have stabilized. The government’s analysis of the housing sector shows that rents grew 0.8% in February, pushing the increase over the past year to a 42-year high of 8.8%. However, research from private sources — such as Apartment List — indicates that rent growth has slowed. After five straight months in which rents fell, national rents rose by 0.3% in February, the company said. 

‘I just want roots’

Jennifer Mark, a 49-year-old autotransfusionist in Goshen, Ind., lives in a $625-a-month one-bedroom apartment with her adult daughter and her husband. She’s been selling cupcake toppers on Etsy to bring in extra money.

But thanks to medical bills that are weighing on her credit score, Mark is not yet able to qualify for a Federal Housing Administration-backed loan and can’t purchase a home, although she has a budget of about $150,000.

Finding a two-bedroom to rent would make homeownership an even more distant prospect. The higher monthly rent would make it difficult for her to save for a home and to pay off the debts that are keeping her credit score low.

The average rent for a two-bedroom apartment in Goshen is $925 per month, up 12% from a year ago, according to Rent.com. For a decent apartment, the cost is closer to $1,200. “My God, rent is so high,” she said.

Renting also comes with restrictions. “If I’m going to be paying this much for rent, then I may as well own and be able to do what I want with my house and not have someone tell me, ‘Oh, you can’t have a cat. You can’t have a dog,’” she said.

She needs to pay off medical bills so she can achieve a credit score of at least 580 — a level she’s already surpassed on newer credit-scoring models not often used by mortgage lenders, like FICO 8 — and qualify for a loan.

Renting does have some perks, she said. She doesn’t have to worry about paying for plumbing or furnace issues, for instance. But owning a home is still her dream, and it remains out of reach. “I just want roots,” Mark said.

A generation of renters? 

The data shows a mixed picture for renters: While the U.S. is building a ton of apartments, home prices aren’t expected to fall enough to make owning one affordable for many lower-income Americans.

There are currently over 940,000 apartments under construction in the U.S., up 24.9% from a year ago, which is helping to address demand. The number of multifamily units under construction is at its highest level since 1974. 

But the supply is not helping all Americans equally. The U.S. is short approximately 7.3 million affordable, available rental homes for extremely low-income tenants, according to the National Low Income Housing Coalition.

One of Stephen Parker’s rental units.


Stephen Parker

Newer units, meanwhile, have been targeted at higher-income renters, wrote Whitney Airgood-Obrycki, a senior research associate at the Harvard Joint Center for Housing Studies, in a blog post this month.

And while rent growth has moderated for more expensive apartments in more sought-after neighborhoods, Airgood-Obrycki wrote, prices were rising faster at the end of last year for the lowest-quality units. 

Landlords are slowing rent increases, Redfin
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-5.08%

deputy chief economist Taylor Marr said in a recent report, “because they’re grappling with a rise in vacancies as an influx of new apartments hits the market.” 

Renters — particularly in the multifamily sector — are more likely to stay put due to high interest rates, Stimler said.

“Those who bought apartment buildings last year and locked in historically low rates before rates started rising, they’re going to be okay, because less and less of their tenants are going to leave and become homeowners,” Stimler said. 

Some Americans feel like they are becoming a generation of permanent renters, losing out on the “American dream” of owning a home and building wealth through real estate. But Stimler said he did not think that was necessarily a bad thing. 

“Our parents got married at 21 or 22, settled down, bought a home, got on the property ladder, and that was their first property purchase,” Stimler said. “That was a huge milestone then. Today, we don’t have that need anymore.”

“Millennials are much more transient,” he said. “They want to be able to pick up and leave, and go anywhere [and have] the ability to work from anywhere. All of these factors have led to a decline in the demand for single-family homes.”

Wherever you stand on that particular debate, one thing is clear: Landlords are benefiting from an increasingly unaffordable housing market, while millions of renters in the U.S. find themselves trapped.

“One man’s meat is another man’s poison,” Stimler said.

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Shrinking food stamp benefits for families mean yet another challenge for retailers

A worker carries bananas inside the Walmart SuperCenter in North Bergen, New Jersey.

Eduardo Munoz Alvarez | AP

For some shoppers who already struggle to cover grocery bills, the budget is getting tighter.

This month, pandemic-related emergency funding from the Supplemental Nutrition Assistance Program, formerly known as food stamps, is ending in most states, leaving many low-income families with less to spend on food.

More than 41 million Americans receive funding for food through the federal program. For those households, it will amount to at least $95 less per month to spend on groceries. Yet for many families, the drop will be even steeper since the government assistance scales up to adjust for household size and income.

For grocers like Kroger, big-box players like Walmart and discounters like Dollar General, the drop in SNAP dollars adds to an already long list of worries about the year ahead. It’s likely to pressure a weakening part of retailers’ business: sales of discretionary merchandise, which are crucial categories for retailers, as they tend to drive higher profits.

Major companies, including Best Buy, Macy’s and Target, have shared cautious outlooks for the year, saying shoppers across incomes have become more careful about spending on items such as clothing or consumer electronics as they pay more for necessities such as housing and food.

Food, in particular, has emerged as one of the hardest-hit inflation categories, up 10.2% year-over-year as of February, according to the U.S. Bureau of Labor Statistics.

“You still have to feed the same number of mouths, but you have to make choices,” said Karen Short, a retail analyst for Credit Suisse.

“So what you’re doing is you’re definitely having to cut back on discretionary,” she said.

The stretch has made it impossible for some to afford even basic items. It’s still too early to see the full impact of the reduced SNAP benefits, said North Texas Food Bank CEO Trisha Cunningham, but food pantries in the Dallas-Fort Worth area have started to see more first-time guests. The nonprofit helps stock shelves at pantries that serve 13 counties.

Demand for meals has ballooned, even from pandemic levels, she said. The nonprofit used to provide about 7 million meals per month before the pandemic and now provides between 11 million and 12 millions meals per month.

“We knew these [extra SNAP funds] were going away and they were going to be sunsetted,” she said. “But what we didn’t know is that we were going to have the impact of inflation to deal with on top of this.”

Shifting market share

So far, retail sales in the first two months of the year have proven resilient, even as consumers contend with inflation and follow a stimulus-fueled boom in spending in the early years of the pandemic. On a year-over-year basis, retail spending was up 17.6% in February, according to the Commerce Department.

Some of those higher sales have come from higher prices. The annual inflation rate is at 6% as of February, according to the Labor Department’s tracking of the consumer price index, which measures a broad mix of goods and services. That index has also gotten a lift from restaurant and bar spending, which has bounced back from earlier in the pandemic and begun to compete more with money spent on goods.

Yet retailers themselves have pointed out cracks in consumer health, noting rising credit card balances, more sales of lower-priced private label brands and shoppers’ heightened response to discounts and promotions.

Some retailers mentioned the SNAP funding decrease on earnings calls, too.

Kroger CEO Rodney McMullen called it “a meaningful headwind for the balance of the year.”

“We’re hopeful that everybody will work together to continue or find additional money,” he said on the company’s earnings call with investors earlier this month. “But as you know, because of inflation, there’s a lot of people whose budget is under strain.”

Credit Suisse’s Short said for lower-income families, the food cost squeeze comes on top of climbing expenses for nearly everything else, whether that’s paying the electric bill or filling up the gas tank.

“I don’t think I could tell you what a tailwind is for the consumer,” she said. “There just isn’t a single tailwind in my view.”

Emergency allotments of SNAP benefits previously ended in 18 states, which could preview the effect of the decreased funding nationwide. In a research note for Credit Suisse, Short found an average decline in SNAP spending of 28% across several retailers from the date the additional funding ended.

Some grocers and big-box retailers could feel the impact more than others. According to an analysis by Credit Suisse, Grocery Outlet has the highest exposure to SNAP with an estimated 13% of its 2021 sales coming from the program. That’s followed by BJ’s Wholesale with about 9%, Dollar General at about 9%, Dollar Tree at about 7%, Walmart’s U.S. business with 5.5% and Kroger with about 5%, according to the bank’s estimates, which were based on company filings and government data.

Retailers that draw a higher-income customer base, such as Target and Costco, should feel comparatively less effect, Short said. If nothing else, the dwindling SNAP dollars could shift shoppers from one retailer to another, she said, as major players seek to grab up market share and undercut on prices.

Fewer dollars to go around

Another factor could make for a bumpier start to retailers’ fiscal year, which typically kicks off in late January or early February: Tax refunds are trending smaller this year.

The average refund amount was $2,972, down 11% from an average payment of $3,352 as of the same point in last year’s filing season, according to IRS data as of the week of March 10. That average payout could still change over time, though, as the IRS continues to process millions of Americans’ returns ahead of the mid-April deadline.

Dollar General Chief Financial Officer John Garratt said on an earnings call this month that the discounter is monitoring how its shoppers respond to the winding down of emergency SNAP benefits and lower tax refunds.

He said stores did not see a change in sales patterns when emergency SNAP funds previously ended in some states, but he added that “the customer is in a different place now.”

Tax refunds can act as a cash infusion for retailers, as some people spring for big-ticket items like a pair of brand-name sneakers or a sleek new TV, said Marshal Cohen, chief industry advisor for The NPD Group, a market research company.

This year, though, even if people get their regular refund, they may use it to pay bills or whittle down debt, he said.

One bright spot for retailers could be an 8.7% cost-of-living increase in Social Security payments. Starting in January, recipients received on average $140 more per month.

However, Cohen said, the cash influx might not be enough to offset pressure on younger consumers, particularly those between ages 18 and 24, who have just started jobs and face milestone expenses like signing a lease or buying a car.

“Everything’s costing them so much more for the early, big spends of their consumer career,” he said.

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