Fannie Mae, Freddie Mac, and Your Retirement  

Even if you do not own a share of their stock or even have a mortgage, the recent events involving Fannie Mae and Freddie Mac will affect your retirement—no matter what your age is. I won’t review all the events regarding the two mortgage insurance giants. The key event occurred over the weekend when the Department of Treasury made clear that it would stand behind their obligations as though they were obligations of the Treasury. This statement formalized what many investors assumed for decades.

Between mortgage guarantees and mortgages they own directly, the two government-sponsored enterprises are estimated to be on the hook for over $5 trillion. The formal acknowledgement of these obligations by Treasury doubled the federal government’s debt.

In addition to the formal federal debt, there are off-balance sheet items for which everyone knows the taxpayers are on the hook. The off-the-book obligations are Social Security and Medicare. Add these obligations together, and we see how they and the Fannie Mae and Freddie Mac situation affect everyone’s retirement plans.

While it receives the least amount of headlines, Medicare is in the worst condition of any of these programs. The program already is spending more money than it takes in, and the annual cost rises at a rapid rate. The annual report of the trustees of the plan shows the program running out of money in a few years. You can view the annual reports here.

As we covered in a recent issue of Retirement Watch, most people underestimate what their medical expenses will be in retirement, and they also assume that Medicare is sustainable as presently structured. In fact, Congress has taken action to change the program and will change it again. The most recent change was to establish separate, higher premiums for higher-income beneficiaries. The premiums could increase further. There also could be reductions in benefits. Higher-income members probably will find themselves paying high premiums for limited coverage. They will have to self-insure or seek other insurance for the rest of their costs.

Barclays Global Investors did a study of the potential changes and their effects on retirement plans. It concluded that for simplicity and precision, it is best for retirees and prospective retirees who anticipate retirement income of $40,000 or higher to assume that they will have to pay an additional $7,000 annually for medical expenses. The amount was determined by using the average cost of a standard medical expense policy for a 60-year-old male. For a married couple, the cost would be twice that because each spouse would be subject to the changes.

This expense is in addition to long-term care, which a recent study commissioned by Fidelity Investments concluded will cost the average 65-year-old company of today about $75,000 during their retirement years.

The last few decades have seen a shift of the risk of retirement costs from employers to individuals. The weak financial condition of Social Security and Medicare will shift risk from government to individuals. The dire financial situations at Fannie Mae and Freddie Mac will hasten that shift.

Retirees need to factor this into their plans. For most people that means saving and investing more to cover the possibility that costs will rise as government reduces the amount it will pay under these programs.