REVERSE MORTGAGE INFORMATION: Tools, News and Resources to Help Seniors Decide

If a study by is correct and up to 75% percent of boomers are fearing full retirement, what does it say about those already retired? These are the folks without ready means to increase their income, the same folks taking from a retirement portfolio that continues to be pressured in its assessment. Most likely these are the same folks that have lost up to 25% of their home’s value and most likely still have portions of their retirement in a stock market that continues to decline. They are already retired and with unemployment close to 10% in some parts of the country, finding a job after retirement to add more cash may prove to be an almost impossibility.

The majority of these folks do not have money managers or financial planners giving them advice on where to run for safe harbor nor do they tend to spend their money with estate planning or elder law attorneys on protecting their assets as they age. Again, the majority DO NOT tend to have professional guidance. Even those with professional assistance but who are feeling the pinch are still on the fence when it comes to taking measures to move to safe harbor or taking other means. Some have put off the annual trip or family vacation, some have sold or are considering selling the vacation home, the extra car, cut back on dining out; all in an attempt to cut back.

More and more elder law attorneys and financial planning agents are looking at assisting their clients in finding ways to supplement their cash flow and for that means. A reverse mortgage is becoming more popular as a way to supplement retirement income that up until now included social security, pension and draws on the portfolio. Its a tax free way to gain access to money on demand and it takes the pressure off the portfolio that is dwindling in value, even before providing taxable cash from its holdings.

The new stimulus package is creating an increase in the national lending limit for reverse mortgages to $625,500 and as an example, someone 75 years old in a home worth equal to or more than this new limit could gain access to roughly $415,000. That amount could be considered a retirement account for those without other means. The money doesn’t have to be spent, in fact, its best used in a credit line growth account that grows over time and provides tax free cash to the borrower upon a withdraw. The money isn’t put with a bank as some have inquired, the money remains as equity in your home, locked from a decline in value until you take access to portions.

Lets put another way. If you need access to cash for any reason at all and you have sufficient equity in your home a reverse mortgage can provide that much needed cash. You as the borrower do not give up title to your home, you do not give up how you can spend that money. If you had access to $415,000 and needed money to pay off a mortgage or a large amount of credit cards, you take out only the amount you need and leave the rest in your home’s equity (credit line) and THAT amount continues to grow over time, regardless of your home’s value. You do not have to put that money in a bank of any type or leave it somewhere that you are unsure how its being handled- YOU control where it resides and as it grows in value you can take from it as you wish with NO taxes on that amount.

Financial planners and estate attorneys are slowly recognizing that a reverse mortgage can play a significant role in bringing an amount of certainty in a system with many unknowns.

A Bank of America has revealed a shocking discovery that spells danger for those wondering how to finance their retirement. 18% or almost 1 in 5 Americans have dipped into their retirement savings to pay down credit card debt, mortgage payments or to cover recent job loss. What does this have to do with reverse mortgages? If 18% of Americans don’t have enough income to live on, does that exclude the senior population or those that have already retired? Of course not. That group may have been hit harder than all other groups. Their income is fixed, it comes from social security, pensions, annuities, etc and if that income isn’t enough for them, then where are they turning first? They are turning to the same retirement plans that have likely suffered the most with the drastic decline in investment of equities, . If your portfolio is down 40% and you continue to take from it to back fill the missing pieces of your fixed income, at some point the white flag has to go up.

Before you say that he’s going to say “get a reverse mortgage” and that he always says dip into the home’s equity, don’t forget that of the 18% of Americans taking money from 401K savings, the said that 22% of that 401K money was to help make mortgage payments. Those clients already have dipped into their home’s equity and they have to continue to pay the monthly mortgage fees or be at risk of losing the home and possibly ALL of their retirement savings, not just a portion, to save that home. They are taking from their savings to make a mortgage payment. They are saying their first choice for retirement savings is their home and they will spend all of their savings to protect the home. When that savings is gone, they have but 2 choices, sell the home or get a reverse mortgage and take equity from the home.

Why not use the reverse mortgage to put a program in place that doesn’t require a monthly mortgage payment in the first place? The cash that you aren’t using to spend on your mortgage could go toward credit card or other monthly bills and it takes the pressure off the portfolio. Your portfolio could take a break from paying the mortgage or other bills. When and if the bottom of the market hits, your investments will now have a better chance of bouncing back from the abyss. The home from which the equity is being taken will continue to provide much needed cash flow as it too is allowed to increase in value. The savings from not making the mortgage payments can be applied to short falls across your varying monthly debts. Its a better way to stop the bloodloss in a trying time. A government sponsored stimulus package may provide opportunities to save on health care, save on utility costs, provide potential full or part time employment or even a tax savings but none of them contain the certainty of return that the reverse mortgage can.

Thousands of Americans are approaching retirement. Every day, retirees are pitched plans about how to protect their assets and invest without any risk. These products have been the focus of watchdog groups and topped the Securities and Exchange Commission list of scams. Here are a few things that if you are pitched you should investigate deeply before investing.

Annuities
Insurance companies and commissioned insurance agents have pitched as the ideal investment to manage risk and protect assets. Products like the fixed annuity which pays you a guaranteed interest rate much like a bank CD. The variable annuity invests in mutual fund-like portfolios known as subaccounts. Equity indexed annuity is a hybrid between a fixed and a variable annuity. This annuity usually pays a guaranteed interest rate while allowing you to share the gains of the stock market.

Let’s look at the pros and cons for a minute. And if you are like me, I always want the bad news first. So we will start with the cons. And the biggest con here is the fees. Many annuities lock in your funds for a period of at least 5 years and some as high as 10 years. If you needed your money or decided you wanted to do something else with it during that time period, you would have to pay early withdrawal penalties as high as 7%. There are also high commissions – between 4% – 10% depending on the product – paid to the agent who sells the product.

The pros of annuities are that they do offer a guaranteed interest rate and the gains are tax deferred until you withdraw them. For example if you like CDs and CDs are all you are comfortable investing in, then an annuity may work for you. Your money is safe due to the guaranteed interest rate, but be aware like any other guarantee you will pay for that right in the form of forgone higher interest rates.

Alternatives
Here are some sales pitches you may hear and some alternatives that may be better suited to your retirement needs.

“You can earn stock market returns with no risk”
If you hear this you are likely being pitched an equity indexed annuity. You will pay higher early withdrawal penalties and there will be caps on how much you can earn. A better solution may be to purchase a diversified stock and bond portfolio. You’ll take on more risk, but you’ll have a lot less fees and have the potential for more growth.

“Don’t you want to protect your IRA from market downturns?”
If you are hearing this you are likely being pitched an annuity. The guaranteed protection being referred to is very expensive in the form of high early withdrawal penalties. It is also usually unnecessary to protect an IRA from market downturn due to the diversification of the IRA. A better solution is to put the IRA in to mutual funds and buy an income annuity once you retire. These income annuities offer you the guaranteed interest rates needed during your retirement years and are setup to provide you with steady monthly withdrawals to live off of.

When you are pitched these plans, be sure to get all the facts and do your homework. Ask to speak with folks who have purchased these products and have had them for 2 years or longer. Also be sure you are dealing with someone who has the experience to fully explain the product. Don’t be afraid to ask for time to take a few days to read over the details before you do anything. If the agent balks at these requests, then walk away. You can visit the at FinanceNewsToday.com for more help with planning your retirement.

An article at RealEstateJournal.com (), speaks to the growing trend away from “[tag]McMansion[/tag]-style” homes and toward smaller, more [tag]efficient homes[/tag]. The article cites problems faced by several families in selling their large homes recently and paints a rather bleak picture of the factors coming together that could put a serious dent in [tag]baby-boomers[/tag] plans for [tag]retirement[/tag]:

Now, some boomers in their late 50s are counting on selling their huge houses to help fund retirement. Yet a number of factors are weighing down demand. With the rise in home heating and cooling costs, McMansions are increasingly expensive to maintain. Nationwide, electricity rates have risen 12% over the past three years, while the price of natural gas for heating has risen 43% in the same period, according to the U.S. Energy Information Administration. That means it can cost $5,000 a year or more to heat and cool a 5,000-square-foot house in a city such as Farmington, Conn., according to Connecticut Light & Power Co.

The overall slump in the housing market also is crimping big-home sales. The volume of newly built homes sold fell 11.2% in the first four months of the year from a year ago, while sales of existing houses fell 5.7%, says the National Association of Home Builders and the National Association of Realtors. Yesterday, one of the biggest home builders, KB Home, cut its earnings outlook for the year, citing declining demand. Bruce Karatz, chairman and chief executive, said demand has fallen “largely due to a sharp reduction of speculative purchases and an oversupply in new and resale inventory.”

Meantime, the jump in interest rates has put the cost of a big house out of more people’s reach. With 30-year mortgages at 6.2% yesterday, a $700,000 loan costs about $4,300 a month, up from $3,900 when rates were 5.28% in June 2003, according to Bankrate.com.

Downsizing is the old-fashioned way to tap into home equity to help fund retirement. During the recent housing boom, many families stretched their budgets to buy the biggest home possible, partly in hopes of capturing big equity gains for retirement.

Last week, the Wall Street Journal’s Jonathan Clements wrote an excellent challenging the wisdom of this strategy. He noted that while household spending on food, clothing and many other items had fallen steadily over the last several decades, Americans still had a negative [tag]savings rate[/tag] due largely to sharply higher spending in two areas: [tag]transportation[/tag] and [tag]housing[/tag]. Again, the notion of buying the biggest and best, rather than what is actually needed:

But houses appreciate over time, so shouldn’t you buy the largest home possible?

That might have been true during the recent housing boom — but it isn’t likely to be true over the long run. Since 1975, home-price appreciation has been modest, averaging just two percentage points a year above inflation.

Admittedly, you could goose your home’s return with the leverage from a [tag]mortgage[/tag]. You also, however, have to factor in the mortgage’s cost, plus all the other [tag]expenses of homeownership[/tag], including maintenance, property taxes and insurance. The bottom line: Once you deduct those costs, you could probably amass far more wealth by purchasing a smaller home and then sinking the extra money into your [tag]401(k) plan[/tag].

The [tag]Center for Retirement Reseach[/tag] at [tag]Boston College[/tag] today unveiled its new . Following is a brief summary of the NRRI:

The National Retirement Risk Index in a Nutshell

WHAT IS THE NATIONAL RETIREMENT RISK INDEX?
• The National Retirement Risk Index (NRRI) measures the percentage of workingage households who are at risk of being unable to maintain their pre-retirement standard of living in retirement.

WHAT ARE THE KEY FINDINGS OF THE NRRI?
• Almost 45 percent of U.S. households are “at risk.”
• Younger households are more likely to be at risk.
• Other vulnerable groups are those with low incomes or no pension coverage.

WHY ARE SO MANY HOUSEHOLDS AT RISK?
• Social Security will replace less pre-retirement income in the future.
• Traditional pensions are disappearing, and 401(k)s have only modest balances.
• Outside of 401(k)s, households save nothing.
• People are living longer.

WHAT CAN BE DONE TO IMPROVE THE PICTURE?
• Save more – even 3 percent of income makes a big difference over time.
• Work longer – staying in the labor force even two extra years has a big payoff.

[tag]Reverse mortages[/tag] play an important role in constructing and understanding the [tag]NRRI[/tag]. The Index assumes that retired households will take full advantage of potential retirement resources – including tapping home equity through a reverse mortgage:

The Index’s base case scenario assumes that households retire at 65, annuitize their financial assets, and tap their housing wealth through a reverse mortgage. The notion is that these assumptions would allow households to take full advantage of their potential retirement resources.

Of course, this notion doesn’t necessarily reflect today’s retirement environment – and that’s the point. The author’s note that today we’re still in a “Golden Age” of retirement with many retirees benefitting from defined benefit pensions. As these disappear and life expectancies rise, more households will need to take full advantage of their potential retirement resources and, even with this, the NRRI indicates for many there won’t be nearly enough.

Monday’s Wall Street Journal (March 27, 2006) carried an article titled “What If…?” The theme is the critical role that assumptions play in retirement planning. The article provides much good information, but it is particularly nice to see the research done by on retirement spending patterns get prominent mention:

According to a new study using data from the Bureau of Labor Statistics, many people overestimate the amount of money they will spend in retirement. The study found that retirees’ total spending, after an initial drop from pre-retirement levels, doesn’t rise with inflation – it generally remains steady. That’s because even though inflation pushes prices higher, the elderly tend to consume less as they age.

We believe that the clear pattern of reduced spending in retirement is too often ignored in retirement planning – including reverse mortgage needs assessment. We’ve developed a retirement calculator that allows users to play with different reality retirement assumptions. Hopefully, the WSJ article is indication that the concept is becoming more mainstream.