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Retirement Planning Tool: Extend Your Retirement Funds with Standby Reverse Mortgage

shutterstock_Retirement Exit Only 64009777

Larry Benton, CSA
The Reverse Advisor
April 30, 2015


In the past, the main purpose of a Reverse Mortgage was to help seniors to fulfill cash needs by allowing them to pull the equity in their homes.  But today, many seniors are finding that even if they don’t particularly need to fulfill a cash need, they can take advantage of the benefits of a reverse mortgage as a tool to use strategically in retirement planning.  Here are 8 ways a reverse mortgage be used as a financial planning tool.

  1. You can delay Social Security and pension payouts

Some seniors may financially need to use payouts from Social Security and pensions as soon as they are available.  However, with the tax-free cash from your reverse mortgage, you will be financially sound enough to wait on receiving those payouts, thus increasing how much you receive.

  1. You can draw on tax-free funds to reduce tax liability

Income from a reverse mortgage is tax-free!  This cannot be said for many other types of income you may earn.  So it is a great advantage to be able to use your home’s equity as income, without losing a cent of it to taxes.

  1. You can postpone drawing down retirement assets, giving assets more time to grow

This idea follows the same formula as your Social Security and Pension payouts.  The longer you can delay in receiving your benefits, the longer they have to grow.  With a reverse mortgage, you can afford to wait.

  1. You can increase your cash flow by eliminating monthly mortgage payments

Every month, a monthly mortgage payment takes a chunk out from your income.  But with a reverse mortgage, your existing mortgage is paid off.  This leaves you with extra money in your pocket that would have normally gone to paying your existing mortgage.

  1. You have access to a low cost, non-cancelable, GROWING line of credit

With a reverse mortgage, you have an ever-growing line of credit available to you.  It grows with time.  This means that the line of credit available to you years from now will be much larger than the line of credit available to you now… and, unlike a bank HELOC, is non-cancelable.

  1. Standby Reverse Mortgage (SRM): You can protect your portfolio performance in a down market**

In a down market, your portfolio and cash flow may not be at its peak performance.  Many Retirement Planners recommend two buckets 1) Retirement Asset Funds and 2) Reserve Cash account to use when market conditions depress earnings; these planners are now recommending a SRM as a third bucket in the event of extended market lags (or a 2nd bucket where no cash reserves exist). With two (or three) retirement buckets, a reverse mortgage acts as the buffer, the incoming funds are able to protect you until the market picks back up again, and then the Standby Reverse Mortgage can be replenished… extending retirement funds longer.

  1. You can have annuity-style payments using your home’s equity

With a reverse mortgage, you are able to choose the option of receiving your funds in annuity-style payments.  These can supplement your existing income This is perfect for some types of people who would rather plan their income as a steady flow.

  1. You can replace cash reserves

Some people have less cash in reserve than they would like.  A reverse mortgage gives you the chance to catch up and replace your cash reserves, getting you up to speed financially, and these reserves grow over time..

These are just a few examples of how you can use a reverse mortgage as a strategic tool.  With the right plan in place, you will be well on your way to a solid retirement.

** Analytical witepapers by John Salter, PhD, CFP available by request:
1) “Tap into Potential Retirement Wealth Utilizing the HECM”    2014
2) “Standby Reverse Mortgages: A Risk Management Tool for Retirement Distributions”  2013

Contact:
Larry Benton, CSA
lbenton@ufaadvisors.com
877.805.2905

 

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Even State Legislatures Look to HECM as Recommendation…

shutterstock_Money under lock & key 49213123State Campaign Points to Importance of Reverse Mortgages in Long Term Care

 

March 17th, 2014  |  by Elizabeth Ecker Published in News, Retirement, Reverse Mortgage

A state and federal initiative launched in 2012 has resulted in a report to lawmakers on long term care financing including the use of reverse mortgages to help Americans fund longevity.

The Own Your Future initiative in Minnesota was launched in 2012 to make recommendations to state and federal lawmakers on paying for long term care. Between 2005 and 2009, 26 states each sponsored Own Your Future campaigns to educate their residents about long term care challenges and make them aware of options and planning methods.

In Minnesota, the campaign was expanded to include an ongoing public awareness campaign throughout the state; efforts to make more affordable and suitable long-term care products available to Minnesota’s middle-income households; and evaluation of possible changes to Medical Assistance (MA) to better align with and encourage private payment for long-term care.

Among the recommendations developed by the state initiative: the use of reverse mortgages. An advisory panel has accepted the recommendations of the subcommittee with a separate set of recommendations having been sent to Congress.

“The Lieutenant Governor [Prettner Solon] has assured us that now that the report is out, it’s not a report that sits on the shelf. Action will be taken,” says Beth Paterson, a Minnesota originator who was appointed by the state’s governor to serve as the reverse mortgage representative on the advisory panel.

The report covers 11 recommendations, narrowed down from 16 that were considered, toward solving long term care funding problems for older Americans.

“The current long-term care financing marketplace consists of insurance products, home equity options  such as reverse mortgages, and health and retirement savings plans,’ the report states. “None of these products has seen widespread use recently due to a number of factors, including the perception of their stability, their safety and their benefit levels.”

Specific to the reverse mortgage market, the report indicates, are public perception challenges that are making it even more difficult for reverse mortgages to gain a place in the long-term care conversation.

“The market for reverse mortgages (RMs) is likewise in a difficult position,” the report writes.”Recently, state and federal  agencies have changed regulations governing the program to address consumer issues with the program, but the perception persists that RMs, as currently constituted, do not have adequate consumer protections.”

Advocates have developed action items for helping the perception around and access to reverse mortgages among Minnesotans.

Written by Elizabeth Ecker

 

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Reverse Mortgages Can Benefit Retirees, Both Wealthy and Not

Move Can Help Retirees Keep Investments Until Right Time to Sell

By Kelly Greene, WSJ
Jan 16, 2014 4:29 p.m. ET

Home = Cash 2Reverse mortgages aren’t just for people struggling to keep their homes anymore.

The loans also can work for well-heeled retirees looking for a buffer to keep them from selling investments at the wrong time, according to academic researchers. And Congress last month gave a boost to the type of reverse mortgage that works best for that purpose.

Reverse mortgages let homeowners who are at least 62 years old borrow against their home equity. The loans don’t have to be used for a specific purpose, but typically are used for home modifications, repairs, medical expenses or home care that elderly people might not otherwise be able to afford.

The loan is due, with interest, when homeowners move out, sell the home, die or fail to pay property taxes or homeowner’s insurance premiums. The homeowner’s heirs typically sell the house, pay the balance and keep whatever is left. At least 595,000 households have an outstanding reverse-mortgage loan, according to the National Reverse Mortgage Lenders Association, a Washington industry group.

In the past, many financial planners recommended reverse mortgages for their clients only as a last resort because fees were relatively high—as much as 5% of the loan amount. That changed a few years ago, when a new product was developed by the industry and insured by the Federal Housing Administration called the HECM Saver, which typically has lower upfront borrowing costs than earlier types of reverse mortgages. (HECM stands for “home equity conversion mortgage.”)

With lower borrowing costs, some planners are finding new ways to use reverse mortgages to avoid selling depressed investments or to lower tax bills. “Retirement is really about cash flow,” says Martin James, a certified public accountant in Mooresville, Ind. “Even for a person who’s got their mortgage paid off, it’s nice to have a line of credit sitting there.”

Earlier this year, the HECM program was eyed by federal lawmakers as a financial risk to the FHA, and lawmakers considered curtailing the program. The bill, passed by Congress and signed by President Barack Obama, is intended to give the Department of Housing and Urban Development the leeway to make changes to keep the program going, probably after Oct. 1, says Peter Bell, chief executive of the lenders’ group.

Getting a reverse mortgage takes some due diligence on the part of homeowners and their families. Big-name banks largely quit the business in the aftermath of the financial crisis, leaving smaller companies and independent brokers to make the loans. Some financial advisers have been accused by regulators of encouraging elderly homeowners to put their reverse-mortgage proceeds into questionable investments, such as annuities with steep penalties for cashing in.

The Consumer Financial Protection Bureau said last year that it would coordinate with other regulators to root out reverse-mortgage scams, monitor the market closely for deceptive and abusive practices and consider further measures. Interested in tapping your home as a security blanket?A few things to consider:

 Your house could be a reliable credit line. If your home-equity line of credit gets canceled, a reverse mortgage might be a good substitute.

Three certified financial planners at Texas Tech University in Lubbock and Edinboro University of Pennsylvania published a paper last year in the Journal of Financial Planning that recommends using a reverse-mortgage line of credit to meet retirement-income needs during a big market drop, rather than selling investments. “A few years ago, we were starting to get calls from clients saying, ‘Hey, my line of credit’s been canceled.’ They have plenty of resources, but that was an emergency pot of money,” says John Salter, the paper’s lead author. “It doesn’t do you much good if the bank’s going to pull it before you need it.”

The researchers used what they called a “standby” reverse-mortgage strategy, meaning the reverse-mortgage line of credit served as a source of readily available cash when retirees’ portfolio values dropped below the level where they could meet their goals.

Using a portfolio worth $500,000 and a home value of $250,000, among other assumptions, the researchers found that using a reverse mortgage’s line of credit significantly improved the chances the portfolio would last through the retiree’s lifetime, because it reduced the risk of having to sell investments when they had fallen in value.

Tapping home equity could lower tax bills. Some retirees pay off their mortgages with taxable withdrawals from their 401(k) or other accounts. Yet they might be able to lower their income taxes by using reverse mortgages to pay off their traditional mortgages, Mr. James says, if they have substantial equity. That means they wouldn’t need to withdraw as much tax-deferred retirement savings, which are subject to income tax and can bump retirees into higher tax brackets.

Plus, without investment distributions needed to make mortgage payments, they might be able to keep their overall incomes under the income threshold at which Social Security retirement benefits are taxed, Mr. James says.

He also is looking at using reverse mortgages as a “bridge” to Social Security, allowing retirees to delay taking Social Security and increase the size of their monthly payments—and those of a surviving spouse—down the road.

Consult an expert. Before you start talking to lenders, consider getting advice from a reverse-mortgage counselor certified by HUD to learn more about the options and mechanics. The National Council on Aging and other nonprofit groups sometimes offer such counseling, often at reduced rates.

There is a directory of reverse-mortgage counselors at hud.gov. Click on “Talk to a Housing Counselor” and then “Search online for a housing counseling agency near you.”

Keep the kids in the loop. When Mr. James broaches the idea of a reverse mortgage with clients, “the first thing they do is wrinkle their nose,” he says. One big reason: Many parents want to leave their home, often their biggest asset, to their children as their inheritance.

Mr. Salter acknowledges that leveraging the family home can be “a touchy subject.”

Still, he contends that many adult children “don’t really want the house” and that they are eager for their parents to use their assets to have “a better rest of their life.”

Besides, Mr. James says, “you still have costs associated with selling the house. You may not get as much as you think you’re going to.”

“Using a reverse mortgage allows for a little more diversification,” meaning retirees could leave other investments with potential for better returns to their families, Mr. James says.

“My first answer, when people ask how to approach the kids, is to ask them if they have an extra room in their house for their parents,” Mr. Salter says.

 

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“RightSize” New Home with a Reverse Mortgage?

bigstock-Sold-Home-For-Sale-Sign-Home-1893969According to recent National Association of Realtors figures, last year over 26% of homes were sold to homebuyers over the age of 50. And as the peak bulge of the boomer generation approaches retirement, the number of older homebuyers is expected to rise dramatically until it makes up the largest homebuyer cohort in American history.

But not everyone heading into retirement is certain they want to move, and a question I am commonly asked is, “Should we refinance the home we’re in, or buy something with less upkeep?”

Obviously I don’t know – but I have accumulated quite a body of knowledge regarding what retiring boomers take into consideration. Following is a starting point for things to consider:

1.     Is your existing home safe for the long-term, including layout and accessibility to bedrooms, bathrooms, kitchen and laundry?
2.     Is the home the right configuration? How about size?
3.     Is the amount of yard and household maintenance appropriate?
4.     Is the location still right, meaning are you close to family and friends?
5.     Have traffic patterns gotten dangerous?
6.     Are you close to doctors, shopping, amenities, recreation, and your house of worship?
7.     Do you still know your neighbors?
8.     Will this still be the right house in 10 years? How about in 15?

If you answer a significant number of these “no,” moving might be a logical consideration. However, anyone who recently has applied for a home loan knows lending laws and regulations have become akin to major surgery. And for those looking to retire soon, or who have already retired, securing a loan can be very difficult.

However, FHA’s seniors’-only HECM for Purchase was specifically designed with the retired – or soon to be retired – buyer in mind. While there are qualifications that must be met, they are not as stringent as those governing “forward” lending.

A highly beneficial feature of HECM for Purchase is that you can buy your new home before you have sold your exit home. Not only does this get you into your new home in a timely fashion, but you now have time to market your exit home and wait for the next peak sales season to roll around before selling.

But perhaps best of all, rather than tying up a significant amount of your financial resources in the new house by doing an all-cash purchase, you bring to the table only a percentage of the purchase price, which allows you to keep liquid more of your savings, or more cash from the sale of your exit home.

 

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Retirement Planning in the Age of Longevity

To the degree that people reach old age mentallysharp, physically fit, and financially secure, the problems of individual and societal aging fall away.”
— Laura L. Carstensen, Founding Director
Stanford Center on Longevity

reverse mortgage news

Amara Rose   November 19, 2013

According to a recent Stanford Study on planning for retirement at a time when we’re living longer than ever before, confidence in the ability to retire comfortably — or even to retire at all — is at a new low. Pitfalls include:

  • Failing to plan for retirement
  • Underestimating expenses
  • Underestimating the number of years they will be retired
  • Retiring too early
  • Failing to save

The biggest challenge is failing to plan for retirement at all, researchers say. Only a third of adults in their 50s have ever tried to devise a retirement plan…and only two-thirds of those who have tried have succeeded.

Even among those who do save, fear of limited resources tops the list of retirement concerns. According to a Bank of America Merrill Lynch 2013 Workplace Benefits Report, in a nationwide survey of more than 1000 employees from companies of all sizes:

  • 80% experienced an increase in health care costs in last two years (this may change under the Affordable Care Act)
  • 56% are saving less for retirement as a result
  • 85% feel they’re not saving enough
  • 60% believe it will be “very difficult” to ever save enough to support their standard of living once they retire
  • 79% would give up 5% or more of their salary if it meant having reliable income to help them live comfortably during their later years (38% would give up 10% of their salary — or more).

Though neither research report mentions reverse mortgage as a viable option for older adults once they reach retirement age, given the monetary concerns now facing those in late middle age or nearing retirement, this group appears to be a ripe market to consider the possibility, assuming someone owns a home with sufficient equity to qualify.

Yet continuing to earn isn’t the only reason for seniors to postpone retirement, says U.S. News & World Report, which suggests there are a number of good reasons to retire the idea of retirement for a while yet, such as:

  • Enjoying one’s job. While boss-bashing makes for humorous cartoons and water cooler conversation, people who love what they do need not retire just because they reach a certain age. Boomers, especially, are aging (and perceive aging) much differently than previous generations. A professional hair stylist, for example, is still booked months ahead because she takes time off to travel. At 67, she has no plans to retire anytime soon.
  • Improved health. Contrary to popular belief, working longer may actually enhance later life health: one study of nearly half a million French workers found that every additional year of work before retirement lowered the risk of dementia 3.2 percent.
  • Marital accord. Women have long maintained that once their husbands retire they’re underfoot all day and at loose ends, which can wreak havoc on a marriage. The longer at least one partner continues working, the better it may be for marital harmony. The extra income is a bonus.

By balancing data on the necessity of planning for retirement with the positives about continuing to work, you can present a more informed picture to potential reverse mortgage prospects to help them make the best possible decision for a secure future in the age of longevity.

About the author: Amara Rose View all posts by Amara Rose is a personal and business coach with a broad background in health and positive aging. She holds a social welfare degree with a gerontology emphasis from Penn State, and has written extensively about senior housing, elder health and nutrition, lifelong learning, and the spiritual dimension of aging. A seasoned marketing copywriter, Amara has wordsmithed everything from blogs to brochures to web content. Contact Amara at amara@liveyourlight.com to learn more.
 

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Navigating the Retirement Labyrinth

misconRetirement planning can be confusing. Here are some major milestones on the retirement timeline:

Age 55. If you leave your job after age 55, you can begin taking penalty-free 401(k) withdrawals. Withdrawals from traditional 401(k)s will be taxed as income.

Age 59 ½. IRA withdrawals are allowed without penalty and are taxed as income.

Age 62. Social Security eligibility begins, but your checks will be reduced 25 to 35 percent if you begin claiming at this age. If you are under full retirement age and you work and earn above the annual earnings limit of $15,120 in 2013, excess earnings are deducted from your benefits.  If you plan to continue to work, benefits are also reduced by 50 cents for each dollar you earn above $15,120 in 2013.

Age 65. Medicare eligibility kicks in. Beneficiaries may sign up for Medicare Part B during a 7 month window around their 65th birthday, beginning 3 months before the month you turn 65 and ending three months after. It’s a good idea to sign up right away because your Medicare Part B monthly premium increases 10 percent for each 12-month period you were eligible for Medicare Part B, but did not enroll. If you or a spouse are still employed and covered by a group health plan after age 65, you have 8 months to sign up after you leave the job before the penalty kicks in.

Age 66. Baby boomers born between 1943 and 1954 are eligible to receive full Social Security retirement benefits at age 66. For boomers born between 1955 and 1959 the full retirement age gradually increases from age 66 and 2 months to 66 and 10 months. The month you reach your full retirement age, your benefit checks are no longer reduced if you continue to earn income from work.

Age 67. For those born in 1960 and later, the age you can receive full Social Security retirement benefits is 67.

Age 70. Your Social Security benefits further increase by 7 to 8 percent each year you delay claiming up until age 70. After age 70 there is no additional incentive to put off collecting.

Age 70 ½. Those aged 70½ or older must take annual required minimum distributions from retirement accounts. The proceeds will be taxed as income. Seniors who fail to withdraw the correct amount must pay a 50 percent tax penalty and income tax on the amount that should have been withdrawn.

Contact your financial planner to discuss your specific situation.

 
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Posted by on October 9, 2013 in Retirement, Seniors

 

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