Monthly Archives: December 2015

Baby Boomers Need a Reverse Mortgage Reality Check in Retirement

December 29th, 2015  | by Jason Oliva Published in NewsRetirementReverse Mortgage

When it comes to retirement, Baby Boomers are vastly unprepared, and not just financially as many have expectations that are in need of a reality check, suggests a recent survey comparing the retirement outlook of workers age 50 and older with the actual experiences of current retirees. And in some circumstances, HECMs may help Boomers bridge the gap to make their retirement expectations a reality.

While many Baby Boomers (b. 1946-1964) have yet to reach their sixties, the time when retirement becomes an impending life decision, the perceptions of pre-retirees do not align with the realities of those who are actually retired, according to the nonprofit Transamerica Center for Retirement Studies (TCRS) report “The Current State of Retirement: Pre-Retiree Expectations and Retiree Realities.”

With the help of Harris Poll, TCRS conducted its online retiree surveys between July 6-24, 2015 among a nationally representative sample of 2,012 U.S. adults age 50 and older, who consider themselves fully or semi-retired, and who were employed by for-profit companies of 10 or more employees during their working careers.

Meanwhile, the worker survey was conducted between February 18 and March 17, 2015 among a sample of 4,550 full-time and part-time workers, including 2,191 workers age 50 and older.

Anticipated retirement age, the expected length of retirement and the decision to continue working even after retiring differed considerably between pre-retirees and retirees.

Most working Boomers (51%) responding to the survey indicated that they expect to retire after age 65, however, retirement arrived sooner than planned for most retirees. Among the fully retired, 61% of respondents retired before age 65, while only 23% retired after age 65.

Reasons for retiring earlier than expected included employment-related causes such as organizational changes at their place of work, job loss, unhappy with their job or career, or receiving a retirement incentive or buyout (66%). About 37% cited health or family reasons as their main cause to retire early. Only 16% said their financial ability allowed them to retire earlier than planned.

Just 7% of retirees said they retired later than planned, with most who did so (61%) citing the need for income and benefits. Another 44% said their reason to continue working was because they were enjoying their work or wanted to stay active.

“The retirement landscape is changing, with many workers planning to work past the traditional retirement age of 65,” said Catherine Collinson, president of TCRS, in a written statement. “This new vision of retirement among workers is a tremendous departure from the experiences of those already in retirement. Many retirees stopped working before age 65, largely for reasons outside of their control. Their financial realities serve as a cautionary tale for workers, employers, and policymakers.”

Retirees are also expecting a long retirement of 28 years on average, with 41% expecting a retirement of more than 30 years. But their finances may not be enough to sustain them for that length of time.

Nearly half of all retirees and age 50+ workers (46% vs. 48%) agreed to some extent that they have built a large enough retirement nest egg. Meanwhile, 47% of retirees and 45% of pre-retirees disagree that their savings are sufficient enough.

“Today’s retirees envision spending decades in retirement, albeit with limited savings and means,” said Collinson.

Most retirees are reliant on Social Security and the TCRS survey supports this claim with 89% of retirees indicating that Social Security is one of their current sources of retirement income (compared to 83% of pre-retirees). Additionally, 61% of retirees say Social Security is their primary source of income throughout retirement.

But for many retirees, a major unexpected expense or the need to pay for long-term care could prove financially devastating, Collinson said.

Though the study does not bother to mention, here is where reverse mortgages may come in handy. Financial planners, in touting the benefits of reverse mortgages, have highlighted the ability to delay claiming Social Security benefits, as well as drawing from other assets like IRAs and 401(k)s.

“Using a reverse mortgage is no longer just for the cash poor and house rich,” said Jamie Hopkins, an associate professor of taxation at The American College in Bryn Mawr, Pa., in a Forbes article earlier this year. “Instead, reverse mortgages can be used strategically as one part of a retirement income plan designed to build a buffer against sequence of returns risk early in retirement, help defer Social Security benefits or reduce cash outflow from traditional mortgage payments.”

Another indicator of the shifting retirement landscape, retirees (42%) are more likely to cite income from a company-funded pension plan than age 50+ workers (31%), according to the TCRS survey. On the other hand, age 50+ workers are more likely than retirees (67% vs. 37%) to expect income from self-funded retirement accounts such as 401(k)s, 403(b)s and IRAs.

As further evidence of the changing times, the survey noted 39% of age 50+ workers are expecting income from working in retirement, compared to only 6% of retirees.

Not helping the retirement situation are the myriad of competing financial priorities retirees identify, including covering basic living expenses, which is a priority for 42% of retires; paying health care expenses (37%); paying off mortgages (21%); paying off credit card or consumer debt (25%) and continuing to save for retirement (20%).

Only 16% of retirees said one of their financial priorities was creating an inheritance or financial legacy.

Despite the financial challenges retirees are facing, many (84%) report a strong sense of enjoyment with life and most (70%) consider themselves to be in good health.

In terms of living arrangements in retirement, most retirees (61%) live in the same home as they lived in when they retired. This bodes well for the reverse mortgage industry, especially considering long-cited statistics that more than 90% of people age 65 and older want to stay in their homes as they age.

But among the 39% of retirees who have moved, their reasons have been to downsize (34%), reduce expenses (29%) start a new chapter in life (28%) and move closer to family and friends (27%).

“Retirees may be facing formidable financial challenges; however, they are also finding meaningful ways to spend their time and enjoy life,” said Collinson.

If pre-retirees want to experience similar satisfaction with their quality of life and make their retirement dress a reality, and not simply just expectations, then proactive measures need to be taken. And that may include exploring reverse mortgages and how they can fit into retirement income planning.

“One of the most important things within reach that retirees and pre-retirees can do is formulate a financial plan to identify opportunities, vulnerabilities, and ways to address them,” said Collinson.

However, only 10% of retirees and 14% of pre-retirees have a written strategy in place, which may include government retirement benefits like Social Security and Medicare, ongoing living expenses, a budget, savings and income needs, health care costs and other factors.

“Mathematically, the notion that people can work for 40 years to save enough and accrue sufficient benefits to fund a 30-year retirement does not add up,” Collinson said. “Solving this equation requires change in how we think about aging, employment and retirement itself. It also requires the highly coordinated efforts of employers, policymakers, nonprofits, the private sector, and individuals and families.”

View the Transamerica Center for Retirement Studies report.

Anyone interested in a HECM mortgage should call Warren Strycker, 928 345-1200 for national service.


Top HECM Financial Planning Stories of 2015

Consider these “sunrise” stories published in 2015 and start your study.

For the reverse mortgage industry, 2015 was a big year for retirement research as financial planners, likely spurred by the arrival of the Financial Assessment in April, published a series of papers, studies and reports demonstrating the effective uses of reverse mortgages in retirement income planning—more than any other year in recent memory.

While RMD recently published its most popular stories of 2015 already, none of the top-10 posts included in this list featured articles on the many advancements of reverse mortgage financial planning research that surfaced this year.

Rather than let the tireless efforts of researchers fall by the wayside, the plethora of this research, which ultimately raises awareness of the effectiveness of reverse mortgages for both consumers and the advisers who work with them, deserves honorable mention.

That being said, here are the top-10 most read reverse mortgage financial planning articles of 2015:

  1. December 28 — Reverse Mortgage Heirs Are ‘Dead Wrong’ About Their Inheritance

Adult children often get skittish when their parents are taking out a reverse mortgage, mainly concerned that doing so will fritter away their inheritance.

Through the judicious and responsible use of a reverse mortgage, if used with the proper estate management in place following the borrower’s death, a borrower can actually provide heirs with a substantial bequest in the form of a securities portfolio, the money from which they may be eligible to receive tax-free, according to a presentation by one practicing tax attorney and reverse mortgage researcher at an industry event this fall.

  1. April 8 — Survey of Financial Planners Reveals Need For Reverse Mortgage Dialogue

A survey by The America Institute of Certified Public Accountants this year indicated that more than half of CPA financial planners said running out of money is a top retirement concern for their clients.

But while the survey took note of annuities and Social Security as stable sources of retirement income, the absence of reverse mortgages underscores a need for increased dialogue between the reverse mortgage and financial planning industries.

  1. August 3 — 3 Tips to Forging Reverse Mortgage Relationships with Financial Planners

While there may not be a “silver bullet” when it comes to reverse mortgage loan originators forging partnerships with financial planners, some were seeing major success through persistent, strategic efforts.

To learn some key tips for LOs to create relationships with planners, RMD chatted with Shelley Giordano, chair of the Funding Longevity Task Force, an organization that helps educate financial planners through various partnerships. Read the article to see what she had to say.

  1. October 29 — Reverse Mortgages are ‘Triple Win’ for Retirees, Advisors and Mutual Funds

Home Equity Conversion Mortgages (HECMs) can offer a myriad of benefits to the borrowers they server, but they can also be attractive to financial advisors and even mutual funds, according to one reverse mortgage researcher.

A small draw from a reverse mortgage credit line at the right time can increase the long-term growth of a person’s securities portfolio, which may include a 401(k) or rollover IRA account. For these reasons, reverse mortgages can benefit mutual funds and financial planners by providing their clients with extra duration of these securities accounts, said Barry H. Sacks, a practicing tax attorney in San Francisco.

  1. November 12 — How Tenure Payments Trump the Reverse Mortgage LOC in Retirement Planning

Various studies have shown how a reverse mortgage line of credit, when used as part of a coordinated retirement planning strategy, can add value to a retiree’s investment portfolio.

But while the line of credit option has garnered considerable attention in financial planning discussions, in certain situations reverse mortgage tenure payments can significantly improve a portfolio’s success rate even further, according to a study published in November in The Journal of Retirement by Tom Davison, a reverse mortgage blogger and financial planning partner emeritus at Summit Financial Strategies, Inc. and Keith Turner, a reverse mortgage advisor with Retirement Funding Solutions.

  1. November 11 — 6 Strategies for Using Reverse Mortgages in Retirement Planning

Following research published earlier in the week, which detailed the various strategies for using reverse mortgages in retirement income planning, another paper explored six specific methods of incorporating home equity into a retirement plan and how each strategy impacts spending and wealth of the borrower.

The paper published by Wade Pfau, a professor of retirement income at The American College of Financial Services, analyzes different reverse mortgages possibilities in efforts to provide financial planners and their clients with a deeper context for considering how to incorporate home equity into a retirement income strategy. A breakdown of the six strategies can be found on pages 8-9 of the original paper.

  1. October 26 — Reverse Mortgages Offer ‘Disruptive’ Retirement Strategy

Reverse mortgages, while they have been around for decades even before the Department of Housing and Urban Development formally created the HECM program in the late 1980s, today they are becoming a “disruptive” way to leveraging home equity.

In the spirit of Silicon Valley, where the term “disruption” has become a buzzword among tech companies looking to radically change the conventional way of doing certain tasks, reverse mortgages are disputing the long-held emotional attachments tied to the home and how home equity can be used in building retirement wealth, according to a webinar from the Financial Planning Association, in which Barry Sacks presented.

  1. September 21 — Reverse Mortgage Line of Credit is ‘Best Bet’ for Retirement Planning

As the reverse mortgage industry continued to grapple with the “loan of last resort” reputation in 2015, one associate professor of finance in St. Louis suggested that the line of credit feature may be the reverse mortgage product’s best bet in becoming a serious retirement planning tool in the eyes of both retirees and the financial professionals working with them.

A standby line of credit can offer borrowers, particularly those who are planning or the long-run and not seeking a last resort solution, the peace of mind in knowing that they will have funds, which grow over time that can be accessed for any number of reasons.

But while greater education still needs to happen to raise awareness of using reverse mortgages in modern-day retirement planning, the line of credit could be the ticket to helping the HECM ditch its “loan of last resort” reputation once and for all.

  1. October 14 — Standby Reverse Mortgage Line of Credit: A Retirement ‘Must Have’

In a similar vein to the third-ranked financial planning story of 2015, the standby reverse mortgage line of credit strategy has been touted as a “must have” in the eyes of financial advisors and their clients—and that is primarily thanks to the HECM program changes over the last few years, which have changed the way reverse mortgages should be perceived in modern day retirement planning.

  1. November 9 — New Paper Spells Out Reverse Mortgage Strategies for Financial Planners

If you haven’t caught on by now, most of this top-10 list has focused on the need for the reverse mortgage industry to build a bridge with the financial planning community. And while much of this list has harped on the need to educate planners on the benefits of reverse mortgages, it’s only fitting that the most-read financial planning article on RMD in 2015 would be about a paper published in The Journal of Retirement.

The paper authored by Davison and Turner (see #6) provides a comprehensive catalog of the various strategies in which a reverse mortgage can be used effectively in retirement planning today.

Davison and Turner draw from a slew of previously published research from established reverse mortgage researchers such as John Salter, Harold Evensky and Shaun Pfeiffer, who have studied the “standby” reverse mortgage line of credit strategy; as well as other notable researchers, including Wade Pfau and Barry Sacks, whose respective research has focused on the synergies produced by a reverse mortgage credit line when used as part of a comprehensive retirement planning strategy.

“Overall, the major positive surprise is the value reverse mortgages can add to the lives of retirees, both those who already look forward to a satisfying retirement and those who are not as well prepared financially but will make it through,” wrote Davison and Turner. “This bodes well for a country with a rapidly expanding and aging retiree population.”


Reverse Mortgage Heirs Are ‘Dead Wrong’ About Their Inheritance

Adult children often get skittish when their parents are taking out a reverse mortgage, mainly concerned that doing so will fritter away their inheritance. Those concerns, however, are largely unfounded, especially if the reverse mortgage is used strategically and the proper estate management is in place following the borrower’s death, says one tax lawyer and reverse mortgage researcher.

Through the judicious and responsible use of a reverse mortgage, a borrower can actually provide heirs with a substantial bequest in the form of a securities portfolio, the money from which they may be eligible to receive tax-free, according to a presentation at last month’s NRMLA conference in San Francisco by Barry H. Sacks, J.D., Ph.D, a practicing tax attorney.

A reverse mortgage accrues interest over a long period of time, but the interest is not deductible until it is actually paid. The tax law that dictates how much of the accrued interest is deductible, and under what conditions.

If the estate management is done well, Sacks said there is a deduction available to reverse mortgage heirs that would otherwise be lost under the conventional approach to estate planning, where the estate sells the home and distributes the proceeds among heirs and beneficiaries.

“This deduction would be lost in the conventional way that estate planning is done, but it can be recovered if the deduction can go to those children so they will get not only a great big 401(k) account left over from their parent, whose account has been enhanced by the judicious use of a reverse mortgage credit line, but they will also get that money tax-free—or at least a portion of it to the extent of the deduction,” he said.

This strategy can be appealing to the emerging group known as the “mass affluent.”

Mass affluent

The “mass affluent” is a term used to describe Baby Boomers who are nearing retirement. It’s a misleading term in that these Boomers are not massively affluent, rather there is a mass quantity of them and they are almost affluent.

Typically, members of this group have between $750,000 and $2 million of net worth at retirement; they primarily rely on investments in their 401(k) or rollover IRA; and their homes are mostly paid off.

Mass affluent retirees have three objectives, Sacks noted. First and foremost, they want cash flow sustainability, meaning they want to have enough funds to last them throughout retirement. Second, they also want to retain some financial cushion in the course of their retirement to be available in the event of an emergency. Third, they want to pass assets onto their heirs and beneficiaries, also known as a bequest motive.

In previous research, Sacks pointed out that mass affluent retirees can achieve all three of these goals without sacrificing one for another. And that’s where a reverse mortgage comes into play.

“The point is, you may erode a little bit of the home equity, but you’re adding a lot more to the overall value of the securities portfolio,” he said.

Various research has shown that using a reverse mortgage cansignificantly enhance the success rate of a retiree’s portfolio, particularly when obtaining a reverse mortgage line of credit earlier in retirement as opposed to using one as a loan of last resort.

But for a retiree who wants to downsize into a smaller home, using a Home Equity Conversion Mortgage (HECM) for Purchase can help them better achieve their three retirement objectives while preserving their securities portfolio and providing a favorable deduction to heirs following the death of the reverse mortgage borrower.

HECM for Purchase vs. IRA

Consider a retiree who has an IRA of $1 million, a home value of $1.1 million with a mortgage of $500,000—thus, providing equity of $600,000. This person wants to sell their home and downsize to a house that will cost $850,000. Additionally, the retiree will need about $45,000 per year (inflation-adjusted), plus Social Security for living expenses.

All of this criteria was posited by Sacks during his presentation to show an illustrative example of a strategy that enables retirees to advance their three retirement objectives (cash flow sustainability, preserve funds for emergencies and bequest motive).

To buy his new $850,000 home, the retiree can proceed in either one of two ways.

For the first method to obtain the $250,000—in addition to the $600,000 realized from the sale of the old house—the retiree could draw on his IRA. Doing so reduces the $1 million in the IRA to $650,000 (i.e. of which $250,000 is used toward the purchase of the new home and the other $100,000 is for income tax on the total $350,000 withdrawn).

The second method: obtain a HECM for Purchase for $250,000, thus leaving the IRA untouched at $1 million.

While both methods are viable solutions to help the retiree purchase the new home, each has a very different impact on cash flow and the probability of it running out over the course of retirement.

After running Monte Carlo simulations for both scenarios, Sacks finds the probability of cash flow surviving 30 years in retirement is only 30% if the retiree does the IRA transaction. That means there is a 70% likelihood of running out of money during a 30 year retirement.

By taking the $350,00 from the IRA, the $650,000 remaining is far too little to enable it to sustain a $45,000 per year inflation-adjusted distribution for many years, Sacks noted.

Whereas if the retiree took the HECM for Purchase, he would get better than an 80% probability of cash flow survival out to 30 years, and about a 90% probability at 25 years, according to the Monte Carlo simulations.

“That’s much better,” said Sacks.

Both scenarios directly advance the first retirement objective of cash flow sustainability, but also meet the other two objectives as well. So the next step in realizing the deduction accessible to heirs is calculating how much interest has accrued.

Interest accrual

Interest is easy to estimate, Sacks noted, since the loan principal is all taken at the outset of the transaction and there isn’t the problem when different amounts of principal are taken at different times. The interest rate, however, varies.

Even when assuming the interest rate is somewhere between 6% and 8%, the total interest that will have accrued over time will amount to numbers in the several hundred thousand dollar range.

Taking the middle ground, at a 7% rare, the simple accrued interest on the $250,000 debt from the aforementioned example will reach $262,500 at 15 years; $350,000 at 20 years; and $437,500 at 25 years.

“That’s a lot of interest and that could be deductible,” Sacks said.

Determining how much the IRA account is likely to be worth in 15 years and beyond is not as simple as calculating accrued interest, because a portfolio of securities—particularly one that is being drawn upon—can have any value in a whole range of potential values, Sacks noted.

After running several simulations, more than 70% of the potential outcomes are values of $1 million or greater with the reverse mortgage transaction at least 15 years later. That means there is greater than a 70% likelihood that there will be more than $1 million in the IRA. Meanwhile, if the retiree used the IRA transaction method, at 15 years there is only a 12% probability that they will have that much money.

What these simulations indicate, Sacks noted, is that there is a very high likelihood that, if the interest amounts shown are deductible, then there is plenty of IRA value which the deductions could be taken upon distribution from the IRA.

Deductions and estate management

The Internal Revenue Code (IRC) allows deductible interest secured by a residence if it falls under the category of Acquisition Indebtedness.

Acquisition indebtedness is defined as indebtedness that is incurred for the acquisition, construction or improvement of a qualified residence of the taxpayer and is secured by that residence. This also includes any refinancing of such indebtedness, but only up to the limit of the outstanding principal at the time of refinancing. The IRC allows interest to be deductible if the Acquisition Indebtedness is on a debt less than $1 million.

“You saw [earlier] that there were several hundred thousands of dollars in the interest,” Sacks said. “That would enable the heir who gets the house to sell the house, and that’s how that interest deduction would become available—it’s available to the person who pays it off.”

The central point in this grand recipe Sacks laid forth is that the conventional approach to estate management—where the estate sells the house, pays off the reverse mortgage and divvies up the proceeds among heirs—wastes the possible interest deduction.

“Instead of the estate selling the house and paying off the reverse mortgage, the proper estate planning to achieve this result is to have the heir and beneficiary of the 401(k) or the IRA get the house directly, then sell it, because that’s the person who gets the deduction under the regulation,” Sacks said.

In other words, whoever happens to do the selling gets the deduction. This strategy may need to be written into the client’s will or trust; and an arrangement must be made between the borrower, borrower’s heirs and the reverse mortgage lender or servicer on how the house is going to be disposed of.

The HECM for Purchase example explained earlier is the ideal situation for the Acquisition Indebtedness treatment, according to Sacks, who noted that the clear purpose of the reverse mortgage is the acquisition of a personal residence. And under such treatment, the entire amount of the accrued interest is deductible when paid.

Though complicated in nature, this strategy may ultimately diminish one of the most common qualms of heirs believing that their parent’s reverse mortgage fritters away their inheritance.

“In fact, the adult children are dead wrong because by taking a reverse mortgage and using it strategically, the parents are actually enhancing their heirs’ inheritance,” Sacks said. “They’re boosting—and by a lot—the overall value of their securities portfolio.”

This, Sacks added, creates synergy and a “positive sum game,” where a relatively small reduction in the home equity results in a much larger increase in the value of the securities portfolio.

“Moreover, by thoughtfully planning or administering the estate, these heirs are going to get some, or all, of that securities portfolio free of income tax,” Sacks said. “It’s a pretty good result, especially if you’re a tax lawyer.”

And, there are significant benefits if you are a Safe Money advocate. Warren Strycker, 928 345-1200 and/or

Share this:

Click to share on Twitter (Opens in new window)

Share on Facebook (Opens in new window)

Click to share on Google+ (Opens in new window)



Financial Planner recommends HECM “synergy” with use of coordinated credit line.10/27/2015Similar post

Counseling Research Sheds New Light on Reverse Mortgage Borrowers11/23/2015Similar post

Home equity is sweet spot for peaceful retirement using all the financial tools at your disposal09/13/2015Similar post