Homeowners age 62 and older saw their collective housing wealth increase in Q2 2019 by 0.5% compared to the previous quarter. This constitutes an increase of approximately $32 billion to a record of $7.17 trillion, according to data provided by the National Reverse Mortgage Lenders Association (NRMLA) in conjunction with data analytics firm RiskSpan.
The increase was reported Tuesday in the quarterly release of the NRMLA/RiskSpan Reverse Mortgage Market Index (RMMI).
The RMMI rose in Q2 2019 to 258.44, which marks another consecutive all-time high since the index’s original publication in 2000. That increase was described as being primarily driven by an estimated 0.5% (or $47 billion) increase in the values of homes owned by seniors.
This was offset, however, by a 0.9% (or $14.6 billion) increase of senior-held mortgage debt.
“Many retired and soon-to be-retired Americans lack the financial assets for a comfortable retirement, yet the most commonly held and valuable asset for most of them is their home,” said NRMLA EVP Steve Irwin in a press release announcing the record. “Responsible use of home equity may be the best option that ensures they have food, medicine and other basics for a comfortable retirement.”
Senior housing wealth topped $7 trillion for the first time ever according to a previous RMMI data release in March 2019, before hitting a new threshold of $7.14 trillion the following June. The RMMI also previously recorded a year-over-year increase of 6.5 percent in 2018, lower than the 8.4 percent increase recorded in 2017 and the 8.2 percent increase in 2016.
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A foreclosure assistance program in the state of Oregon is on track to assist the majority of the state’s foreclosed reverse mortgage borrowers just in time for a final round of applications, which are expected to begin in Spring 2020.
The Oregon Homeownership Stabilization Initiative (OHSI)’s reverse mortgage benefit program is designed to assist homeowners in getting out of default on their reverse mortgages, offering up to $40,000 in payments to individual borrowers to bring affected seniors up-to-date on taxes and insurance in order to remain in their homes, Carmel Charland and Nicole Stoenner of OHSI tell RMD in a phone interview.
Some qualifying borrowers can also receive as many as 24 months of future property tax and homeowner’s insurance payments direct from OHSI.
OHSI works directly with the reverse mortgage servicer to bring clients current on their obligations under the terms of a Home Equity Conversion Mortgage (HECM).
In the wake of the 2008 financial crisis, the U.S. Department of the Treasury disbursed the Hardest Hit Fund, designed to provide targeted aid to states hit hardest by the subprime mortgage crisis that started in 2007. As a result, OHSI was established in 2010, and started administering foreclosure assistance programs the following year. After five years of observations and taking into account changes in the state’s property tax deferral programs, OHSI simed to expand the scope of its assistance programs.
“By the time we got the additional funding and were looking at how to utilize this money in 2016, we took a look back at where we had been,” says Carmel Charland, OHSI administrator.“ At that point in time, the real estate climate had really changed in Oregon, so we wanted to look at who had not really been served by the previous programs that we had run.”
One of those underserved segments was people with reverse mortgage loans who had endured foreclosures. Looking at neighboring states that had developed similar programs helped guide Oregon to the topic of reverse mortgage foreclosures, which also led to partnerships with other state government agencies that assisted the state of Oregon in developing its own program.
“We were able to look at our sister Hardest Hit Fund states and take some good examples,” Charland says. “I think the first state to do a reverse mortgage program was Florida, and then California ran with it, so we really partnered with California a lot in developing [our own reverse mortgage assistance program].”
Since reverse mortgage borrowers fell under the umbrella of previously under-served people in the foreclosure assistance program, OHSI identified a need worthy of implementation. This also led to direct support from the federal government.
“As we researched this we got further support from the Federal Housing Administration (FHA), in that there are over 300 HECM reverse mortgages in the state of Oregon that were in default in 2016,” Charland describes.
HECM foreclosure assistance
The one-time benefit for those who avail themselves of the program can be extended in the form of a second payment the program makes to the loan servicer to keep the borrower current for up to two years, Charland explains.
“[Beneficiaries] get a one-time benefit to bring them current and out of default, but once we receive confirmation from the servicer that their loan has been reinstated, then we make a second payment that is equivalent to the next 24 months’ worth of taxes and insurance, and potentially homeowner application dues,” she says. “And then, the servicer puts that in a set-aside account to be used as needed over the next 24 months.”
That additional payment for taxes and insurance is designed to help give the affected homeowner ample time to put finances in order to arrange for a period after which the program’s assistance fund is exhausted. The 300 observed HECM delinquencies in 2016 is believed to be attributable to the changes in Oregon’s tax deferral practices, Charland says.
“There were some changes and shifts and I’m not familiar with all that took place, but it impacted people who thought they had deferral but then no longer had one,” she says. “They were kicked off or [deferrals were made] temporarily unavailable. So, that caused a lot of these delinquencies.”
While OHSI didn’t have a record determining exactly how many HECM reverse mortgages existed in the state at the time of the interview, its internal statistics have led the organization to believe that the majority of those borrowers that have applied for reverse mortgage foreclosure assistance have already been, or are currently in the process of being served, as the program identified 300 HECM delinquencies in 2016.
“Currently in the state we’ve received 301 applications,” says Nicole Stoenner, legislative and communications coordinator at OHSI. “So, another component might be that we’ve really addressed the need [for reverse mortgage assistance] and spoken directly to the population of folks with reverse mortgages that have been FHA-approved.”
The amount of money in total spent on the program is also relatively modest, but has managed to serve nearly all of those who have submitted applications thus far, says Charland.
“To date, we’ve spent $436,000 and $638,000 on this program, and that’s serving 275 approved applications,” she says.
Considering that many of the affected senior clients are limited in their technological skills and have a tendency to be geographically isolated, Charland says, the reverse mortgage assistance program can take applicants over the phone in their office which is not usually required of the organization’s other assistance programs.
That greater level of more personalized, tailored assistance makes OHSI potentially more involved with reverse mortgage clients when compared to other clients they serve. That also leads those in OHSI to become familiar with the scenarios that necessitate assistance in the first place.
“We really get to know these people,” Charland describes. “The most common scenario is that they are overwhelmed by a health crisis, a major medical event that just blows apart their financial plans. We hear that all the time. The other thing that’s really common is financial abuse either from somebody in their life, or some kind of scam. They’re the victims of an online or phone scam, so it’s definitely been a different experience to work with this population.”
The organization has even created a new training program to identify specific scenarios in which seniors are taken advantage of.
“We’ve now done red flag training for elder abuse, because this is sometimes how it comes to light: when they apply to our program,” Charland says.
Getting the word out, winding down
While some of the efforts in the reverse mortgage assistance program have revolved around getting the word out about to borrowers and reverse mortgage servicers, the program isn’t permanent and will be winding down its operations soon. Until then, though, OHSI is working diligently with partners in both government and industry to ensure that as many loans as possible don’t go into default.
“Champion Mortgage, which is one of the largest providers, has some really amazing staff that really took the initiative and helped coordinate some events here in Oregon that we partnered with, and they had a really big influence on getting people into the program,” Charland says.
Champion has since ceased its reverse mortgage operations in Oregon specifically, but as similar programs in other states have run their course, some servicers may not be aware that the Oregon program is still operational.
“Another consideration I just now thought of is that California has stopped taking applications for all their programs last year,” Charland says. “So, it’s entirely possible that some servicers don’t even understand that we’re still open and taking applications.”
Still, operations in the state of Oregon are winding down for this program, and the program will only be taking new applications for consideration for the next six months.
“Our plan is to use all of the federal funds until they run out, and now our estimate is that Spring 2020 will be about the date that we’re going to run out of those funds,” said Stoenner.
The difference the program makes
Although only running for a limited time, those who have worked in the reverse mortgage assistance program have seen its benefits make a demonstrable difference in the lives of beneficiaries, and being brought current on the terms of their loans helps offer a peace of mind that can be difficult to come by for people living on a fixed income, Charland says.
“For the folks themselves, it makes a huge difference because they really are looking at foreclosure, and because of being brought current and having that buffer timeline, it really enables them to regroup and find a way forward, either by adjusting their budget, finding other resources, or finding time to sell and discuss with their families what the best scenario is for them,” she says. “It provides them the time they need to have the best outcome.”
This is even more important for the locality, since Oregon’s state housing finance agency has noted a troubling increase in the rate of senior homelessness.
“One of the things we’re noticing and a trend we’re seeing is an increase in seniors that are facing homelessness, and we see any sort of housing stabilization program as an effort to prevent homelessness, and [the reverse mortgage assistance program] certainly falls in line with those efforts,” adds Stoenner.
This quarter, Next for Me partnered on a housing survey with Silvernest, an online home sharing platform that pairs boomers, retirees, empty nesters and other older adults with compatible housemates for long-term rent arrangements.
Our survey was conducted with Next for Me and Silvernest subscribers in the United States who are between the ages of 40 – 65+.
The majority (35%) were single, with an additional 16% reporting they are divorced, 9% widowed
Responses came from the South (19%), the Midwest (19%), and North East (16%), but the majority (40%) were from the West
36% do not have housing plans post-retirement
Boomers now represent the fastest-growing segment of adults in the market for roommates, according to SpareRoom.com. Harvard University’s Joint Center for Housing Studies reports that in 2017, 1.9 percent of people age 65 and over resided with a roommate or housemate, up from 1.3 percent in 2006. One of the fastest-growing household types in the coming decade will be empty nesters and older singles, totaling 11.1 million additional households age 65 and over.
Although 50% of Boomers say they want to age in place, there are a number of factors that may make it difficult, starting with financial:
49% of our survey respondents say they don’t or “probably don’t” have enough money saved to cover their mortgage or housing expenses in retirement
That doesn’t take into account not-so-extraordinary circumstances like later-in-life “Grey Divorce”, which is likely to take a serious toll on both spouse’s financial health. Factor in loneliness and the safety and accessibility concerns that come with aging, and you get a demographic that is increasingly open to the idea of home sharing.
The 65+ population is growing daily, and more and more of them are putting off retirement, either by choice or out of financial necessity. This aging population will need accessible housing, and those who are financially unprepared will need to find new ways of reducing their housing costs.
The full report “New Housing Options for the 50+ Generation” is included in our annual research subscription. As a subscriber you receive quarterly trends reporting and calls with our editors.
According to a recent brief from the Boston College Center for Retirement Research (CRR), middle-class Americans age 65 to 69 have more or equal wealth in their home equity than in their financial assets. (For this purpose, middle class is defined as the middle 60 percent based on total wealth.) Yet few retirees are taking steps to utilize this significant asset to help them finance their retirement.
The CRR brief said downsizing is the main way retirees tap home equity. Yet it also cites a study that found only 30 percent of homeowners approaching retirement move and that more retirees move to a home that’s more expensive than the one they left. Those who do move to a less-expensive home generally do so in response to a negative financial shock, such as high medical expenses, the need for daily or medical assistance (precipitating a move to assisted living or a nursing home) or widowhood.
Another way to tap home equity is through a federal government-insured Home Equity Conversion Mortgage that’s available to homeowners age 62 and older, commonly known as a reverse mortgage. Despite its availability, only about 2 percent of eligible homeowners have taken out a reverse mortgage. Cost is cited as the most common impediment, although reverse mortgages gained a bad reputation in the past for many other reasons.
High costs. Just like conventional mortgages, reverse mortgages have both up-front and closing costs that can be reduced by shopping around for competitive lenders. If a reverse mortgage is the best or only way to buy your retirement freedom, it might be well worth the cost.
Family misunderstandings. Given stories about angry children who thought they were inheriting a mortgage-free home, some older homeowners are reluctant to burden their children. A carefully designed strategy using a reverse mortgage, however, has the potential to increase the total legacy to adult children, or it can help prevent the unwanted legacy of a retired parent who has run out of money and needs to move with an adult child.
Home title. It’s simply not true that the lender owns the title of a home with a reverse mortgage. The homeowners keep the title and aren’t required to pay off the debt until they move or die. Heirs also have the right to keep the house and pay off the debt.
Desperate borrowers. Some borrowers spend the proceeds of a reverse mortgage too quickly or can’t keep up with required property taxes, insurance and maintenance. The U.S. Department of Housing and Urban Development now requires a counseling session for potential borrowers and has enacted rules to discourage taking too much debt too soon from a reverse mortgage.
Nonborrowing spouses. In the past, spouses younger than age 62 were taken off the home title to allow a reverse mortgage to proceed. Then they were surprised when the borrower died and they had to immediately repay the loan or leave the home. But in 2015, new protections were put in place for nonborrowing spouses: They can remain on the home title and stay in the home even after the borrowing spouse has passed away, without having to immediately repay the loan.
You never have to leave your home as long as you maintain the property, the taxes on it and the home’s insurance.
You never have to make loan repayments in advance of leaving the home unless you choose to do so.
Pfau’s book explores several viable uses for a reverse mortgage, such as using it to:
Generate a lifetime monthly paycheck that supplements Social Security and other financial resources, like an annuity.
Provide payments for a fixed period to pay for living expenses while you’re delaying Social Security as a purposeful strategy to optimize that benefit.
Pay off a conventional mortgage to reduce monthly housing expenses.
Fund remodeling costs that help you age in place.
Create a liquid asset through a reverse mortgage line of credit that can be tapped for emergencies or that grows to be used late in life for medical or long-term care expenses.
Pay for premiums for long-term care insurance.
Design a strategy to reduce “sequence of returns” risk with invested assets. With this strategy, when the stock market drops, you tap the reverse mortgage line of credit for living expenses, which buys time to allow invested assets to recover. After the market rebounds, you can switch back to withdrawing from your invested assets.
Pay for living expenses if your financial assets become depleted.
Pfau’s book contains analyses that show it’s best to take out a reverse mortgage line of credit early in your retirement, before you might start tapping it.
Of course, reverse mortgages aren’t for everybody, particularly if you don’t plan to stay in your home for many more years. In this case, it may not be worth incurring the up-front expenses.
On the other hand, if you have substantial home equity, if your financial resources aren’t sufficient to enable you to retire and if you really want to retire, you’d be wise to explore all of your options to deploy your home equity. The two books mentioned above are great resources to help you get started.
These two books are featured on these pages. See below:
As you near retirement, you might look back and think that saving for this next stage of life was the easy part. During your working years, the big decisions were how much to save and where to invest. But now it’s time to switch gears. Instead of accumulating assets, you must figure out how to turn your nest egg into an income stream to last a lifetime.
“The idea of withdrawing from their retirement portfolio is really painful for a lot of people. They’re savers,” says John Bohnsack, a certified financial planner in College Station, Texas.
Here are steps that can help you generate the retirement income you will need. Along the way, you’ll need to answer some questions: Will you get a part-time job in retirement that brings in some income? When should you claim Social Security or start taking your pension, if you have one? And how will you address the big uncertainties of health care and long-term care? Taxes will get more complicated because, unlike previous generations, most retirees today have the bulk of their retirement money tied up in tax-deferred 401(k)s and traditional IRAs. How do you withdraw from these accounts safely without triggering a big tax bill?
Begin With a Budget
Get a handle on what your annual expenses will be in retirement by creating a retirement budget. Frank Castello, a 66-year-old former IT manager from Bowie, Md., gave his retirement budget a test run before leaving the workforce in 2016. He drew up a spreadsheet with his anticipated expenses, calculating that he would need $4,000 a month to live on. He lived on that budget for two years before retiring, while also maxing out his 401(k) and boosting his savings outside the plan. “I was constantly refiguring, rejiggering, verifying and validating the numbers,” says Castello. “Do I have it right? Will I have enough? You don’t know for sure until you live it.”
So far, it’s worked out for him. Castello, who isn’t married, lives on savings and a $1,490 monthly pension. He rolled his 401(k) into an IRA that is 63% invested in stocks, with the rest mostly in bonds—an account he hasn’t touched yet. He has enough cash on hand to pay expenses for a few years without having to worry about stock market fluctuations, and he has set up an emergency fund that he might need to tap when his 2005 Acura TL finally gives out. And Castello is waiting until age 70 to claim Social Security to get the maximum benefit. “I’m healthy. I don’t need the money now,” he says.
Take a look at what you’ve spent in the past year. (If you don’t track your expenses now, your credit card issuers may offer a year-end summary of your charges to get you started.) Then adjust those expenses for what might change in retirement. For instance, you won’t be commuting to work anymore, but you might be traveling to more far-flung destinations.
Or you might decide to tackle some major home renovations. “I always joke with clients, ‘Look around your house and see what you want to change and start planning for it,’” says Nicole Strbich, a CFP in Alexandria, Va. Because once you retire, you’re going to sit in your living room and decide you need new carpet, a kitchen renovation and a bigger porch, she says. (Renovations often end up costing more than projected, so Strbich advises doing them just before retiring, while you still have a paycheck to cover any surprise bills.)
Take a look at what you’ve spent in the past year … Then adjust those expenses for what might change in retirement.
Don’t overlook health care surprises, either, especially if you plan to retire early. Judy Freedman of Marlton, N.J., retired six years ago as a group director in global communications at Campbell Soup. Too young for Medicare—she’s now 61—Freedman pays more than $1,000 a month for the retiree medical plan through her former employer. And though she has a dental policy that covers the basics, such as teeth cleaning, expensive dental work has to be paid out of pocket. (After you sign up for Medicare, you’ll need a supplemental policy to provide dental coverage.) Before retiring, Freedman, a widow, cut her expenses by downsizing. She sold her three-bedroom ranch house on a large lot and moved into a townhouse community, which reduced her property taxes, utilities and landscaping bills.
Once you’ve nailed down your anticipated expenses, subtract all your expected guaranteed sources of income, such as a pension, annuity and Social Security. (You can get an estimate of your future Social Security benefit by opening an online account at www.ssa.gov/myaccount.) The result is how much you will need to withdraw from your portfolio to maintain your lifestyle in retirement.
Make Withdrawals Last as Long as You Do
What if your expenses outpace your sources of income, meaning you’re likely to deplete your nest egg too quickly? In that case, you may need to consider working longer or go back to your retirement budget and figure out what expenses you can cut.
But knowing whether you’re withdrawing money too quickly from your nest egg can be tricky: You don’t know how many years you’ll live in retirement, and you can’t count on earning the returns that we’ve enjoyed in the decade-long bull market. “If you do it in a careful and measured way, you can make withdrawals and, even if your account drops in value, not necessarily run out of money,” says Tim Steffen, director of advanced planning for Baird in Milwaukee.
One popular guideline has been the 4% rule, which was designed in the 1990s as a safe withdrawal rate for a 30-year retirement that may include bear markets and periods of high inflation. It assumes half of your retirement portfolio is in stocks and the other half is in bonds and cash.
The rule works like this: Retirees draw 4% from their portfolio in the first year of retirement. Then they adjust the dollar amount annually by the previous year’s rate of inflation. So with a $1 million portfolio, your withdrawal in your first year of retirement would be $40,000. If inflation that year goes up 3%, the next year’s withdrawal would be $41,200. If inflation then drops to 2%, the withdrawal for the following year would be $42,024.
The 4% rule is a good starting point but may need some fine-tuning to fit your own situation, says Maria Bruno, head of U.S. wealth planning research at Vanguard. “Are you retiring at a younger age? If so, you might need a lower withdrawal rate.” You may also need to withdraw your money more slowly if you are investing more conservatively, she adds.
Michael Kitces, director of wealth management at Pinnacle Advisory in Columbia, Md., says that while the 4% rule protects portfolios under bad-case scenarios, retirees could experience the opposite and end up after 30 years with more than double what they started with—even after decades of withdrawals. He suggests that if you use the rule, you review your portfolio every three years. Anytime it rises 50% above the starting point—say, a $1 million portfolio grows to $1.5 million—increase the dollar amount you withdraw that year by 10%. Then you can resume increasing that dollar amount by the rate of inflation until your portfolio grows significantly again to warrant a raise. (Of course, if you want to leave a legacy for your heirs, you may want to keep your money invested.)
Manage Your Portfolio
Inflation is relatively low today, but even at current rates, it can greatly erode your purchasing power over a long retirement. And the Consumer Price Index, the most popular gauge of inflation, may be undercounting your expenses in retirement. The CPI-E, a government index that gauges the rise in prices for households age 62 and older, averaged 1.86% annually over the past decade, slightly higher than the general inflation rate. That’s because older households devote more of their budget to health care, and the cost of that has risen faster than the general inflation rate.
To keep up with inflation, your portfolio will need the kind of long-term growth that stocks can provide. The right amount for you depends on how much risk your nerves can handle, along with your other assets and sources of income. If you’re near retirement or newly retired, Vanguard’s Bruno recommends a diversified portfolio with 40% to 60% in stocks.
Are you retiring at a younger age? If so, you might need a lower withdrawal rate. You may also need to withdraw your money more slowly if you’re investing more conservatively.
Investors may have grown complacent in a bull market that’s now close to being in its 11th year, but a bear is inevitable. Given the long run of this bull market, there is an elevated risk of a bear on the horizon, says Kitces.
A bear market can be devastating if it strikes early in retirement and you are forced to sell investments at a loss to pay bills. One way to lessen the impact of this, says Kitces, is to reduce your exposure to stocks as you head into retirement. If you’re, say, 50% in stocks, reduce that to 40% or 30%, he says. When the market falls, you can use that opportunity to buy stocks at lower prices and boost your holdings back to 50% of your portfolio, he says.
Another way to protect yourself during a market downturn—and preserve your peace of mind—is to use the bucket system. You divide your money into three buckets based on when you’ll need it. Bucket One holds enough cash for living expenses in the first one or two years of retirement that won’t be covered by a pension, an annuity or Social Security. Bucket Two is made up of money you won’t need for the next 10 years and can be invested in, say, short- and intermediate-term bond funds. Bucket Three is the money you won’t need until much later, so it can be invested in stocks or even alternative investments, such as real estate or commodities. (Review your cash bucket annually to see if it needs to be replenished from one of the other buckets.)
With the bucket system, even if the stock market plummets, you have the comfort of knowing that you have enough money in the first two buckets to cover your expenses for years without selling your stocks for a loss (see Make Your Money Last).
Plan for Health Care
Vanguard’s research last year estimated that the typical 65-year-old woman pays $5,200 annually in health costs, including Medicare premiums and other out-of-pocket medical expenses. The cost nearly doubles by age 85, to $10,100 annually. “Health care is the biggest wild card,” says Elliot Herman, a CFP in Quincy, Mass. The only sure thing about it is that the cost will rise over time.
To help with medical bills in retirement, consider opening a health savings account while you’re still working, if you have a high-deductible health insurance policy. “We sometimes say an HSA is a Roth on steroids,” says Vanguard’s Bruno. You get a triple tax-free benefit: Contributions aren’t taxed, they grow tax-deferred, and the money can be used tax-free for eligible medical expenses. And recent changes in HSA rules for those with chronic conditions make these accounts even more attractive.
For 2019, you can contribute up to $3,500 if you have single coverage and as much as $7,000 for family coverage. To make the most of the HSA, pay current medical bills out of pocket (if you can afford to), so the account has more time to grow. You can’t contribute to an HSA once you enroll in Medicare, even if you’re still working, but you can use the money at any time to pay medical bills, including Medicare Part B and Part D premiums.
Long-term care, which isn’t covered by Medicare, is another uncertainty that retirees need to address. You may never need long-term care, but if you do, the bill can be huge. A study by the U.S. Department of Health and Human Services estimated that nearly half of people who are now 65—or who reached that age in the past few years—won’t have any long-term-care costs. But one-fourth are expected to face long-term-care bills of up to $100,000, and 15% will rack up costs of $250,000 or more.
If you have the assets, you could pay the bills out of pocket. Long-term-care insurance is also an option, although it can be expensive, and you may have a difficult time finding a policy if you have a health issue (see How to Afford Long-Term Care).
Kitces advises buying a policy while you’re in your fifties, when the cost is lower and you’re likely still healthy enough to qualify for a policy. Policies are much more expensive than those issued many years ago, but the higher price also reduces the risk of steep rate hikes in the future, says Kitces.
Long-term care, which isn’t covered by Medicare, is another uncertainty that retirees need to address. You may never need it, but if you do, the bill can be huge.
Some people resist buying long-term-care insurance, thinking it will be a waste of money if they never need care, says Keith Bernhardt, vice president of retirement income at Fidelity Investments. The solution for them, he says, can be a hybrid policy that combines long-term-care and life insurance benefits. It will cover bills for long-term care, but if you never need care (or need only little of it) your heirs will receive a death benefit when you die. “It helps to remove that concern that ‘I won’t get a benefit from this,’ ” Bernhardt says. Be aware that the policy is doing double-duty, so premiums are significantly higher than if you purchased a stand-alone long-term-care policy. An independent insurance broker can help you find a policy among different companies.
Getting Guaranteed Income
A traditional pension will provide guaranteed income for life. Although more than 80% of state and local government workers have access to a pension, only about 17% of private-sector workers can access that type of retirement plan, according to the Alliance for Lifetime Income, a nonprofit that represents insurance companies and other financial institutions.
If you’re not in the fortunate group, an immediate annuity provides a way to create your own pension, using money you’ve saved in your 401(k) or elsewhere. In exchange for a lump sum, an insurance company will provide you with a monthly payment, usually for the rest of your life. Variable and equity-indexed annuities can also provide guaranteed income in retirement, but the amount may fluctuate depending on the performance of an underlying investment portfolio. These annuities are more complex than immediate annuities and often come with high fees.
A popular strategy is to buy an immediate annuity that will cover your monthly expenses, such as utilities and food. If a bear market hits, you’ll have the flexibility to wait until the stock market recovers before taking withdrawals from your portfolio (although you may have to postpone your winter Caribbean island cruise).
There are downsides to annuities to consider before you write a check. Once you give an insurance company your money, you usually can’t get it back, although some insurance companies allow one-time withdrawals for certain emergencies. Another drawback is that inflation will erode the value of your payments over time. Most insurance companies offer immediate annuities with an inflation rider—for example, payments will increase by 3% a year—but that will lower your initial payouts by up to 28%. For example, if a 65-year-old man invested $100,000 in a New York Life immediate annuity with no inflation rider, he would receive $6,197 a year. If he added a 3% annual inflation adjustment, his first annual payout would be only $4,446.
An even greater concern is the impact of interest rates on your payouts. Two factors affect the amount of income you receive from an immediate annuity: your age (the older you are, the higher your payouts) and interest rates. When interest rates are low, payouts are depressed, too.
Payouts are usually tied to rates for 10-year Treasuries, and that rate is historically low, says Harold Evensky, a certified financial planner and chairman of Evensky and Katz/Foldes Financial. Evensky believes a low-cost immediate annuity makes sense for a lot of retirees but that this may not be a good time to invest in one. Waiting will provide two benefits, he says: You’ll be older, which means higher payouts, and there’s a good chance that interest rates will be higher in the future than they are now.
If you’re worried that interest rates could go lower—or you’d like to start receiving at least some guaranteed income now—consider building an annuity ladder. With this strategy, you spread the amount you want to invest in an immediate annuity over several years. For example, if you want to invest $200,000, you would buy an annuity for $50,000 this year and another $50,000 every two years until you have spent the entire amount. If rates rise, you’ll be able to capture them, and if they fall, you’ll have locked in payments at the higher rate.
Another option that requires a smaller outlay of cash is a deferred annuity, also known as a longevity annuity. With this annuity, you get guaranteed payments when you reach a certain age. For example, a 65-year-old man who invests $100,000 in a deferred annuity that starts payments when he turns 80 would receive about $1,850 a month, according to ImmediateAnnuities.com.
Two factors affect the amount of income you receive from an immediate annuity: your age (the older you are, the higher your payouts) and interest rates.
You can invest up to 25% of your IRA or 401(k) account (or $130,000, whichever is less) in a type of longevity annuity known as a qualified longevity annuity contract (QLAC) without having to take required minimum distributions when you turn 70½. Deferred annuity payouts are also tied to interest rates, so if you believe rates are going to rise, you may want to postpone investing in one of these annuities.
Depending on the type of retirement plan you have, you may already own an annuity. Many teachers and other public service employees have variable annuities in their 403(b) retirement savings plans. These annuities invest in mutual funds and can be converted into an annuity that provides income in retirement.
Legislation pending in Congress would make it easier for 401(k) plan providers to offer annuities to plan participants by eliminating some of the liability risks for the employer. The legislation would also make these annuities portable, allowing job changers to transfer annuities to another employer’s plan or an IRA without paying surrender charges.
Supporters of the law say it would help workers convert their savings into lifetime payouts when they retire. But critics say the legislation doesn’t go far enough to prevent employers from offering complex variable and equity-indexed annuities that are burdened with high fees—a common problem with many 403(b) annuity offerings. You may be better off investing your savings in low-cost mutual funds or exchange-traded funds and buying an immediate or deferred annuity after you retire.
Your Home as a Safety Net
Reverse mortgages have often been branded as a way for older retirees to raise money only when other sources of retirement income have dried up. But a growing group of financial planners and academics say that taking out a reverse mortgage early in retirement could help protect your retirement income from stock market volatility and significantly reduce the risk that you’ll run out of money.
Here’s how the strategy, known as a standby reverse mortgage, works: Take out a reverse mortgage line of credit as early as possible—homeowners are eligible at age 62—and set it aside. If the stock market turns bearish, draw from the line of credit to
pay expenses until your portfolio recovers. Retirees who adopt this strategy should be able to avoid the pitfalls of the Great Recession, when many seniors were forced to take money out of severely depressed portfolios to pay the bills.
The standby reverse mortgage strategy can be effective “both from a practical and a behavioral perspective,” says Evensky. “If people know they’ve got resources when the market collapses, they don’t panic and sell.”
A traditional home-equity line of credit could also provide a source of emergency cash, but you can’t count on the money being there when you need it, says Shelley Giordano, founder of the Academy for Home Equity in Financial Planning at the University of Illinois at Urbana Champaign.
During the 2008–09 market downturn and credit crunch, many banks froze or closed borrowers’ home-equity lines. “Just when people needed money and liquidity, the banks needed liquidity, too,” says Giordano. That won’t happen if you have a reverse mortgage line of credit. As long as you meet the terms of the reverse mortgage—you must maintain your home and pay taxes and insurance—your line of credit is guaranteed.
Several factors make a standby reverse mortgage particularly attractive now. Homeowners age 62 and older have seen the amount of equity in their homes increase sharply in recent years, to a record $7.14 trillion in the first quarter of 2019, according to the National Reverse Mortgage Lenders Association.
Low interest rates are another plus. Under the terms of the government-insured Home Equity Conversion Mortgage, the most popular kind of reverse mortgage, the lower the interest rate, the more home equity you’re allowed to borrow.
Which leads us to one of the most counterintuitive—and potentially lucrative—features of reverse mortgages. Your untapped credit line will increase as if you were paying interest on the balance, even though you don’t have to pay interest on money you don’t tap. If interest rates increase—and given current low rates, they are almost guaranteed to move higher eventually—your line of credit will grow even faster, says Giordano.
You won’t have to pay back money you tap as long as you remain in your home, a comforting thought if you take money during a bear market. A HECM reverse mortgage is a “non-recourse” loan, which means the amount you or your heirs owe when the home is sold will never exceed the value of the home. For example, if your loan balance grows to $300,000 and your home is sold for $220,000, you (or your heirs) will never owe more than $220,000. The Federal Housing Administration insurance will reimburse the lender for the difference.
If you have an existing mortgage, you’ll have to use the proceeds from your reverse mortgage to pay that off first. You have plenty of flexibility: Funds left over can be taken as a line of credit, a lump sum, monthly payments or a combination of those options. Even if there’s not a lot of money left over, paying off your first mortgage means you won’t have to withdraw money to make mortgage payments during a market downturn, Giordano says. “A regular mortgage that requires a monthly principal and interest payment can be a real burden, especially when the value of your portfolio is under stress,” she says.
Under the terms of the government-insured Home Equity Conversion Mortgage, the lower the interest rate, the more home equity you’re allowed to borrow.
The drawbacks. One of the biggest downsides to reverse mortgages is the up-front cost, which is significantly higher than the cost of a traditional home-equity line of credit. The FHA says lenders can charge an origination fee equal to the greater of $2,500 or 2% of your home’s value (up to the first $200,000), plus 1% of the amount over $200,000, up to a cap of $6,000. You’ll also be charged an up-front mortgage insurance premium equal to 2% of your home’s appraised value or the FHA lending limit of $726,525, whichever is less. And you’ll have to pay third parties for an appraisal, title search and other services. You can pay for some of these costs with the proceeds from your loan, but that will reduce the loan balance. Costs vary, so talk to at least three lenders that offer reverse mortgages, says Giordano.
Because of the up-front costs, it’s rarely a good idea to take out a reverse mortgage unless you expect to stay in your home for at least five years. Remember, too, that the loan will come due when the last surviving borrower sells, leaves for more than 12 months due to illness, or dies.
If your heirs want to keep the home, they’ll need to pay off the loan first. That may not sit well with children who expect to inherit the family homestead, so it’s a good idea to discuss your plans with them in advance. Giordano doesn’t see this as a big barrier to a standby reverse mortgage—especially if it helps you preserve other, more liquid assets. “Kids would much rather split up a big fat portfolio than try to decide how to split up the house,” she says.
Yes, this new phase of life comes with a lot of uncertainties. And financial advisers say that many new retirees often hold back on spending because of all the unknown bills that may await years down the line. But Fidelity’s Bernhardt says these retirees often discover a happy surprise.
“They actually find out that they are in a pretty good spot. They are able to be happy and enjoy retirement,” he says. “It’s not quite as expensive as they thought it was going to be.”
The conventional wisdom to minimize taxes in retirement is to draw first from taxable accounts, which are generally taxed at favorable long-term capital gains tax rates (as low as zero but no higher than 23.8%); then tap tax-deferred accounts, such as traditional IRAs and 401(k)s, whose withdrawals are taxed as ordinary income; and dip into Roth IRAs last so this tax-free money has more time to grow.
But if you’re approaching retirement with the bulk of your assets in a 401(k) or traditional IRA, consider a slight break with convention. The IRS requires you to begin minimum withdrawals from tax-deferred accounts after age 70½—so it can finally start collecting income taxes on the money. (Legislation pending in Congress would raise that age to 72.) But if your balances are large enough, these mandatory withdrawals could throw you into a higher tax bracket.
“The crop of retirees that are leaving the workforce today is the RMDgeneration,” says Maria Bruno, head of U.S. wealth planning research at Vanguard. “These are folks leaving the workforce with large tax-deferred balances.”
It’s not too late to reduce future RMDs if you’re still in your sixties. “We call this the sweet spot,” says Bruno. One tax strategy is to draw from tax-deferred accounts early in retirement, when you might be in a lower tax bracket, and use the money to help with living expenses while delaying Social Security. Or, if you don’t need the cash to live on, you can gradually convert some tax-deferred money into a Roth IRA.
In either case, make sure you don’t withdraw or convert too much money in a single year and push yourself into a higher tax bracket. It’s a good idea to visit an accountant or financial adviser to make sure you don’t trigger any unintended tax consequences.
How to Get More From a Smaller Pie
The Society of Actuaries and the Stanford Center on Longevity have developed a withdrawal strategy geared for middle-income workers with less than $1 million in savings—people who often don’t work with financial advisers. This Spend Safely in Retirement Strategy relies on optimizing Social Security benefits, which ideally you would delay until age 70. “That’s the cornerstone of the strategy,” says Steve Vernon, research scholar at the Stanford Center on Longevity and author of Retirement Game-Changers.
Social Security retirement benefits can start as early as 62, but taking them that early will reduce your monthly check by up to 30% compared with waiting until your full retirement age (66½ for those turning 62 this year). And for every year you delay benefits past your full retirement age, your benefit grows by 8%. Few retirees (only 4%) delay Social Security until age 70, according to a new study that calculated that today’s retirees are losing out on an average of $111,000 per household during retirement by claiming benefits early.
Vernon acknowledges that it’s a challenge to get people to delay claiming. But Spend Safely aims to get over this hurdle with a strategy to generate income in your sixties without Social Security: Pull the amount from your portfolio each year that you would have received from Social Security had you claimed benefits. (If you’re earning money from a part-time job, that will reduce the amount you will need to pull out.) On top of that, withdraw an amount at a rate modeled after the required minimum distributions that older savers must take from tax-deferred accounts after age 70½. This Spend Safely rate starts at 2.7% of the year-end portfolio balance at age 60 and gradually raises that to 3.6% at 70. Thereafter, you would use the RMD withdrawal rates published by the IRS.
Vernon says retirees can tweak this method, say, to boost their travel budget in the early years, although that would mean reducing withdrawals later. One drawback: Annual withdrawals will go up and down with the investment portfolio’s performance each year.
Swelling numbers of Americans these days are working in retirement, taking part-time jobs and launching businesses. And retirees are increasingly staying in their homes rather than moving to retirement communities. They’re also, however, breaking the mold in a potentially worrisome direction: embracing debt.
The median total consumer debt of households headed by someone 65 or older in 2016 ($31,300) was 2 ½ times what it was in 2001 and nearly 4 ½ times the level in 1989. Some 60% of 65+ households carried debt in 2016, up markedly from about 42% in 1992. Credit card debt and student loans have increased, too.
The rising debt levels among older Americans is not only problematic for their finances, it’s bad for their mental health.
“Starting retirement with debt could exacerbate the impact of any impending negative [financial] shocks.”
“Debt-related stress is a growing concern, given the growing amount of debt held by older adults as they enter retirement,” wrote the authors of Debt Stress and Mortgage Borrowing in Older Age: Implications for Economic Security in Retirement, a paper just presented at the Retirement and Disability Research Consortium, in Washington, D.C.
The scholars behind another paper, Is Rising Household Debt Affecting Retirement Decisions?, echoed those comments. “Starting retirement with debt could exacerbate the impact of any impending negative [financial] shocks,” they noted.
Why Debt Is Rising for Retirees
What’s going on here?
The debt partly reflects confidence among near-retirees and retirees that they’ll continue earning an income during retirement, allowing them to pay the interest due. The economics behind their increased borrowing also largely mirrors the broader debt binge by consumers of all ages to pay for the rising cost of big-ticket items like cars, homes and college. (For a sad look at this trend, I encourage you to read The Wall Street Journal’s recent poignant piece, “Families Go Deep in Debt to Stay in the Middle Class.”)
Here’s what’s particularly concerning about older Americans’ debt load: Recent action in the bond markets is sending an alarm that the potent combination of trade, tariff and currency wars is slowing down the U.S. economy and possibly hurtling us toward recession.
No one, of course, knows when a recession will arrive. But one surely will sometime, as history has shown repeatedly. That’s why near-retirees and retirees would do well to shore up their finances by reducing, not increasing, debts.
The Debt That Adds Stress the Most
After wading through a stack of scholarly studies about older Americans and debt, my read is that the researchers are plenty worried.
Ohio State University’s Donald Haurin, Cäzilla Loibl and Stephanie Moulton just released an especially fascinating paper on the relationship between debt and financial stress for older Americans. In it, they described what they found to be a hierarchy of debt, stress-wise.
Credit card debt, they noted, is the most stressful type, with the strongest impact on older adults’ working longer and delaying filing for Social Security. Stress resulting from a $1 increase in credit card debt, they said, is the equivalent of stress due to a $14 to $20 increase in mortgage debt.
And second mortgages (home equity loans and lines of credit) are more stressful than first mortgages, they noted.
The researchers said that reverse mortgages — available only to people 62 and older — are less stressful than regular mortgages, dollar for dollar. But, they added, since reverse mortgage debt grows over time, stress from it may grow over time, too. By contrast, the authors noted, debt from a traditional mortgage declines over time, lowering debt stress.
Barbara Butricia of the Urban Institute and Nadia Karamcheva of the Congressional Budget Office arrived at similar results regarding credit card debt and retirement in a presentation at the Wharton School’s Pension Research Council in May. They calculated that a $10,000 increase in credit card debt for someone age 55 to 70 (with the median amount of credit card debt) raises the likelihood of continuing to work by over 9 percentage points and reduces the odds of receiving Social Security benefits by about 9 percentage points.
Smart Money Advice for People 50+
These studies highlight the rising vulnerability of older adults in bad economic times.
And their findings also suggest a personal strategy to pursue: Pay off your “stressful” debts first.
In other words, if you’re in your 50s or 60s, try to direct cash flow to eliminating credit card debt and second mortgage debt. And if these debts are significant enough to affect retirement decisions, getting rid of them should make a big difference to your future economic security.
You can’t control the swings in the business cycle or the direction of the stock market. You don’t have the authority to force China and the U.S to reach a trade accord. But you can direct more income to debt reduction.
That’s a smart personal finance strategy for all seasons, especially now.
Through a new rule announced recently, the Federal Housing Administration (FHA) is making it easier for condo owners to get reverse mortgages and other FHA financing.
The FHA published a final regulation and policy implementation guidance this week establishing a new process for condominium approvals, effective October 15, which will expand FHA financing for qualified first time homebuyers as well as seniors looking to age in place, the Department of Housing and Urban Development said in a press memo.
In a stated Trump Administration effort to “reduce regulatory barriers restricting affordable homeownership,” the new rule introduces a new single-unit approval procedure that eases the ability for individual condominium units to become eligible for FHA-insured financing. It also extends the recertification requirement for approved condominium projects from two years to three.
The rule will also allow more mixed-use projects to be eligible for FHA insurance, the department said in a press release. HUD Secretary Ben Carson touted the rule’s ability to assist both first-time homebuyers, as well as seniors aiming to age in place.
“Condominiums have increasingly become a source of affordable, sustainable homeownership for many families and it’s critical that FHA be there to help them,” said Carson in a press release announcing the new rule. “Today, we take an important step to open more doors to homeownership for younger, first-time American buyers as well as seniors hoping to age-in-place.”
Reverse mortgage implications
This rule is being implemented partially in response to the demands of the housing market, and is aimed at including reverse mortgages for seniors who wish to age in place in a condominium unit, according to Acting HUD Deputy Secretary and FHA Commissioner Brian D. Montgomery.
“For seniors, part of our mission is to provide affordable options to age in place. Condominiums can make a lot of sense for many seniors [for reasons of affordability],” Montgomery said on a conference call with reporters. “Our single unit review now also includes reverse mortgages, known as Home Equity Conversion Mortgages (HECMs), designed to help seniors age in place.”
In a question and answer session with officials from HUD and FHA, the impact on the reverse mortgage market was additionally clarified in response to RMD.
“Due to the availability for HECM loans to be applied to the single unit approvals, I think that by introducing the single unit approval process, that’s going to provide an opportunity for all borrowers to utilize FHA financing to either acquire new homes, or if they are seniors, to age in place,” said Gisele Roget, FHA deputy assistant secretary of single family housing.
She also clarified that the previous rules governing condo approvals shut out a lot of senior condo owners from obtaining a HECM in the past, and this new rule will help to address that.
“We recognize that many seniors live in condominium projects that were unable or unwilling to go through the process of FHA’s project approval,” Roget said. “And so, by allowing HECM borrowers to utilize the single unit approval for HECMs, they will be able to age in place in condominium projects that do not have the overall FHA project approval.”
The ranges were also extensively deliberated internally by FHA, which can include HECM for Purchase transactions, added Commissioner Montgomery.
“Whether it’s HECM for Purchase or just purchasing a condo for a first-time homebuyer, we’ve spent a considerable amount of time studying the ranges,” Montgomery said. “We wanted to avoid some of the pitfalls of the housing crisis, and this is a message that we heard loud and clear. We’ve worked closely with groups out there, and obviously with our own Office of Policy Development and Research.”
Industry participants applauded HUD’s expansion of the rules.
“Condos have become an affordable housing option for seniors, especially in high home value areas, so the FHA’s new policy has the potential to help a large group of older Americans age in place,” said Jesse Allen, EVP of alternative distribution at American Advisors Group (AAG) in an email to RMD.
Others acknowledged that this decision on condominiums has been long-requested.
“After years of working with HUD on this issue, it’s great to see them lift their ban on spot approvals,” said Scott Norman, VP field retail and director of government relations at Finance of America Reverse (FAR). “There is a great deal of demand in the condominium market, so this is very welcome news. While we are still going over the details, this announcement could help qualify tens of thousands of homeowners for reverse mortgages over the next few years and may allow more seniors the opportunity to age in place. We applaud HUD and Commissioner Montgomery for their hard work on this document.”
Some lenders also see this new rule as overcoming cumbersome approval rules which govern full condominium complexes, since homeowners associations (HOAs) often never bothered with applying in the first place.
“Most HOA’s that are not currently FHA approved have little interest in applying for approval. It seems most management companies aren’t open to it or they know there are issues they have run into in the past that prohibit FHA approval,” said Michael Mazursky, president of iReverse Home Loans. “This should definitely help many Seniors qualify for a HECM that in the past couldn’t proceed. The proprietary product has been able to fill the void, but this is a new outlet that should be extremely beneficial to Seniors.”
The industry’s trade association also lauded the new rules’ announcement.
The new rule is posted at https://www.hud.gov/sites/dfiles/SFH/documents/SFH_FHA_INFO_19-41.pdf
I work for a lending company as executive (get it together guy) and help folks like you find gainful employment in retiring years. The focus of the Fix and Flip occupation is to help keep income coming in for those in short supply (with building skills). We provide the capital and oversight to make sure you get it right.
No, you don’t have to know how to do “drywall” or “plumbing” or “electrical” but if you got through these many years and kept your bearing, you probably know enough about those skills as you need to direct contractors on your project.
Here’s a model you can follow to keep you on track. We know some of you will need some help finding your way, but when you do, there will be financial benefits that will keep you going as you progress through the steps.
At the heart of FLIP is a proven 5-stage model that really works in any market:
FIND: Select ideal neighborhoods, search for houses and attract sellers.
ANALYZE: Identify the improvements, and analyze the profit potential.3. BUY: Arrange financing, present the offer and close on the purchase.
This is where we pitch in to make financing easy and flawless so you can concentrate on other things that matter. We want you to be successful.
FIX: Develop and execute an improvement plan on time and in budget.
SELL: Add finishing touches to quickly sell for maximum profit.
Yes, if you want to talk to somebody about this process, call me and let’s talk. You’ll know soon enough if it fits your goals for retirement.
And, yes, you’ll get to be your own boss and work when you want to. And yes, you could just earn yourself a pile of money.
As we drift this week in the debaucherous chaos of Megan Rapinoe — aka what would happen if Rosie O’Donnell played soccer — it is important to consider a revelatory Twitter thread earlier in the week from Jesse Kelly and an on-air rant by Tucker Carlson.
For in the midst of progressive cancer, both men had strong medicine.
Kelly, who has clearly shown himself to be a man who refuses to pull punches when it comes to America’s domestic enemies, nonetheless confessed that he has under-appreciated their true malicious intent for the rest of us:
For too long the people on the Right (myself included) have called the American Left ‘socialists’ or some brand of that. But it’s dawned on me they’re something else entirely and I can’t quite put my finger on it. Even the commies loved their country. This is something worse. The commies didn’t want to flood their countries with illegal aliens and deport nobody. The commies would never have allowed government schools to encourage young children to question their gender. Or allowed a young boy to dress in drag and dance for men. I can’t stop thinking about that Gallup poll showing only 22 percent of Democrats are proud of their country. Something has really shifted. It’s not UN-American. It is ANTI-American. That’s not communism. That’s an insurgency.
That is exactly right and is what we’ve diagnosed on “The Steve Deace Show” for quite some time. If conservatism is actually going to be capable of being an effective movement going forward, its adherents need to realize that its foes aren’t primarily driven by a political ideology. No, they are devout knee-benders to a spirit of the age cult, whose iconoclastic goal is the dismantling of Western Civilization, or Judeo-Christendom, for the purposes of installing a totally different culture.
I get how hard this is to embrace, though, even for a former military man like Kelly. For it means that words like freedom, tolerance, and humility are actually nowhere to be found in the playbook of the Rapinoe mob, and thus our public spaces cannot truly be shared with them in any real sense over the long term.
Either they will win and rule us, or we must do what it takes to stop that from happening. That’s called a civil war folks, which is exactly what the militant left has been waging for quite some time now while we focus on Rasmussen polls.
As for Tucker Carlson, he pointed out during one of his shows the painfully obvious fact that Rep. Ilhan Omar (D-Minn.) loathes the very country that rescued her from oppression and then elected her to Congress. If we don’t learn from that stupidity vis-a-vis our nation’s immigration policy, he said, the natural consequences will be both existential and deserved:
No country can survive being ruled by people who hate it. … [Omar] scolded us, called us names, showered us with contempt. It’s infuriating. More than that, it is also ominous. The United States admits more immigrants more than any other country on Earth, more than a million every year. The Democratic Party demand we increase that by and admit far more. OK, Americans like immigrants, but immigrants have got to like us back.
To share beliefs with Carlson and Kelly used to simply mean that you were an American, regardless of party. But now they qualify you as a bigot who must shut up and guzzle whatever Rapinoe and Omar spew forth from their rancid firehose.
Just look at Rapinoe’s “I deserve this” taunt and see it through to its logical conclusion, because it implies something very dire if you get in her way. It is Loki in the first Avengers movie: You were meant to be ruled by her, you backwards fool.
Sure, laugh at the preposterous reality of that if you chose, but it is the very sort of laughter that is the soundtrack to putting a bullet in your culture’s head day by day. We are being surrounded by an orgy of nonsense that far too many people write off as just another political debate, instead of hearing it as the ominous and looming executioner’s song that it is.
Editor’s Note: “One of our tangents here at Gofinancial.net is the belief that Social Security, Medicare and Home Equity is in danger of being raided by the new left looking out for themselves, mostly. Is this force ANTI AMERICAN or just SELF SERVING?You don’t have to agree with us, but others are and so we add their voices here to support our own. Yes, you can object. It’s OK.” Warren Strycker, veteran mortgage professional.
Jul 2, 2019, Jamie Hopkins Contributor — Director of Retirement Research at Carson Wealth
The reverse mortgage market world heads in reverse away from the government created Home Equity Conversion Mortgage (HECM) and towards new propriety products. This is an encouraging sign because any healthy market needs competition, innovation, and variety. However, recently HECM program has been the driving force behind the reverse mortgage world, leaving many without an ideal solution to utilizing home equity as part of a sustainable retirement plan.
All in all, the reverse mortgage history in the U.S. is relatively short, with perhaps the first one dating back to 1961, and the HECM being created by the federal government through the 1987 Housing and Community Development Act. So, it is not entirely surprising that the reverse mortgage is still trying to find its way.
The government has continuously revamped the program over the past 10 years to improve consumer protections and to ensure that the program does not become a burden on taxpayers as the HECM is secured by the FHA Mutual Mortgage Insurance Fund.
At the HECMs peak back in 2009, with around 114,000 new reverse mortgages being issued, there was a healthy proprietary market. However, that market has since disappeared. The robust market back in the mid to late 2000s was not all that surprising as seniors looked to tap into home equity during the economic downturn to meet their spending needs.
Since then, research has supported the use of home equity during market downturns, but in more of a proactive than reactionary manner. Today, with markets storming upward and most portfolios doing well, the number of retirees looking to tap home equity through the HECM has declined dramatically to just shy of 50,000. In fact, since 2012 the number has been pretty flat, hovering in the mid 50s.
In 2017, HUD and the FHA changed the reverse mortgage rules, which shifted the mortgage insurance premiums (MIP) paid on HECMs. Instead of paying a higher MIP over the course of the loan, most borrowers now pay a higher MIP upfront and a lower MIP over the course of the loan.
This higher initial MIP does create some sticker shock and caused a drop in reverse mortgage applications after it went into effect. The drop off of applications and loans has caused the reverse mortgage world to react in considering a more diversified product offering. As such, a focus on proprietary products to both supplement the HECM and to compete against it have started to develop.
This development of proprietary products is relatively new. By looking at the HECM back in 2009 you essentially got the full reverse mortgage picture. But in 2019, the HECM might take a back seat to proprietary products. In 2018, proprietary product development was the focus. Companies like One Reverse Mortgage, FAR, AAG, Retirement Funding Solutions, Longbridge Financial, and others all were developing, looking at, or rolling out new products. The results? Very encouraging.
By the end of 2018 the proprietary market was taking off and now in 2019 it is seriously in flight. After speaking with a number of loan officers and companies, the consensus appears to be that this is working. Some companies might even see the total volume of loan amounts in proprietary products eclipse the loan amounts they originate in HECM products in 2019. Looking back a few years this would have been almost unimaginable.
Historically, proprietary products have been what I have called “accounting dust.” While they exist, and for some firms were important, as an overall player in the market they really didn’t have an impact. For the past few years the proprietary market has been a very small percentage of the overall market but that is starting to change.
While volume of loans closed in the proprietary reverse mortgage market is not ready to challenge the HECM, the loan values of these proprietary can be so much greater, reaching millions of dollars per loan, which most HECMs are fairly small in comparison with just a few hundred thousand dollars.
In the past, the proprietary reverse mortgage products were offered by only a few companies, had limited products, and really looked like a jumbo HECM. So what changed? Products on the market now include a proprietary line of credit, which didn’t exist until recently.
Products have also attempted to compete with the HECM by offering cheaper loans, but with lower loan to home value options. By offering less access to home equity, the lenders feel they can manage the risk of the loan better and don’t need to use the HECM which requires borrowers to pay into the MIP fund because of the risk of the loan going underwater at some point.
The cost of the HECM is one of the biggest complaints, so a less expensive loan could find some traction. A few years back the HECM changed, requiring a larger upfront payment for many loans. This sticker shock brought down the total value in the HECM market. So now, there are other options and options create opportunity. Furthermore, FHA loans cannot be approved on certain community housing set ups, which proprietary loans can be approved on.
What all this means for retirees is more options, flexibility, and innovation. Innovation and competition is good for the market, it drives companies to develop new products to meet current market needs and to try and solve problems. The reality is that the HECM has only reached a small portion of the overall senior housing market that could benefit from tapping into home equity. Perhaps increase product development and growth in the proprietary market can take smart home equity solutions both up-stream and down-stream.
I am the Director of Retirement Research at Carson Wealth and a Finance Professor of Practice at Creighton University Heider College of Business. I was a professor at the American College of Financial Services where I helped co-create the Retirement Income Certified Professional Designation (RICP®).
I’ve written about, and published, a variety of articles on retirement. I frequently write and publish law review articles dealing with retirement issues, such as long-term care, taxation of insurance benefits, and estate planning. I am extremely passionate about the retirement security of Americans and believe that a better prepared public can enjoy a more secure and fulfilling retirement.
Former Reagan economist Art Laffer on the U.S. economy’s record expansion.
As America marks the 10th anniversary of the end of the Great Recession in June, a new Bankrate surveyOpens a New Window. finds that more than 1 in 5 (22%) Americans who were adults when the recession started in December 2007 say their retirement savings are worse now than they were before it hit.
“The echoes of the Great Recession remain very present in the financial lives of many Americans, despite the improvement in the broader economy,” said Mark Hamrick, senior economic analyst at Bankrate.com. “While some have managed to prosper in the decade since, there are still tens of millions who are struggling to even get back to where they were before the economy took a turn for the worse.”
At a time when the traditional economic data tells a story of booming growth and maximum employment why do more than 1 in 5 say retirement savings are worse now than before the Great Recession?
Hamrick talked with Fox Business to discuss why retirement savings are worse now than before the Great Recession.
Boomer: If I am now retired where should I have my investments? II am in my 60’s and still working, to avoid a loss if we have another recession, should I continue contributing to my 401K or should I be putting my savings elsewhere?
At a time when the traditional economic data tells a story of booming growth and maximum employment why do more than 1 in 5 say retirement savings are worse now than before the Great Recession?
Hamrick: To both of these questions, we have to start with the fact that we don’t give specific investing advice at Bankrate. Among the reasons for this is that more information is needed to address specific situations or questions.
Our mission is to help people attain their financial goals by providing trusted and useful information. Still, there are some important considerations which can help you to begin the process of moving forward. If you believe you still have work to do regarding the best investment decisions, no matter whether you are just beginning a career, heading toward retirement or having stopped working, the first step is acknowledging that you have some homework to do.
Among the first things to consider:
-How much money are your currently investing and how much do you plan to invest or need to invest in the future to achieve your goals? What are your anticipated expenses such as mortgage payments or rent, health insurance costs, debt and money needed for other basic needs?
-What other sources of potential income do you envision? Is part-time work necessary or desired?
-A recession or downturn is ultimately inevitable. You still need to work toward your financial goals in any case. But you might also need to make some adjustments depending on previous investments or asset allocation decisions.
-Are you in good health? Americans are generally living longer these days. So, it isn’t unusual for someone to live 20 or 30 years (or longer) beyond the end of work. That means that you’ll still likely weather a number of market and economic or business cycles and the inevitable market volatility. For some, that might suggest that at least a portion of their savings or investments need to generate a return better than the rate of inflation as well as better than what cash can provide in a conservative or interest-bearing account.
-What is your risk tolerance? Can you stomach nerve-rattling downturns in the market from a psychological standpoint?
-Are you married or have a partner who is also dependent to a degree on your investments? Does that person have retirement benefits including a 401K and/or Social Security benefits?
-Do you know of a fee-only financial adviser or do you have a relationship with another reliable and trusted financial professional who can help you chart your future course? Many professionals are willing to engage in a free consultation to begin.
Boomer: At a time when the traditional economic data tells a story of booming growth and maximum employment why do more than 1 in 5 say retirement savings are worse now than before the Great Recession?
Hamrick: My sense is that the depth and breadth of the virtual hole that was created by the financial crisis and Great Recession are generally underestimated. Our survey found, for example, that of those with retirement savings at the start of the downturn, nearly 1-in-5 tapped into that money to some extent. That means they had ground to make up. Further, of those with emergency savings when the recession began, about 1-in-4 depleted that savings cushion entirely.
It is important to remember that not all expansions and recessions are created equal. While the downturn was exceptionally severe, ultimately regarded as the worst since the Great Depression, there have been some less-than-stellar aspects of the expansion which has followed. While the duration of the expansion has been historic, wage gains have largely been less than substantial and sustained.
Given that most Americans rely on income from work as a means to potentially improve their standard of living, the lack of better wage gains has hampered their recovery. While we don’t know when the next recession will begin exactly (and can’t know either its depth or length), it will likely erode the financial standing of many Americans once again through unemployment and losses in investments and income.
Editor’s Note: “OK, you aren’t ready for the cost of retirement. We get it. A HECM Reverse Mortgage is in your future. It’s OK, we’ve been waiting for you so we could help when this happened.” Warren Strycker, Professional financial veteran.
Financial literacy and money management skills are important at any age. In one’s youth, it’s important to save up for retirement. In retirement, it’s important to properly manage money so that you can continue to live comfortably while also paying for any unexpected medical bills or other expenses. If you’re a senior, or you have a senior loved one who is looking to improve their finances, this is the article for you.
Here’s some practical, well-researched advice on how to manage your money well during retirement:
Health insurance is an often-overlooked way for seniors to better manage their money. Health insurance coverage matters, as recent studies have shown, especially in a country where nearly 20 percent of the nation’s money goes toward funding health care systems. Healthcare can be costly, and illnesses or injuries can be unexpected at any age, especially for seniors.
Luckily, if seniors have the right healthcare coverage, staying healthy doesn’t have to be a financial stressor. There are many health insurance options available for seniors these days, including Medicare. Of course, Medicare is just one option. It’s important to make sure you have the right coverage for your unique situation and health history. While Medicare is a great benefit, there are gaps in its coverage. Depending on your needs, like if you need coverage for dental and vision care, a Medicare Advantage plan can cover all the bases. Whereas if you want to stick with Original Medicare, you might only need supplemental coverage through a Medigap plan. It’s important to use your resources to zero in on what coverage suits you best so you’re getting the most for your money.
Finances During Grief
No one likes to think about losing their loved ones. Unfortunately, however, it is a natural fact of life. Seniors who have recently lost a spouse, while contending with their grief and all the emotions that come with it, still need to address financial concerns, such as funeral costs and tending to medical bills. Depending on your financial situation after the loss of your spouse, you may want to consider thinking ahead for your own end-of-life arrangements. Funeral expense insurance can help cover medical costs and the service, removing the financial burden from your family.
There’s no denying it: the United States has a massive debt problem. This issue directly impacts seniors during a time when the nation’s Social Security benefits are facing funding issues. These days, one of the best ways to pay off your debt is to avoid having it in the first place. In addition to the tactics listed above, you could restructure your budget to become more modest, allowing you to allocate more funds toward paying off debt. For instance, many seniors downsize from a large family home into something smaller, less expensive, and easier to manage.
If all else fails, you can also work with a financial advisor or even enter a debt management program. While these decisions might seem scary at first, they can really bring more freedom to your golden years and more money to your wallet.
It’s never too late to start making better financial decisions. The truth is, at any age, you can start turning your financial situation around and improve how you plan for your future. By following the advice listed here, you can start building a nest egg and protect yourself in unexpected situations, such as a medical crisis. By practicing proper money-management techniques, you can not only improve your financial literacy, you can also eliminate debt and help ensure you have the funds available to truly enjoy your retirement.
A few years back, I conducted and published research in the Journal of Financial Planning that showed Americans don’t understand reverse mortgages. In fact, respondents scored below 50 percent on a 10-question true-false quiz.
It’s a similar uphill battle that annuities have faced – a somewhat complex concept that needs to be carefully reviewed, but it’s attacked and misrepresented in the broader media. As a result, people tend to shun annuities and reverse mortgages in their financial planning.
I often describe both annuities and reverse mortgages as oversold but underutilized. Because of a general consumer distrust and misunderstanding of the two products, the industries behind them have ramped up marketing and sales efforts. In some cases, though – like with celebrity ads on TV – this can actually push people further away from the products.
The USA Today article mentioned the inaccuracy of reverse mortgage TV commercials – which is fair. Reverse mortgage TV commercials have done the overall industry a disservice. They aren’t professional and feel more like celebrity sales.
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The article also covers the basics of a reverse mortgage: they can be attractive because they allow seniors to tap into their home equity to support cash flow. But the accuracy stops there.
Half-truth #1: Reverse mortgages are high-interest-rate loans
The article said reverse mortgage is a “high interest rate” loan. Are there expenses with reverse mortgages? Absolutely. Are they high-interest rate loans? Not exactly. The interest rates on a reverse mortgage aren’t out of line with most traditional 30-year mortgages – which is far below most personal rate loans.
Reverse mortgages keep in line with traditional mortgage rates. In some instances, they can be lower for seniors as reverse mortgage rates aren’t as subject to income requirements and credit scores as traditional loans. Labeling reverse mortgages as “high interest rate” without comparison isn’t entirely accurate.
And sure, reverse mortgages do have additional costs – payment into the FHA insurance fund – that not all forward mortgages have. But this payment offers up a product feature other loans don’t – the ability to not make money payments and never owe more than the value of the house on the loan. So yes, there’s an additional cost, but for an additional feature. We need to look at the entire situation before jumping to a conclusion.
Half-truth #2: Reverse mortgages are too expensive
Another misconception pushed in the article about reverse mortgages is its high cost. Reverse mortgages can absolutely be too expensive for the solution a client needs with closing costs, insurance premium and interest owed.
However, like any product, you need to review its value and not just look at the dollar amount. A new Lexus costs more than a 15-year-old KIA. That doesn’t mean one vehicle is better or worse based on price alone. You need to attach the price to its value and compare. This is similar with financial products. Reverse mortgages under the HECM program have features that are unique when compared to traditional mortgages, like the non-recourse aspect of the loan and that while the borrower lives in the home, there is no requirement to make monthly mortgage payments.
Half-truth #3: Reverse mortgages aren’t a long-term solution
Another half-truth about reverse mortgages is that if you live a long time, reverse mortgages aren’t a good solution. It is true that your compounding interest balloons the longer you live and carry your debt. However, one big thing the article failed to mention is that reverse mortgages are required by law to be non-recourse loans. Once you die, your estate would not be responsible for any amount above the value of your home. This means that you only owe up to the value of the loan amount due or the home value.
The USA Today article mentioned a scenario of how a reverse mortgage debt could grow substantially over time. The article basically laid out an example of owing $1.5 million on a loan with a principal borrowing amount of $700,000. However, the article made no mention of the non-recourse aspect. So if the borrower had a home that ends up being worth $700,000, you can’t owe more than the value of the home with a reverse mortgage. So while there is a substantial cost with compounding debt interest on a loan, this is limited to a degree because of the non-recourse aspect of reverse mortgages. And furthermore, if you end up borrowing more money than your home is worth through the course of the loan, you made a smart financial decision, not a bad decision. You got more out of the loan than your home was worth. Showing dramatic debts without mentioning the non-recourse aspect of the loan leads to half-truth scare tactic. You need to understand the costs but also the protections the loan affords.
Longevity isn’t an automatic negative factor with reverse mortgages as it’s commonly believed. Many people see this retirement income product as a quick fix in a pinch for the short term. But reverse mortgages have been shown in numerous research projects to be more beneficial – not less beneficial – when there’s longevity in place. Therefore, reverse mortgages shouldn’t be viewed as a short-term fix – a traditional line of credit might be better. Instead, they should be considered as a long-term solution.
If you live to the age of 100 and took out a reverse mortgage that pays monthly income at 62, that’s when the homeowner “wins” the most. You’ll borrow more, make no monthly payments, and could have the loan secured by an asset with less value than what you received. Utilizing a reverse mortgage early in retirement has also been shown to extend the longevity of an investment portfolio by helping to offset poor market returns (sequence of returns risk) early in retirement.
Like any retirement income strategy, reverse mortgages need to be researched, reviewed and considered beforehand. Don’t base your opinion on just one source. Reverse mortgages aren’t appropriate for everyone, as they come with costs and risks, but you might have the ideal situation.
On a higher level, we need to encourage more transparency and broader incorporation of all products – annuities, investments, reverse mortgages – into financial planning. Pushing only one way puts Americans in a worse place for retirement.
By Chris Clow | June 24, 2019 REVERSE MORTGAGE DAILY
Homeowners age 62 and older saw their collective housing wealth increase in Q1 2019 by 2.7 percent compared to the previous quarter. This constitutes an increase of approximately $104 billion to a record of $7.14 trillion, according to data provided by the National Reverse Mortgage Lenders Association (NRMLA) in conjunction with data analytics firm RiskSpan. The increase was reported Monday in the quarterly release of the NRMLA/RiskSpan Reverse Mortgage Market Index (RMMI).
The RMMI rose in Q1 2019 to 257.12, which marks another consecutive all-time high since the index’s original publication in 2000. That increase was described as being primarily drivenby an estimated 2.4 percent (or $110 billion) increase in the values of homes owned by seniors, which also includes an estimated increase of 0.8 percent in the population of senior homeowners.
This was offset, however, by a 1.1 percent (or $6.5 billion) increase of senior-held mortgage debt.
“Reverse mortgages have become an essential component for addressing a huge problem for many Americans—funding retirement,” said NRMLA President and CEO Peter Bell in a press release announcing the data. “More than 1.12 million families have used a reverse mortgage alongside side their 401Ks, IRAs, savings, investments, Social Security, Medicare and Medicaid to cover life’s daily expenses, so they could live more financially secure lives.”
Bell also echoed the sentiment he shared about reverse mortgage products in a recent USA Today op-ed, which responded to an investigative story concerning the safety and effects of taking out a reverse mortgage loan.
“As with all major financial decisions, a reverse mortgage should be part of an overall strategic plan, with input from knowledgeable professionals, and family members who may be impacted,” Bell advised.
Senior housing wealth topped $7 trillion for the first time ever according to the previous RMMI data release in March 2019. The RMMI also previously recorded a year-over-year increase of 6.5 percent in 2018, lower than the 8.4 percent increase recorded in 2017 and the 8.2 percent increase in 2016.
As more Americans near retirement age, they’re grappling with where they should live as they grow older. Should they stay in their existing homes? Sell and buy a smaller home? Become renters?
Although there is no single right answer, a recent, private convening of experts on aging and retirement hosted by the Urban Institute highlighted the need to think about both aging in the right place and how to pay for it.
Aging in place may prove costly or difficult
Survey after survey has shown that older Americans overwhelmingly prefer to age in place. But aging in place may require some trade-offs. Staying in a home must be financially sustainable, but it should also maximize physical, social, and emotional well-being. Financial considerations include maintenance and repair costs and the cost of necessary safety retrofits (grab bars, lifts, ramps, etc.), as well as the general cost of living in that area.
The size of the home, which drives many of these costs, must also be optimized. According to the 2017 American Community Survey, over 40 percent of seniors age 55 to 75 years, and 38 percent of seniors age 75 and older live in 3-bedroom houses, suggesting a potential mismatch between the size/maintenance requirements for the home and the needs of the inhabitants. But this doesn’t necessarily imply downsizing, as smaller, newer homes in sought-after areas could be more expensive. Rather it implies finding a place that balances multiple objectives:
availability of the right place at an affordable price point, plus repair and maintenance costs
access to medical facilities such as primary care doctors, in-home care, and nursing homes
social programs that facilitate interaction
local transportation options
proximity to family and friends
Households will value each of these factors differently, but the eventual decision will have an enormous impact on the financial, social, emotional, and health outcomes of seniors. Aging in the wrong place for many years can lead to poor financial outcomes relative to moving out earlier in retirement. This highlights the need to educate seniors on the financial consequences of aging in the wrong place.
Ultimately, the question of whether seniors are aging in place may not be as important as asking whether they are aging in the right place.
How can we help seniors age in the right place?
Regardless of whether they choose to stay or move, most older Americans don’t have enough savings to pay for their living expenses in retirement. And more seniors are relying on mortgages: 41 percent of senior homeowners ages 65 and older have a mortgage today, compared with just 21 percent in 1989. Mortgage balances are also higher, increasing on average from $17,000 to $72,000 over the same period for the same age group.
And with people living longer, retirement savings must last longer. Participants at the convening discussed a few options to mitigate retirement costs.
Researchers Michael Eriksen and Gary Engelhardt found that 3 million Americans ages 65 and older are treated for falls annually, requiring 800,000 hospitalizations and resulting in 300,000 hip fractures. The hospitalization cost is about $33,000 per stay, and the aggregate annual cost is about $55 billion, a large portion of which is undoubtedly incurred by Medicare.
As the nation’s population of seniors increases, and given the mismatch between homes and needs of inhabitants, these expenses will likely grow.
The researchers suggest a relatively inexpensive fix: in-home modifications that reduce the incidence of falls by 50 percentage points for those ages 75 and older. Every $1 invested in modifications returns $1.50 in reduced medical spending for people ages 75 and older, according to Eriksen and Engelhardt.
Of course, falls are only one small component of the overall cost of retirement. The bigger question is how to pay for overall retirement expenses, given limited savings.
Home equity products
Convening participants discussed the potential for monetizing home equity to improve retirement finances, but the lack of efficient mechanisms is a major barrier. Home equity is the major source of wealth for most elderly homeowners, including many whose available liquid assets could not cover an unexpected major expense.
Home equity loans and lines of credit are currently only available to people with the strongest credit profiles. Cash-out refinances require income to support the mortgage debt, and this vehicle is interest rate dependent; they are very costly if rates have risen substantially since the original mortgage was taken out.
Thus, homeowners with limited incomes and savings have only one option for equity extraction: the Federal Housing Administration’s Home Equity Conversion Mortgage (HECM) program, which has fallen short of its potential.
Seniors point to high costs, product complexity, fear of losing their homes, or getting scammed as reasons they don’t participate in the HECM program. In response to massive losses on HECM loans during the housing bubble, the US Department of Housing and Urban Development made several changes to HECM requirements to reduce risk. But these changes have shrunk the pool of potential borrowers and cut HECM lending volumes. Changes to program requirements have also introduced uncertainty for lenders.
Convening participants agreed about the urgency of stabilizing and improving HECM by doing the following:
lowering costs associated with servicing HECM loans and introducing a lower loan-to-value ratio
offering a lower-cost product for households that want to borrow a limited amount (for instance, to pay for home safety retrofits)
encouraging the return of the private reverse mortgages, a product several lenders have recently relaunched
But are these fixes enough? Some in favor of HECM’s current model prefer targeted changes to address issues like postassignment servicing. But others favor a fundamental reform of the program to make sure it is servicing those who need it most.
Many seniors continue to age in unsuitable or expensive homes, requiring proactive intervention from both homeowners and government. The public and private sectors can take steps to educate seniors on the benefits of aging in the right place and make changes that help more seniors do just that.
Addressing these issues will allow seniors to thrive in their chosen homes. Failure to act will only make the situation worse as more Americans reach old age.
Editor’s Note: If you notice you are tipping glasses full of water over without realizing i — and it isn’t lack of peripheral eyesight, or wondering why you can’t pee when you are sitting on the toilet, it could be that your brain isn’t functioning as usual (or at all). It’s difficult to acknowledge that your hands and other bodily functions don’t work without your brain, and other stuff you don’t want to admit, isn’t working, because…
Yes, it’s depressing, but that is what results from knowing this stuff is happening as you age and not really dealing with it (because you didn’t think you could do anything about it)… and you don’t have mountains to climb, and you wonder if you are demented now! All that, and more.
(Yes, it’s probably OK to be a little frustrated. That’s called retirement even when you don’t. But when things aren’t functioning because you don’t use them for long enough, then life issues are at stake whether you like it or not.
Now, there’s this…
Surprising ways to retain sharp memory using brain games that strengthen mental functioning.
I asked my 95 year old father to go with me to a seminar I was holding and he said “no”. It made me pause, so I asked him: “Why not, dad?” and he said “I don’t want to”.
Hmmmmm. What happens when we don’t want to? Nothing. Nothing happens and then we tip glasses over and wonder why we can’t pee when command requires brain function.
As we grow older, we all start to notice some changes in our ability to remember things. Mostly, though, it’s about we don’t try much.
Maybe you’ve gone into the kitchen and can’t remember why, or can’t recall a familiar name during a conversation. You may even miss an appointment because it slipped your mind. Memory lapses can occur at any age, but we tend to get more upset by them as we get older because we fear they’re a sign of dementia, or loss of intellectual function. The fact is, significant memory loss in older people isn’t a normal part of aging—but is due to organic disorders, brain injury, or neurological illness, with Alzheimer’s being among the most feared.
Most of the fleeting memory problems that we experience with age reflect normal changes in the structure and function of the brain. These changes can slow certain cognitive processes, making it a bit harder to learn new things quickly or screen out distractions that can interfere with memory and learning. Granted, these changes can be frustrating and may seem far from benign when we need to learn new skills or juggle myriad responsibilities. Thanks to decades of research, there are various strategies we can use to protect and sharpen our minds. Here are seven you might try.
A higher level of education is associated with better mental functioning in old age. Experts think that advanced education may help keep memory strong by getting a person into the habit of being mentally active. Challenging your brain with mental exercise is believed to activate processes that help maintain individual brain cells and stimulate communication among them. Many people have jobs that keep them mentally active, but pursuing a hobby or learning a new skill can function the same way. Read; join a book group; play chess or bridge; write your life story; do crossword or jigsaw puzzles; take a class; pursue music or art; design a new garden layout. At work, propose or volunteer for a project that involves a skill you don’t usually use. Building and preserving brain connections is an ongoing process, so make lifelong learning a priority.
Use all your senses
The more senses you use in learning something, the more of your brain will be involved in retaining the memory. In one study, adults were shown a series of emotionally neutral images, each presented along with a smell. They were not asked to remember what they saw. Later, they were shown a set of images, this time without odors, and asked to indicate which they’d seen before. They had excellent recall for all odor-paired pictures, and especially for those associated with pleasant smells. Brain imaging indicated that the piriform cortex, the main odor-processing region of the brain, became active when people saw objects originally paired with odors, even though the smells were no longer present and the subjects hadn’t tried to remember them. So challenge all your senses as you venture into the unfamiliar. For example, try to guess the ingredients as you smell and taste a new restaurant dish. Give sculpting or ceramics a try, noticing the feel and smell of the materials you’re using.
Believe in yourself
Myths about aging can contribute to a failing memory. Middle-aged and older learners do worse on memory tasks when they’re exposed to negative stereotypes about aging and memory, and better when the messages are positive about memory preservation into old age. People who believe that they are not in control of their memory function are less likely to work at maintaining or improving their memory skills and therefore are more likely to experience cognitive decline. If you believe you can improve and you translate that belief into practice, you have a better chance of keeping your mind sharp.
Economize your brain use
If you don’t need to use mental energy remembering where you laid your keys or the time of your granddaughter’s birthday party, you’ll be better able to concentrate on learning and remembering new and important things. Take advantage of calendars and planners, maps, shopping lists, file folders, and address books to keep routine information accessible. Designate a place at home for your glasses, purse, keys, and other items you use often. Remove clutter from your office or home to minimize distractions, so you can focus on new information that you want to remember.
Repeat what you want to know
When you want to remember something you’ve just heard, read, or thought about, repeat it out loud or write it down. That way, you reinforce the memory or connection. For example, if you’ve just been told someone’s name, use it when you speak with him or her: “So, John, where did you meet Camille?” If you place one of your belongings somewhere other than its usual spot, tell yourself out loud what you’ve done. And don’t hesitate to ask for information to be repeated.
Space it out
Repetition is most potent as a learning tool when it’s properly timed. It’s best not to repeat something many times in a short period, as if you were cramming for an exam. Instead, re-study the essentials after increasingly longer periods of time — once an hour, then every few hours, then every day. Spacing out periods of study is particularly valuable when you are trying to master complicated information, such as the details of a new work assignment. Research shows that spaced rehearsal improves recall not only in healthy people but also in those with certain physically based cognitive problems, such as those associated with multiple sclerosis.
Make a mnemonic
This is a creative way to remember lists. Mnemonic devices can take the form of acronyms (such as RICE to remember first-aid advice for injured limbs: Rest, Ice, Compression, and Elevation) or sentences (such as the classic “Every good boy does fine” to remember the musical notes E, G, B, D, and F on the lines of the treble clef).
Additional editor’s note: And, if you are a computer guy/gal, you already know about passwords. Don’t try to memorize them. They will change and then you’re stuck. Have one place where you keep them (not on the computer) and keep them there forever as you change them to comply with Microsoft that now you have to change them. (If you are hooked up to Microsoft and on the internet, you know they come into your computer at night and change stuff. Yes, they do, don’t they? Gotta have a way to remember or you won’t survive.
A common question I receive regards how to find a trustworthy reverse-mortgage lender. This is not necessarily easy for those beginning the process with little more to rely on than an Internet search engine. A starting point may be with personal referrals from your financial advisor, or from friends or family who have felt satisfied with their lenders. I am also willing to help readers find the names of local lenders from reputable companies if you write to me providing your city and state. I am not compensated by reverse-mortgage lenders for giving such referrals.
It is important to speak with a few different lenders and to get a sense of the range of possibilities with regard to reverse-mortgage options in terms of up-front costs, the lender’s margin, and ongoing costs, and whether the lender can serve as a resource to address any servicing issues after the loan is initiated. Costs will vary and can depend on how the loan is used: those wishing to set up a line of credit as a later resource may have to pay a higher up-front cost than those who plan to spend more quickly from the HECM. It is important to consider more than just who offers the lowest up-front costs, because having a personal connection to the lender can be important for any subsequent servicing issues or questions, and because the interaction of up-front costs and the lender’s margin can be complicated and hard to assess.
Here are some issues to consider when speaking with a lender:
Is the lender patient about meeting with you in person or speaking by phone to answer your questions?
Is the lender clear about the different terms and costs available for reverse mortgages? Does it explain the costs clearly and not try to hide them by emphasizing only the possibility of no “out-of-pocket” costs?
Has the lender been clear about your responsibilities regarding property taxes, maintaining homeowner’s insurance, and keeping the property maintained?
Has the lender suggested that you seek additional guidance for tax advice or for advice about receiving assistance from government-welfare programs, if relevant?
Does the lender demonstrate interest or knowledge about retirement-income planning so that you have a better sense about the right options and strategies for your situation? Is the lender conversant about the topics and issues raised in this book?
As well, there are some red flags to consider that may suggest that a lender is not the right choice for you:
The lender pressures you to make a decision about applying for a reverse mortgage before you feel comfortable or ready.
The lender encourages you to take a larger proceed from the line of credit when the loan begins than you otherwise feel comfortable with or feel is necessary for your situation.
The lender encourages you to use the reverse-mortgage proceeds to buy a new investment or insurance product, especially if it seems as though the lender could receive some sort of compensation if you do.
The lender provides you with a list of HUD-approved independent counselors, as it should, but tries to direct you to a specific counselor.
This is an excerpt from Wade Pfau’s book, Reverse Mortgages: How to Use Reverse Mortgages to Secure Your Retirement (The Retirement Researcher’s Guide Series), available now on Amazon.
Depression impacts more than 6 million of America’s 35 million seniors every year according to the National Council on Aging, yet older adults often don’t know where to turn for help – and many don’t know whether they should look for help, often mistaking their condition for loneliness or irritability. Depression is frequently misdiagnosed in seniors and can easily be mistaken for Alzheimer’s or a sleeping disorder.
But the fact is that more of the nation’s senior population receives treatment for mental health services from primary care doctors than they do from mental health professionals. An older adult may know who to call for treatment for a sore throat yet have no clue where to go for help with depression and anxiety.
Medicare is the primary health maintenance resource for seniors, but it’s of little help if a Medicare beneficiary suffering from depression doesn’t know where to find mental health care providers in their area. Fortunately, there are plenty of useful resources that can help you find the treatment you need, walk you through the enrollment process, locate plans in your area, and find supplemental coverage to help pay for mental health care needs.
Where to look
Psychology Today provides an easy-to-use portal with search capabilities for people seeking a psychologist or therapist who accepts Medicare. You’ll find contact information and a rundown of each practitioner’s treatment specialties, as well as their Medicare status. Mental Health America can also help you find treatment providers, as can SAMHSA (Substance Abuse and Mental Health Services Administration).
Go online to research information about Medicare and Medicare Advantage plans in your area, including information about getting treatment for depression and how coverage breaks down based on what part of Medicare your plan falls under. Original Medicare pays for a preventive screening for depression. Medicare Part A provides coverage if you require an inpatient stay in a medical or psychiatric hospital, while Medicare Part B covers outpatient mental health treatment,
including outpatient counseling, diagnostic testing and evaluations, psychotherapy, and family counseling.
Plan coverage details
The Centers for Medicare and Medicaid Services publishes a resource guide with detailed information about Medicare’s mental health services, including eligibility, outpatient/inpatient benefits, prescription drug coverage, and financial assistance. This useful guide spells out exactly what mental health services are covered under Medicare Parts A and B and prescription medication coverage under Part D. Published annually, it provides important information and coverage updates that beneficiaries must stay abreast of.
It’s also important to review and compare plans regularly, which you can do through MedicareAdvantage.com, where you can search by state, get detailed information about the enrollment process, compare Medicare Advantage plans — including those plans offered by UnitedHealthcare and other private insurers — and talk to a licensed health insurance agent 24/7.
Medicare supplemental insurance varies somewhat from state to state, so it’s important to stay up to date on coverage details in your state. Medicare supplement plans help pay out-of-pocket costs not covered under Medicare Part A and Part B. It’s designed to help make Medicare coverage go farther by filling coverage gaps, an important factor for enrollees seeking mental health treatment.
Medicare is a vast health care resource for seniors but it is subject to frequent changes. That’s why it’s so important to stay on top of the most recent changes in order to get the maximum benefit, to understand how to fill gaps in coverage based on your particular health care needs, and where to find qualified mental health care professionals near you.
RetirementProfessor @ The American College; Principal @ McLean Asset Management
FINRA is the Financial Industry Regulatory Authority. It is a self-regulatory body for financial brokers and brokerage firms. As a part of its efforts to protect consumers, it issues alerts and reports on a variety of financial issues, including reverse mortgages. FINRA’s stance on them is described in a report entitled, “Reverse Mortgages: Avoiding a Reversal of Fortune.” This is a cute and clever title that clearly casts negative connotations on these mortgages, leading many financial advisors and financial broker-dealer firms who receive guidance from FINRA to conclude that reverse mortgages are a bad idea and do not allow their affiliated financial advisors to discuss reverse mortgages with their customers.
Reverse Mortgages: Avoiding a Reversal of Fortune
Update: The Department of Housing and Urban Development (HUD) recently made changes to Home Equity Conversion Mortgages (HECMs), which make up the majority of reverse mortgages in the U.S. We are reissuing this alert to reflect those changes, and to reiterate that while reverse mortgages can help seniors manage their finances if used responsibly, they come with costs and risks.
If you are in your sixties, and own your home, chances are you have heard about reverse mortgages—or will soon. Reverse mortgages can be helpful to homeowners who want to stay in their homes but are having trouble keeping up with their mortgage payments, or who have no other source of funds to pay bills or meet unexpected expenses. But as more Americans near retirement age, some financial institutions are aggressively marketing reverse mortgages as an easy, cost-free way for retirees to finance lifestyles—or to pay for risky investments—that can jeopardize their financial futures.
FINRA is issuing this Alert to urge homeowners thinking about reverse mortgages to make informed decisions and carefully weigh all of their options before proceeding. And, if you do decide a reverse mortgage is right for you, be sure to make prudent use of your loan.
What is a Reverse Mortgage?
Older homeowners who want to tap the equity in their homes typically have three options. They can sell their house and downsize, take out a home equity loan or consider a reverse mortgage. A reverse mortgage is an interest-bearing loan secured by the equity in your home. To be eligible, you and any other co-borrowers, such as your spouse, must own your home and be 62 or older—although some lenders offer reverse mortgages to individuals as young as age 60.
Like a home equity loan, a reverse mortgage allows you to convert your home equity to cash that you can use for any purpose. Unlike other home loans, however, homeowners make no interest or principal payments during the life of loan. The interest is added to the principal, which is why reverse mortgages are often called “rising debt” loans. Unless you opt for a fixed-term loan, the loan only becomes due when you die, sell your home to move or otherwise leave your home for more than 12 months—for instance, if a health issue requires you to enter a nursing home.
If any of those events occur, you or your heirs must repay the loan, including compounded interest, in full. Normally, that means the house must be sold, and the loan will be paid back from the proceeds of the sale. Because interest will have been accruing during the life of the loan, you will likely owe more than you borrowed—and if home values have fallen or you live longer than expected, you may even owe more than your house is worth. But since reverse mortgages are non-recourse loans, the worst that will happen is that you or your heirs will receive nothing from the sale of your house. The lenders cannot go after any other assets that you or your heirs own.
Recent Changes to FHA Reverse Mortgage Loans
Home Equity Conversion Mortgages, or HECMs, are administered by the Federal Housing Administration (FHA) and make up the majority of reverse mortgages in the U.S. The loans are insured by the federal government against default by a lender (the borrower pays a fee for this protection). The Housing and Economic Recovery Act of 2008 made significant changes to FHA reverse mortgages and how they are sold. For example, the law allows seniors to use a reverse mortgage to purchase a new home (called a “reverse mortgage for purchase“). It also mandates counseling for all FHA reverse mortgages.
Additional changes resulted from the Reverse Mortgage Stabilization Act of 2013, which authorized FHA to change the HECM program. FHA replaced the Standard and Saver HECM options with a single program that is different in a number of ways. For one, it adjusted the maximum loan amount. Based on a formula tied to the borrower’s age and current interest rates, this new maximum is less than the previous HECM Standard, though slightly higher than the HECM Saver option. There are also new limits on the amount homeowners can borrow at closing and during the first 12 months. This new limit is 60 percent of the maximum loan amount, though making repairs or paying off an existing mortgage may constitute “mandatory obligations” that could allow for additional borrowing. And lenders are now required to perform a financial assessment of the borrower before a HECM loan can be approved. Part of the assessment is a detailed credit check.
Beyond HECM Loans
Non-HECM single-purpose reverse mortgages may be offered by some states, local governments and non-profit organizations for specific objectives such as home repairs or the payment of property taxes. There may be income restrictions accompanying these reverse mortgages, and they are not federally insured.
Banks and other lenders may also offer proprietary reverse mortgages, often called jumbo reverse mortgages. These are typically designed for borrowers with high-value homes. Proprietary reverse mortgages are not federally insured, and fees are not regulated as they are with HECM loans. It’s a good idea to work with a HUD-approved mortgage counselor if you are considering either of these non-HECM options (there may be a fee for counseling services).
Three Reasons to Be Cautious
First, reverse mortgages may seem like “free money” but in fact, they can be quite expensive. Like traditional mortgages and home equity loans, you will be charged interest, but interest rates for reverse mortgages are generally higher than these other types of loans. In addition, the fees and costs associated with reverse mortgages are often significantly higher, too—sometimes as high as 4-8 percent of the total loan amount. You can usually have these costs deducted from the loan amount, instead of paying for them out of pocket, but either way, you may end up with less cash than you expected.
Also, be aware that reverse mortgages must be the primary mortgage on your home, so if you have another mortgage already, you will have to borrow enough to pay that off, too. That may also reduce the amount of cash left for you to use.
Second, you are still the owner of your home and therefore responsible for property taxes, insurance and home maintenance costs. If you are not able to meet these obligations, the lender may have the right to foreclose on your home, leaving you in the worst possible situation—no place to live, and no more home equity to draw on.
Third, even if you can keep up these payments, you may get to the point that you want or need to move into a smaller home, or into an assisted living facility, for reasons other than cost. At that point, your loan will come due. With compounded interest due, you may be surprised to find out how much you owe, which may restrict your future housing choices.
Use Your Loan Wisely
Tapping into your home equity in your retirement years through a reverse mortgage is a very serious decision. Whether it is the right decision for you may ultimately depend on a number of factors—your health, your spouse’s health, other sources of income, the reason you’re tapping your home equity, when you do it and how wisely you use your loan proceeds. Unfortunately, some financial professionals who profit from selling reverse mortgages aggressively urge homeowners to obtain them even when they may not be necessary—for example, as a means to fund dream vacations, buy a second home or invest in risky or illiquid investments. In some cases, those who sell the mortgages may also profit from the sale of the touted investment, giving them twice the incentive to talk you into a loan you may not need.
When you obtain a reverse mortgage, you normally have several options for receiving the funds. You can take a lump sum payment, set up a line of credit that you can draw on as needed or set up regular periodic payments. Depending on your lender, you may also be able to set up a combination of these options. For example, you may decide to receive a portion of the loan amount in monthly payments, and leave the remainder as a line of credit that you can use for unexpected expenses.
Whichever you choose, make sure you use your loan wisely. Just because you don’t have to pay it back as long as you live in your home doesn’t mean you should treat it as “mad money.” Reverse mortgages were originally designed as a tool for allowing aging, low-income homeowners to keep their homes by providing a source of additional monthly income to meet expenses. But some lenders market reverse mortgages to younger retirees as a way to finance a more extravagant retirement lifestyle than they could otherwise afford. The trouble is, those same homeowners may need their home equity some day for something far more pressing than a vacation, only to find that it has already been spent.
If you are approached by a financial professional to do a reverse mortgage in order to fund a particular investment, keep in mind that all investments carry risk and costs—and the higher the promised return, the higher the risk. It’s best to steer clear of investments that are risky or underdiversifed—as well as those that make it expensive, if not impossible, for you to access your money if unexpected expenses arise.
Tips When Considering Reverse Mortgages
Weigh All Your Options. Does it make more sense to sell your house—and either downsize or rent while carefully investing the sale proceeds? Take out a home equity loan or line of credit? Can you consolidate credit card debts? Even if you are having trouble paying for your taxes or for home maintenance, there may be local government assistance programs that can help. Whatever your situation, ask your state agency on aging about less risky, or lower cost, ways to address your needs.
Understand the Risks, Costs and Fees. Just because you won’t be making any interest payments as long as you live in your home doesn’t mean the interest rate doesn’t matter. If you do decide to move, for whatever reason, you will have to pay back the loan plus compounded interest. The same is true if you have to leave your home, for whatever reason, for more than 12 months (and possible less if you have a non-HECM loan). Be sure to ask about all costs and fees, including any prepayment penalties.
Recognize the Full Impact of Your Decision. While you typically do not have to pay taxes on the proceeds of a reverse mortgage, the income or lump sum you receive could impact your eligibility—or your spouse’s eligibility—for various state and federal benefits, including Medicaid. In addition, depending on the laws of your state, a reverse mortgage may not enjoy the same home-equity protection that would otherwise apply if you have a health emergency and need to enter a nursing home—and your spouse must liquidate assets to pay for that care. Finally, a reverse mortgage is generally not the right choice for those who want to leave their homes to their heirs.
Get Independent Advice. Reverse mortgages are such complicated transactions that the federal government requires borrowers to meet with HUD-approved counselors before obtaining a federally guaranteed loan. (Most loans are federally guaranteed, but some lenders offer proprietary loans that are not.) Make sure that any counselor recommended by your lender is truly independent by asking whether he or she receives any funding from the lender or the mortgage industry. Even if you are applying for a loan that is not federally guaranteed, it is a good idea to get advice from a trusted financial adviser who has no interest in either the mortgage or any investment you plan to make with the proceeds. In any event, before you agree to a reverse mortgage, be sure to consult with legal and tax professionals who know the consequences of reverse mortgages for residents of your state and who are not connected in any other way to the transaction or the lender.
Be Skeptical of Reverse Mortgages as Part of an Investment Strategy. If someone urges you to obtain a reverse mortgage to make an investment or purchase an insurance product or a security, such as a deferred annuity, be very skeptical, particularly if they are promising high returns. In essence, they are encouraging you to speculate with your home equity, which you may need for more critical purposes down the road. Also consider what will happen if the returns turn out to be less than promised, or worse, you lose the principal. If you cannot sustain that kind of low return or loss, you should probably not be making the investment with your home equity.
Ask the Right Questions About the Proposed Investment Strategy. Reverse mortgages can be an extremely costly way to fund an investment. Before you obtain a reverse mortgage for investment purposes, make sure you understand both the terms of the loan AND the terms of the investment. What fees must you pay, directly or indirectly, for the reverse mortgage? What are the costs and fees associated with buying the investment? With selling it? How easy will it be to get your money out if you need it suddenly? Does the investment have a long surrender or lock-up period? What is the potential downside? Is it marketed and sold by the same person or entity that is offering the reverse mortgage? How is the reverse mortgage broker compensated? How is the seller of the investment compensated?
The Bottom Line
Home equity is often a homeowner’s most valuable asset, and most precious source of retirement security. Reverse mortgages can be a useful tool for certain older Americans who might otherwise face losing their homes. But homeowners should consider all the risks and explore all of their options before taking out a reverse mortgage, and even then, should use the loan funds wisely.
However, while its title has not changed, the report itself has evolved over the years. It used to tell investors to consider reverse mortgages only as a last-resort option, but after Barry Sacks published his research, he convinced FINRA to remove that language.
The current version of the report provides three reasons to be cautious about reverse mortgages. First, FINRA warns that reverse mortgages may “seem like ‘free money’ but in fact, they can be quite expensive.” The report mentions the up-front costs and ongoing interest on the loan balance.
Second, the report mentions that reverse mortgages must be the primary mortgage on the home. This is not really a reason to be cautious, but the report points out that after paying off an existing mortgage from the initial principal limit, borrowers may have less access to cash than they had anticipated.
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Next, the report reminds investors that they are still responsible for property taxes, insurance, and home-maintenance costs. Finally, the report reminds borrowers that the loan will become due should they decide to move out of the home. With accumulated interest, borrowers might be surprised about the amount of home equity that they have left after repaying the loan.
The report then reminds borrowers to use the loan wisely rather than for frivolous expenses. As I have focused on using home equity as part of a responsible retirement-income plan, hopefully, this point is clear already. Nonetheless, it is worth providing a quotation from the report that drives home this point: “Those same homeowners may need their home equity some day for something far more pressing than a vacation, only to find that it has already been spent.”
The report ends with some tips when considering reverse mortgages. First, weigh all your options. Besides a reverse mortgage, other options include selling one’s house to downsize or rent, using a home-equity line of credit, or seeking local-government assistance to help cover property taxes and home maintenance. Next, understand the costs and fees of the loan. Third, recognize the full impact of the reverse mortgage, such as the impact of loan proceeds on state and federal benefits such as Medicaid.
This section continues with the sentence, “Finally, a reverse mortgage is generally not the right choice for those who want to leave their homes to their heirs.” However, this language probably should also have been removed following the implications of Barry Sacks’s research. Since money is fungible, the report’s statement is wrong when coordinated strategies can create synergies for the investment portfolio to manage sequence risk that leads to a larger overall legacy after repaying any loan balance.
The next FINRA tip is to obtain independent advice through loan counseling, particularly if one is considering a proprietary reverse mortgage that is not part of the HECM program. Finally, its last two points are about being skeptical about using reverse mortgages as a way to fund an investment or insurance product. I hope I have been clear that this is not a valid use of a reverse mortgage. I have discussed coordinating the reverse mortgage with an existing portfolio or using a reverse mortgage to continue to pay premiums on an existing long-term care policy, but I have not suggested that a reverse mortgage be used to fund new investment or insurance products.
This is an excerpt from Wade Pfau’s book, Reverse Mortgages: How to Use Reverse Mortgages to Secure Your Retirement (The Retirement Researcher’s Guide Series), available now on Amazon.
I’m a Professor of Retirement Income at The American College in Bryn Mawr, PA. I also serve as a Principal and Director for McLean Asset Management, helping to build retirement income solutions for clients. My research article on safe savings rates won the inaugural Journal of Financial Planning Montgomery-Warschauer Editor’s Award, and I actively publish research on retirement topics in a wide variety of academic and practitioner research journals. I also write about retirement income at my Retirement Research blog. I’ve contributed to the curriculum of the Retirement Income Certified Professional (RICP) and the Retirement Management Analyst (RMA) designation programs for financial advisors, and I am a frequent speaker about retirement income at national conferences. I am a CFA charterholder and hold a doctorate in economics from Princeton University.
Clients who risk running out of money in retirement can likely benefit from a reverse mortgage, especially if they take out the mortgage early in retirement, according to Christopher Mayer, chief executive at mortgage lender Longbridge Financial, and Wade Pfau, professor of retirement income at The American College.
Home equity can be tapped to pay off existing mortgages, mitigate sequence-of-return risks and shore up retirement plans that might otherwise be at risk of failure, Pfau and Mayer said Wednesday at the FPA Retreat in La Jolla, Calif.
But reverse mortgages can be a tough sell, given shady practices used by some insurance agents to use reverse mortgages to raise money for other products.That may be why only 6 percent of seniors are interested in a reverse mortgage, even though 78 percent own a home.
“But by not talking about it, you’re leaving your clients fundamentally unable to achieve their goals,” Mayer said.
Reverse mortgages can tap 40 percent to 70 percent of a senior homeowner’s equity via a line of credit, a monthly payment similar to an annuity, a lump sum, or a combination of those options. Repayment is due when homeowners have been out of the home for a year, and they have no liability beyond the home value for repayment.
The most common use of loan proceeds is to pay off an existing mortgage. “You’re taking away that fixed [mortgage] payment and moving that to the end of retirement” when the reverse mortgage is paid off, Pfau said. That can help overcome a sequence-of-returns problem early in retirement, and significantly enhance the legacy value of the client’s estate.
In contrast to reverse mortgages, traditional home equity lines have mandatory repayment requirements, are fully amortized after 10 years (not ideal for an aging retiree), and can be cancelled by lenders just when a borrower might need cash to avoid draining a shrunken portfolio, Pfau and Mayer said.
They also stressed that retired clients will benefit by taking out a reverse mortgage early, rather than draining assets first. One reason is that the credit line grows at the interest rate being charged.
“This is the most confusing aspect” of reverse mortgages, Pfau said. The growing credit line is “divorced from the home value.”
If you are 62, wrestling with debt and questioning the use of a Reverse Mortgage, you should consider talking with me”, says Warren Strycker, owner of Gofinancial.net and veteran HECM financial professional. “It won’t hurt to open up your stubborn streak, and you won’t have to do anything you don’t want to,” adds Strycker. “Yes, I’ve been around the block with reverse mortgages and you’ll see soon enough what I’m talking about.”
Retirement is filled with all sorts of risks including longevity, inflation, unexpected health care needs and costs, sequence-of-return risk and the list goes on.
To be sure, no one product or strategy can manage or mitigate all the risks that you may face in retirement. But a reverse mortgage can be used to manage many of the risks one might face in retirement.
Reverse mortgages was the subject of a panel discussion at TheStreet’s Retirement, Taxes & Income Strategies Symposium, held recently in New York.
“I honestly think that that’s one of the best uses of a reverse mortgages, is to actually help mitigate those risks,” says one of the panelist Steve Resch, Vice President – Retirement Strategies, at Finance of America Reverse.
TheStreet’s moderator and editor of TheStreet’s Retirement Daily sat down with Resch after the panel discussion. Resch says anything that is going to disrupt or interrupt a planned 30-year retirement period can be mitigated by incorporating home equity and a reverse mortgage in particular into a retirement-income plan
(SEE THIS VIDEO TRANSCRIPT BELOW).
Some risks in particular that can be managed and mitigated with a reverse mortgage include sequence-of-returns, long-term care expenses and unexpected expenses.
If you don’t mind, start by giving us a little bit about yourself, your title.
I am vice president of retirement strategies with Finance of America Reverse. And basically what that means is that for our company, I go around the country talking to financial advisors about using reverse mortgages in the retirement planning process.
I’m also a financial advisor. I’m a partner in a firm I started 25 years ago, and I’ve been using reverse mortgages in my planning practice for about 15 years now as well.
So we just concluded a panel discussion about all the risks that people might face in retirement and the tools that they might use to mitigate and manage some of the risk. So talk a little bit about how maybe reverse mortgages play in terms of their use and value in managing these risks.
I honestly think that that’s one of the best uses of a reverse mortgages, is to actually help mitigate those risks. From my perspective, it’s anything that is going to disrupt or interrupt a planned 30-year retirement period can be mitigated, hopefully, with some incorporating home equity in that planning process. So we look at risks such as sequence of returns.
Which is if your investments are not performing the way you anticipate them doing, why would you sell out your investments if you need cash flow when you could have an alternative income source, and that would be using home equity as an alternative income. So we can mitigate risk using home equity and that sequence of returns risks, using home equity for that.
There’s other risks, such as long-term care expenditures. A lot of people may have long-term care plans in place, but we don’t know if that’s going to be sufficient or enough for them down the road. So having an available access to home equity to mitigate that risk is, in my opinion, better than having to draw excess funds from their portfolio to fund that risk.
So long-term care events, sequence of returns, then there’s also simply unexpected expenses. For example, I had a client who called me and they said that their son-in-law just up and left their stay-at-home daughter and her three children, and left them in a terrible financial mess, and they needed money to help them out. So the question is do you risk your future asset growth and your distribution plan that’s already in place to help out in this emergency situation, or do you incorporate home equity, let that be used to help the family, and there’s no payments required using that as well. So they have the money to help the family without changing their household cashflow situation.
Talk a little bit about the requirements that need to be met in order to actually get a reverse mortgage.
Well you have to be 62 or older to get it.
And that would be both spouses?
Yes, but there are protections now if you have a spouse who is not 62. So the non-62 person on title would not be on the loan. However, if the borrower died, the non-borrower could remain in that property for the rest of their life without having to pay any payments as well. So they’re not forced out. So this is a protection that’s been put in place.
But you do have to be 62 or older, it has to be your primary residence that you put this reverse in place on.
Right. And you have to take some educational training courses.
Yes. And that’s another thing that’s a very important. It’s a safeguard that has been put in place. There’s always been counseling required ever since FHA got involved in 1988, but the counseling has been greatly intensified. So the counselors have full control on whether you can get a reverse mortgage or not. They have to give you a certificate. And if they don’t feel you understand the program, if you don’t understand what you’re doing, they will deny you that certificate, and you would not be able to get a reverse mortgage.
And there’s a limit on how much you can actually get in your reverse mortgage relative to the value of the home?
Yes. The amount you can get is based on your age and the value of the property, and there’s a percentage of that. The lenders do not control that. As far as the FHA products go, HUD controls that. It’s a formula set by HUD.
We also have proprietary reverse mortgage products, and those loan to valuations are set by the lender.
Right. So years ago, there wasn’t much research, there was no body of knowledge around reverse mortgages.
Today, there’s a great deal of research and espousing strategies that make it more accessible to folks in terms of sequence of return risks.
The one study that I’ll mention is the one that referred to the notion that it would be good to get a reverse mortgage at age 62 with a line of credit, and and use it when their sequence of return risk exposure, and pay it back when the market comes back up.
Talk a little bit about that strategy.
And actually by putting in place at age 62, what you’re doing is growing and compounding that line of credit at an earlier age, because the line of credit grows and compounds at the same rate as your cost of funds. So the earlier you put this in place, the greater your line of credit will be down the road. So then it’s in place so that when you do retire, whether you retire at 66 or 70 or whatever it is, you have this available funds to manage those sequence of returns risk, which would be if the investments are underperforming at the time you start a distribution plan, your better option would be leave your investments alone, take your needed funds that you were going to take from your investments out of your home equity, let your investments recover, and then draw on those later down the road when they’re in a better position.
So another common use, I think, of reverse mortgages is the notion that many people want to age in place, age in their home, and many homes are not age-friendly, and the ability to put in place universal design is one way to tap into home equity and not necessarily have to move out.
Exactly. Yes. And setting up your home to be a accessible or senior-friendly is expensive, and if you have someone who is in that home and they want to stay there, and they’ve got their investments and their distribution plan is in place, the question is how do you effectively fund the renovations that are needed for this home without disrupting that portfolio and your distribution rate.
So again, it’s an opportunity to have the home take care of that, mitigate that risk of drawing down too much money from your investments.
Any do’s and don’ts that you might recommend?
The one thing that I will tell my clients too when we’re considering a reverse mortgage is to not really put it in place unless it’s with a home that you intend to stay in. If you’re only going to be in that home another five, six years or whatever, if your thought is, “I’m going to move to Florida in the next five years,” don’t put a reverse in place now, because it really is a long-term planning tool for someone who wants to age in place in that home.
There’s costs involved, and so you don’t want to incur a lot of costs when you’re only going to be there for a short period of time. But you can, however, use a reverse to purchase a new home as well, and that’s a great opportunity. I know a lot of times when you are even downsizing, if you’ve been in the home a long time, even downsizing will cost you more money. So this is a great opportunity to get into the home that you want without having to drain excess capital from your resources.
I’m told that the new term is rightsizing.
Rightsizing. Exactly. It’s rightsizing. Yes, it’s rightsizing.
I have people who have actually moved up in size, but they liked the home better, and it was better laid out for them. So yes, it is rightsizing.
So other mortgages, there are jumbos available in the reverse mortgage market?
Yes there are. This is pretty new, this started in the past couple of years. In fact, our company has been in the forefront of developing new proprietary products. They are for jumbo properties. They are not FHA-insured. The lender takes the risk, but they are still no-recourse loans just as the FHA-insured products are. But these are for loan amounts up to $4 million that we can do. We have multiple options on them, including options with a line of credit, options with flex pays so you can take your money out of your home over a period of time, rather than all at once.
So I think this is a new wave that we’re going to be seeing is more and more development of proprietary products, just to help fill in the gaps that the FHA-insured products don’t always cover.
Right. So a jumbo would cover from a minimum of say what?
Well it depends on what you’re looking at. For example, the jumbo products that we have will cover a non-FHA-approved condominium that is at least $500,000, where FHA products are up to $726,000. So it depends on where you’re looking and what type of property. But I would say for the most part, probably $800,000, $900,000 and higher, you could maybe look at a jumbo product. They’re not available in all states yet. We have to be approved in each state, but we’re working on that. We’re doing very well.
Great. Thanks, Steve, for joining us.
Okay. Thank you. Thanks for having me.
Retirement is filled with all sorts of risks including longevity, inflation, unexpected health care needs and costs, sequence-of-return risk and the list goes on.
To be sure, no one product or strategy can manage or mitigate all the risks that you may face in retirement. But a reverse mortgage can be used to manage many of the risks one might face in retirement.
See comments and editorial observations at the end of this article.
Ken Fisher, Special to USA TODAY Published 7:40 a.m. ET April 28, 2019 | Updated 12:39 p.m. ET April 28, 2019
TV commercials label reverse mortgages simple fixes for elderly homeowners needing cash – a financial easy button.
Sorry, there is no such thing.
Yes, reverse mortgages can be attractive. Folks older than 62 can unlock cash from their home without selling. They can simply draw monthly income, a line of credit or lump sum from their home equity, with no repayment until the home is no longer their primary residence. Staying current requires covering property taxes, homeowners insurance and maintenance.
But be careful. Read the fine print. This isn’t money you lend yourself. It’s a loan using your home equity as collateral. That means interest, typically at a high rate, plus other fees and costs. Worse than paying that interest monthly, it compounds, magnifying what you owe. When you sell, you repay the principal plus all compounded interest.
Elderly retirees need their finances to be simple, clear and available until they die. Reverse mortgages’ ballooning costs can cut against those basic needs.
Reverse mortgage calculators show interest’s huge impact. Pretend you did one borrowing $2,000 per month for 10 years – $240,000 in total. At a 4.5% interest rate, your total due after 10 years would $303,530 – before fees. That’s $63,530 in interest alone. Bump it to 20 years of payments and your final bill is $779,160 – $480,000 in principal plus $299,160 in interest. Thirty years? You owe $1,524,468. Less than half of that, $720,000, is your principal. The majority is interest. The longer, the uglier – until your home’s entire value is the lender’s.
These loan amounts aren’t realistic for everyone. They’re illustrative, showing the key risk: underestimating your life expectancy, living far longer than you anticipate, and ending up aged and broke, unable to meet late-life health expenses. If you’re in great health with a good family history, you could live into your 90s or beyond. Planning for a longer life is key to not exhausting your money.
Reverse mortgages often do the opposite, with perverse incentives. The longer you live, the bigger the lender wins, while your compounding interest burden balloons. Do you really want to be cash-strapped and in debt while trying to fund assisted living or other late-life care?
Some disagree, arguing reverse mortgages can insure against depleting your savings before you die, working alongside an investment portfolio. They can. This view rightly considers folks’ assets in totality, rather than in buckets, avoiding a common error.
But it requires the elderly to invest well. Are you a strong investor? Will you be? Are you willing to risk being forced to sell your house late in life to cover a ginormous compounded interest debt, hoping there is enough left to live off of? At an age when most people need simplicity and ease, this seems unwise.
Beware products charging big fees for something you can do easily with cheaper, more simple investments. If you’re younger, save now and invest in your 401(k), reaping compound growth’s rewards rather than having them work against you. Stay invested throughout retirement without excessive binge-type withdrawals, and you should readily cover normal late-life expenses.
More security, less debt. Wouldn’t you rather have that control?
Ken Fisher is founder and executive chairman of Fisher Investments, author of 11 books, four of which were New York Times bestsellers, and is No. 200 on the Forbes 400 list of richest Americans. Follow him on Twitter: @KennethLFisher.
See USA Today’s take on the Reverse Mortgage back in 2016. You’ll have to decide on your own which one of these stories is “Fake News”. Obviously, one is and one isn’t — posted in the same publication three years previous.
How to tell if a reverse mortgage is right for you
Deborah Kearns, Published 7:02 a.m. ET Oct. 24, 2016 USA Today.
After Eileen Redden inherited her idyllic childhood home last year, she knew she wanted to live out her days there. Enamored with the 1945 Cape Cod in Bayside, N.Y., she threw herself — and her savings — into renovating it.
But soon after Redden had spent considerable money on improvements, her business-coaching firm lost a top client, and she felt the financial pinch.
With retirement looming, Redden, 63, needed another source of income. Today, she’s breathing easier with a reverse line of credit that allows her to pull money from her house as she needs it. Being able to stay in the home she loves while tapping its equity for a financial cushion was a win-win, Redden says.
“The key to deciding if a reverse mortgage is right for you is finding the right company to work with,” says Redden, who did extensive research before contacting American Advisors Group based in Orange, Calif., which specializes in reverse mortgages. “My loan officer took the time to listen to my financial goals, and there was no pressure or sales pitch.”
Redden is one of 58,000 people who took out a home equity conversion mortgage in 2015, according to the National Reverse Mortgage Lenders Association. An HECM is a federally insured reverse mortgage through the Federal Housing Administration. HECMs account for nearly all reverse mortgages in the U.S.
If you’re nearing retirement or already there, and you’re worried you won’t have enough money, a reverse mortgage might be a smart strategy.
How a reverse mortgage works
Reverse mortgages are the opposite of a traditional home loan in that they allow homeowners 62 and older to access their home’s equity without paying a monthly mortgage payment or taxes on the proceeds, says Chad Nicholson, a mortgage broker with American Financing in Aurora, Colo.
The FHA’s requirements to apply for a reverse mortgage include that you must be at least 62, that your home is your primary property and you live in it full time, and that you have no delinquent federal debts.
A reverse mortgage isn’t free money; you have to repay the loan when you sell the home or when you or your spouse no longer live in it, Nicholson notes. However, your surviving heirs won’t be on the hook to repay the loan. They’ll still receive any equity beyond the owed loan amount when they sell the home.
The amount of money you receive is based on a sliding scale of life expectancy; the older you are, the more you can pull out.
All of these reasons make a reverse mortgage a safer option than a home equity line of credit or a personal loan, both of which typically come with higher interest rates and stiff penalties if you miss a payment, Nicholson says.
“In retirement, it’s all about having cash flow flexibility and living a simpler way of life,” Nicholson says.
What it costs
One of the drawbacks of a reverse mortgage is the high financing costs. Borrowers can expect to pay up to 6% of their home’s appraised value in fees, including a mortgage insurance premium, third-party fees for closing costs, a loan origination fee and a loan servicing fee. Typically, you can roll most of these fees into your loan.
Also, there is a mandatory $125 financial counseling fee required by the FHA.
When should you use one?
For many Baby Boomers, Social Security checks are the only source of income in retirement, averaging just $1,230 a month, according to a study by the University of Wisconsin.
The research found that two-thirds of Baby Boomers who were employed in the private sector have no retirement income aside from Social Security, while having less than $25,000 in savings and investments. That breeds fear and uncertainty for many seniors, says Wade Pfau, professor of retirement income at the American College of Financial Services.
“Retirees are affected by a lot more risk, and they’re more vulnerable to market volatility,” Pfau says. “That’s where a reverse mortgage is a useful retirement income tool if you plan to stay in your home long enough to recoup the [loan] costs.”
If you’re a big spender, taking out a reverse mortgage could add to the problem. Don’t forget you’re reducing your home’s equity, which is important if you plan to leave the property behind as part of your estate. In other words: Be responsible with how and when you use the loan proceeds, or a reverse mortgage could cause more problems than it solves, Pfau says.
How to spot a reverse mortgage scam
Scammers use a lot of different tactics to trick homeowners into unscrupulous deals. Paul Fiore, executive vice president of retail lending at American Advisors Group, one of the largest reverse mortgage lenders in the country, offers a list of gut checks as you evaluate reverse mortgage offers:
Does the lender take time to understand your situation and educate you? If someone is trying to rush you into a decision without taking the time to explain things and offer education, that’s a red flag.
Does the lender allow you to choose your own reverse mortgage counselor, or does it try to select one for you? Every potential borrower must undergo independent reverse mortgage counseling with an FHA-approved HECM counselorbefore applying for the loan. The lender must provide a list of third-party resources that offer this counseling. If the lender doesn’t give you a list or pressures you to select a specific counselor, move on.
Is the lender asking you for money upfront? Lenders may talk to prospective clients and take preliminary information about their financial situation, but they cannot process an application or obligate the homeowner to specific costs without the homeowner undergoing independent counseling and showing proof of attendance.
Are you feeling pressured to sign loan application documents before you’re ready? Ask a lot of questions and don’t sign anything until you feel confident and satisfied that you have all the answers you need to make an informed decision.
The views and opinions expressed in this column are the author’s and do not necessarily reflect those of USA TODAY.
This story in USA Today on the Reverse Mortgage ran supportive of Reverse Mortgages back in 2016. “Gotta believe somebody”, says Warren Strycker, Financial Professional and an advocate of the Reverse Mortgage for more than a dozen years. “Fisher has his own reputation to uphold and continues to downgrade other products to accumulate his riches. A little Fake News is added to make it more interesting.”
While the goal of saving in a person’s working years that Fisher lays out is one that should be sought after, the goal as stated in Fisher’s column doesn’t acknowledge the realities faced by many retirees, says Reverse Market Insight President John Lunde.
“The author is a longtime investment business professional and highly successful if the Forbes 400 list is to be believed,” says Lunde. “In this case he’d be well served to further educate himself on this product adjacent to his field of expertise and take another draft on his opinion piece with a more comprehensive understanding of the repayment requirements.”
For those interested, John Lunde’s background to support this argument with Fisher, is not unsubstantiated: Following is Lunde’s credentials to support his remarks.
“John K. Lunde is an expert in financial analysis and investment modeling in a range of industries, including reverse mortgage, investment management, real estate settlement services and wireless telecommunications. John draws on deep experience in the reverse mortgage industry and extensive relationships with leaders at top lenders, servicers and investors in the space to focus RMI’s product development and sales in productive niches for clients.
“Prior to founding RMI in March 2007, John led the Business Metrics & Analysis team at Financial Freedom to deliver comprehensive ongoing internal performance analysis across all lines of business in the company: Marketing, Sales, Operations and Servicing. John has previously worked at AT&T Wireless, Cendant Settlement Services and MetaMarkets.com and holds a Bachelor of Science degree in Business Finance from California State University San Bernardino.”
WE INVITE YOUR TRUST. “The TOOL they sell is one whose time is coming, and people who refuse even to consider a reverse mortgage in the coming years may do themselves a disservice.” (Merton). https://gofinancial.net/2019/03/love-them/
Introduction According to recently-released data from the Census Bureau and Bureau of Labor Statistics (BLS), the percentage of retirement-age Americans in the labor force has doubled since 1985, from its all-time low of 10 percent in January of that year to 20 percent in February 2019.1
To understand who is continuing to work and why, we gathered data on retirement-age Americans’ incomes, health, and activities from the Census Bureau, Bureau of Labor Statistics, and Centers for Disease Control (CDC), finding: The share of retirement-age Americans in the labor force has doubled since its all-time low in 1985.
As of February 2019, over 20 percent of Americans aged 65 or older are working or looking for work, double the all-time low of 10 percent who were in the labor force in 1985. College-educated adults are the fastest growing workforce segment among retirement-age adults, pushing up incomes for older workers.
The share of adults that are 65 years or older and working that have at least a college degree increased from 25 percent in 1985 to 53 percent in 2019. This pushed up the average real income of retirement-age workers by 63 percent during this time period, from $48,000 to $78,000.
Improved health has been a key driver of this increase in labor force participation. Of Americans aged 65 or older and working or looking for work, 78 percent report being in good health or better, up from 73 percent in 1997 and 69 percent in 1985.
As a result, more retirement-age people can work: 77 percent feel no Older Americans in the Workforce | 2 Findings The share of retirement-age Americans in the labor force has doubled since its alltime low in 1985. As of February 2019, over 20 percent of Americans aged 65 or older are working or looking for work, double the 10 percent who were in the labor force in 1985.
To understand trends on work, we analyzed data from the Current Population Survey (CPS), a monthly survey jointly sponsored by the Census Bureau and BLS.2 The survey records, among other data, information about Americans’ work, incomes, and educations. As of February 2019, over 20 percent of Americans aged 65 or older are working or looking for work.
This level represents a 57-year high and a doubling from its lowest recorded value of 10 percent in 1985. The BLS expects this upward trend to continue in the near term, estimating that 13 million Americans aged 65 or older will be in the labor force by 2024.3
Crucially, this increase in retirement-age Americans who are working has been driven by an increase in paid work, not unpaid volunteer work. To analyze trends in paid versus unpaid work, we assessed data from the CDC’s National Health Interview Survey (NHIS), an annual cross-sectional survey of the health and health behaviors of 87,500 adults in the United States.4 We found that, whereas the portion of retirement-age Americans working for pay has climbed steadily, the portion doing unpaid work has hovered around 1 percent since 2001, the first year the NHIS began distinguishing between paid and unpaid work.
Nevertheless, the profile of work done by retirement-age Americans can vary as they enter transition periods between their careers and retirement: Researchers have documented arrangements such as part-time work, bridge jobs, and phased retirement that make the path to full retirement less abrupt.5
In addition, the jobs in which Americans are concentrated change: Older Americans are more likely to work in white-collar professions and retail, whereas younger Americans are more likely to work in physically demanding fields like manufacturing.6 FIGURE 1. Labor Force Participation (65+ Americans) 0% 5% 10% 15% 20% 25% 1985 1990 1995 2000 2005 2010 2015 Percentage of 65+ Americans in Labor Force Source: Current Population Survey Older Americans in the Workforce | 3 College-educated adults are the fastest growing workforce segment among retirement-age adults, pushing up incomes for older workers.
The share of adults that are 65 years or older and working that have at least a college degree increased from 25 percent in 1985 to 53 percent in 2019. This pushed up the average real income of retirement-age workers by 63 percent during this time period, from $48,000 to $78,000. Older Americans in the labor force earn more than their younger counterparts, and this gap has widened over time. On average, retirement-age Americans who are still working earn $78,000 in personal income, around 63 percent above where they stood in 1985, after adjusting for inflation. In comparison, working Americans below 65 earn on average $55,000 in personal income, 38 percent more than in 1985. As a result, the proportion of older Americans’ family income attributable to older Americans’ wages—as opposed to income from assets or younger family members’ wages—has increased over time.7 Over time,
Americans aged 65 and over who are working have become more educated as a group. Over half now have some sort of college degree—defined as associate’s, bachelor’s, or advanced degree—versus just one quarter in 1985. More educated subsets of the 65-and-over population have higher labor force participation rates in general and have also seen higher growth in labor force participation.
Retirement-age Americans are feeling healthier than ever. More than three out of four Americans aged 65 or older report being in good, very good, or excellent health, and this proportion has grown steadily over the past 35 years. This improved health means that retirement-age Americans experience fewer limitations in what they can do: 67 percent experience no limitations in any sort of activity—up from 60 percent in 1997. Notably, improved health has resulted in a greater ability to work into old age: While the percentage of Americans aged 65 or older who report being able to work at all has only increased modestly, retirement-age Americans increasingly feel they can do any work they want. A full 77 percent report no limitations in the kind of work they can do, compared with 71 percent in 1997.
Conclusion In summary, the percentage of retirement-age Americans who are working has doubled since 1985. This trend has been especially pronounced among highly-educated segments of the population, which has pushed up the average income of this group at a rate disproportionately higher than their younger peers. Improved health has been a key driver of this increased labor force participation, as retirement-age Americans are experiencing fewer work-related activity limitations. FIGURE 4. Self-Reported Health and Ability to Work 50% 55% 60% 65% 70% 75% 80% 85% 90% 95% 100% 1985 1990 1995 2000 2005 2010 2015 Self-Reported Health (65+ Americans)
Self-reported health good or better No limitations in any activities 50% 55% 60% 65% 70% 75% 80% 85% 90% 95% 100% 1997 2002 2007 2012 2017 Ability to Work (65+ Americans) Able to work No limitations in kind of work Source: National Health Interview Survey Older Americans in the Workforce |
First-of-its-kind study identifies large, neglected ‘middle market’ for seniors housing and personal care needs
54% of middle-income U.S. seniors will not be able to meet yearly costs of $60,000 for assisted living rent and other costs, even if they committed 100% of their annual financial resources
Government and industry interventions urgently needed to meet needs of projected 14.4 million middle-income people over age 75, many with multiple chronic conditions
ANNAPOLIS, MD, April 24, 2019 — Demographic shifts in the United States over the next decade will nearly double the number of middle-income seniors ages 75 and over—more than 14 million people—lacking the financial resources to afford seniors housing with supportive personal care services, a new study shows.
The study, published today by the journal Health Affairs and also scheduled to appear in its May 2019 edition, identifies a vast new ‘middle market’ for the seniors housing and care industry and underscores the need for government and private sector actions to ensure middle-income seniors can afford the housing and care they will need.
The study was conducted by researchers at NORC at the University of Chicago, with funding provided by the National Investment Center for Seniors Housing & Care (NIC), with additional support from AARP, the AARP Foundation, the John A. Hartford Foundation, and The SCAN Foundation.
“We still have a lot to learn about what the emerging ‘middle market’ wants from housing and personal care, but we know they don’t want to be forced to spend down into poverty, and we know that America cannot currently meet their needs,” said Bob Kramer, NIC’s founder and strategic advisor. “The future requires developing affordable housing and care options for middle-income seniors. This is a wake-up call to policymakers, real estate operators and investors.”
Most Middle-Income Seniors Won’t Be Able to Afford Seniors Housing in 2029
Researchers found that more than half of (54%) of middle-income seniors would not have enough assets to cover projected average annual costs of $60,000 for assisted living rent and other out-of-pocket medical costs a decade from now, even if they generated equity by selling their home and committing all of their annual financial resources. That figure rises sharply, to 81 percent, if middle-income seniors in 2029 were to keep the assets they built up in their home but commit the rest of their annual financial resources to cover costs associated with seniors housing and care.
Said another way, only 19 percent of these ‘middle-market’ seniors are projected to have the financial resources to afford housing and care in 2029 if they don’t sell their home to use the equity for seniors housing.
These significant financial challenges are expected to coincide with many middle-income seniors seeking seniors housing and care properties due to deteriorating health and other factors, such as whether a family member can serve as a caregiver. The study projects that by 2029, 60 percent of U.S. middle-income seniors over age 75 will have mobility limitations (8.7 million people), 67 percent will have three or more chronic conditions (9.6 million people), and 8 percent will have cognitive impairment (1.2 million people). For middle-income seniors age 85 and older, the prevalence of cognitive impairment nearly doubles.
According to the study, the ‘middle market’ for seniors housing and care in 2029 will be more racially diverse, have higher educational attainment and income, and smaller families to recruit as unpaid caregivers than seniors today. Over the next 10 years, growth in the number of women will outpace men, with women comprising 58 percent of seniors 75 years old or older in 2029, compared to 56 percent in 2014.
Public and Private Sectors Have Roles to Play in Meeting Needs of ‘Middle Market’
“In only a decade, the number of middle-income seniors will double, and most will not have the savings needed to meet their housing and personal care needs,” said Caroline Pearson, senior vice president at NORC at the University of Chicago and one of the study’s lead authors. “Policymakers and the seniors housing community have a tremendous opportunity to develop solutions that benefit millions of middle-income people for years to come.”
Seniors housing in the United States is paid out of pocket by seniors with sufficient assets. A relatively small percentage of Americans have long-term care insurance to defray the costs. For seniors with the lowest incomes, Medicaid covers housing only in the skilled nursing setting, but increasingly also covers long-term services and supports in home and community-based settings. Programs such as low-income housing tax credits have helped finance housing for economically-disadvantaged seniors.
Researchers say there is an opportunity for policymakers and the seniors housing and care sector to create an entirely new housing and care market for an emerging cohort of middle-income seniors not eligible for Medicaid and not able to pay for housing out of pocket in 2029.
The analysis suggests that creating a new ‘middle market’ for seniors housing and care services will require innovations from the public and private sectors. Researchers say the private sectors can offer more basic housing products, better leverage technology, subsidize ‘middle-market’ residents with higher-paying residents, more robustly engage unpaid caregivers, and develop innovative real estate financing models, among other options.
They say government can create incentives to build a robust new market for middle-income seniors by offering tax incentives targeted to the ‘middle market,’ expanding subsidy and voucher programs, expanding Medicare coverage of non-medical services and supports, creating a Medicare benefit to cover long-term care, and broadening Medicaid’s coverage of home and community-based services.
“This research sets the stage for needed discussions about how the nation will care for seniors who don’t qualify for Medicaid but won’t be able to afford seniors housing,” said Brian Jurutka, NIC’s president and chief executive officer. “This discussion needs to include investors, care providers, policymakers, and developers working together to create a viable middle market for seniors housing and care.”
The National Investment Center for Seniors Housing & Care is a non-profit organization that supports access and choice in seniors housing and care through its industry-leading research and analytics. In addition to researching the growing ‘middle market,’ NIC collects and analyzes quarterly data on seniors housing and care and convenes national conferences that bring together healthcare leaders, investors, property owners and operators, and others to discuss trends and innovations in seniors housing and care.
# # #
“All seniors want to live in affordable, safe and supportive housing, and more than 19 million older adults are unable to do so. We must act now to implement innovative solutions – including robust aging-in-community efforts – to accommodate what is sure to be an increasing demand for housing that meets the needs of older adults.”
Lisa Marsh Ryerson, President
“The data are a powerful call for bold and immediate cross-sector action to create affordable options for age-friendly housing. As more people live longer with mobility limitations, chronic conditions and cognitive impairment, we must have housing that fits our budget and care needs.”
Terry Fulmer, President
John A. Hartford Foundation
“This study shows we are woefully unprepared to accommodate a growing population of often-overlooked older adults who won’t be able to afford daily living supports within 10 years. Now is the time to understand their unique needs and develop solutions that appreciate their health and socio-economic status.”
Bruce Chernof, MD, President and CEO
The SCAN Foundation
Editor’s Note: “Hmmmmmmm. HECM advisors have been blowing this horn for awhile so this doesn’t come as a surprise here at Gofinancial.net, where we have been preparing to help those with home equity, carry their later years at home where they want to be if possible,” says HECM financial professional Warren Strycker. “We’ve been waiting for this acknowledgement, knowing we were expected to perform when it is clearly obvious for all to see. We expect to be busy helping those who see the hand writing on the wall. Others will find reasons to criticize HECM unfairly and fall into their own trap — sad, I’d say.”
Of course, for the loan to make sense, the borrower must be at least 62 and should be committed to remaining in the home for a number of years, ideally using the loan as a means to age in place.
If this is the case, a reverse mortgage can be a beneficial financial planning tool for more well-off borrowers in a number of ways.
First, as part of taking the loan, a borrower’s original mortgage balance must be paid, therefore eliminating their monthly mortgage payment and freeing up cash, which is clearly beneficial for a retiree living on a fixed income.
Second, a borrower can use the proceeds from the loan to fund expenses and delay taking Social Security. This maximizes the benefit one gets from Social Security, as the later you draw it, the more money you can access.
Third – and this is the strategy most often touted by retirement researchers – borrowers can establish a growing reverse mortgage line of credit to drawn upon when needed. (without cost).
The idea is to use the credit line as a safety net in the event funds are needed but your stock portfolio or other assets are down. This way, borrowers can allow their assets to rebound, using the reverse mortgage proceeds instead to cover expenses.
Wade Pfau, a well-known retirement researcher and professor of Retirement Income at the American College of Financial Services, said studies have proven that using a reverse mortgage as a last resort offers the least benefit.
“For someone who ends up needing [the loan] as a last resort, they could have surely created more line of credit to help at that point by setting up the reverse mortgage earlier on in retirement and letting the line of credit grow until it is needed,” Pfau explained. “This is why last-resort strategies end up looking the worst in financial planning research about reverse mortgages.”
Jamie Hopkins, director of retirement research at Carson Group, said that a proactive strategy is especially important when it comes to home equity.
“One problem with waiting to deploy home equity toward the end of retirement is that home equity grows more slowly than other investable assets in general,” Hopkins explained. “Most homes just keep pace with inflation and provide no real return over it, and many senior-owned homes actually see a decline in value because seniors don’t always keep up with the newest and best home features and remodels.”
Instead, both Pfau and Hopkins say establishing a HECM line of credit earlier on can help a retiree better manage their resources.
“A HECM or other line of credit can provide cash flow and spending flexibility for retirees. This needs to be the focus,” Hopkins said. “Can using a reverse mortgage or line of credit improve the client’s life? If the answer is yes, then it should be explored.”
Hopkins added, though, that it’s important to fully understand the terms of the loan.
“On the flip side, reverse mortgages are a form of borrowing, so all costs and downsides also need to be understood,” he said.
Pfau agreed with an early deployment strategy.
“The line of credit creates many opportunities to help manage the new types of risks retirees face, such as the amplified impacts of market volatility caused by the sequence of returns,” Pfau said.
“The reverse mortgage can help to protect the investment portfolio from this risk in any number of ways, such as reducing the early retirement distribution rate to make mortgage payments, managing the delay of Social Security benefits, or coordinating portfolio distributions with reverse mortgage proceeds to cover a retirement spending goal,” he added. “It’s all about creating the opportunity for greater line of credit growth by the time it is needed.”
Source: ABC News 04/23/19 — Editor’s Note: See footnote for our take on this:
The nation’s Social Security program is running out of money with benefits on track to be reduced by around 2035 unless Congress steps in, according to a report released Monday by the Trump administration.
The prediction is somewhat better than last year’s annual assessment delivered to Congress, when the government predicted a reduction of benefits a year earlier in 2034.
The government also concluded Monday that Medicare’s hospital insurance trust fund will run out of money in 2026. That’s on par with last year’s assessment.
“Lawmakers have many policy options that would reduce or eliminate the long-term financing shortfalls in Social Security and Medicare,” according to an administration statement. “Lawmakers should address these financial challenges as soon as possible.”
The viability of America’s 84-year-old Social Security program has become an urgent question for politicians looking to court voters in next year’s election.
President Donald Trump has repeatedly vowed not to touch the popular program or Medicare, the health insurance program for seniors. But his 2020 budget proposed spending less on both programs over the next 10 years, including some $26 billion on Social Security programs and hundreds of billions trimmed from Medicare. Administration officials insisted that the cuts wouldn’t impact benefits and the cost savings would be found by rooting out fraud and changing how the Medicare pays providers like hospitals.
House Democrats have vowed to block the budget proposal from being enacted.
“Americans pay into these essential programs throughout their working lives, and they expect to receive the benefits they’ve earned,” said Rep. Richard Neal of Massachusetts, the Democratic chairman of the House Ways and Means Committee.
Options to fix the program could include increasing the payroll tax, raising the retirement age or modifying the formula that determines how people receive their benefits. Some 94% of workers participate in Social Security.
One House bill would expand benefits for individuals, implement a payroll tax to earnings that are more than $400,000, and lower taxes for some recipients, among other things.
Rep. John Larson, D-Conn., who serves as the chairman of the House subcommittee that oversees Social Security and is a co-sponsor of that bill, said the report “underscores why it is so important that Congress take action now to prevent cuts from occurring in 2035.”
“With 10,000 Baby Boomers becoming eligible for Social Security every day, and with people facing a retirement crisis after still not fully recovering wealth lost during the Great Recession, the time to act is now,” Larson said in a statement.
Nancy Berryhill, acting Social Security commissioner, said the program was able to buy more time before it depletes its reserves because of a decline in people receiving money for disability. Since last year’s estimate, the trust funds supporting Social Security increased by $3 billion in 2018 to a total of $2.895 trillion in reserves.
“Disability applications have been declining since 2010, and the number of disabled-worker beneficiaries receiving payments has been falling since 2014,” she said in a statement.
But even with that extra cash on hand and plenty of political support, the cost of the program has struggled to keep pace with the cost of paying out benefits for some 174 million Americans and their 63 million beneficiaries.
“Social Security’s total cost is projected to exceed its total income (including interest) in 2020 for the first time since 1982, and to remain higher throughout the remainder of the projection period,” the report found.
The assessment was completed by Berryhill, along with Treasury Secretary Steven Mnuchin, Health and Human Services Secretary Alex Azar and Labor Secretary Alexander Acosta.
Editor’s Note: As usual, we promote HECM mortgages to back up the uncertainty of Social Security as a primary income source. “Yes, Martha, you can use your home equity to fill the gaps.” In basketball terms, “you gotta make your free throws”.
Press coverage around reverse mortgages has grown more positive in recent years as new research has helped to explain how they can improve the prospects of an overall retirement income plan. However, a lingering question remains about the costs of reverse mortgages. Costs can be high, which leaves people wondering how their benefits can be justified.
In isolation, reverse mortgages can look expensive, and one might question the motivations of those researchers who argue that reverse mortgages can add value. But reverse mortgages should not be viewed in isolation. They are a piece of a larger puzzle that retirees are trying to solve. Reverse mortgage costs can be offset by gains elsewhere in the overall financial plan. To show this, I’ll create an example to illustrate how a reverse mortgage, by protecting the investment portfolio in retirement, creates a net positive result despite its costs.
The power of a reverse mortgage to help preserve an investment portfolio in retirement can be viewed in any number of ways. For instance, a reverse mortgage could be used to refinance a traditional mortgage to avoid making mortgage payments in the key early years of retirement; it could be used to build a bridge to support the delay of Social Security benefits without taking excess distributions from an investment portfolio; or it could be used to coordinate distributions from an investment portfolio to avoid creating greater pressure on the portfolio when markets are looking bleak.
I’ll show an example of the last point, as this is where most of the research about reverse mortgages has focused, starting with Barry and Stephen Sacks’ seminal article1 on reverse mortgages published in 2012.
For the example, I’ll assume a 65-year old retiree who has $1 million in an IRA and a home worth $200,000. The home is fully paid off. She uses a 50/50 asset allocation, rebalanced annually and divided between the S&P 500 and intermediate-term U.S. government bonds. I’ll use historical market returns from 1966 to 1995. This is a valuable series of data to use because it was the years that gave the financial planning world the 4% rule-of-thumb for retirement spending. Over those years, one could withdraw just 4.038% of their retirement date investment assets and sustain that level of spending with inflation adjustments for 30 years without depleting the assets. I’ll also assume that the home’s value grows at the Case-Shiller Home Price Index returns over that period.
The idea is to treat the retiree as retiring at present and facing current rules and costs for IRAs and reverse mortgages, but we test their retirement with a market return sequence from the historical data. On the reverse mortgage side, because LIBOR rates are not available for this period, I will approximate them using one-year constant maturity Treasury rates and 10-year Treasury bond yields. The historical data for stocks, bonds and inflation are provided by Morningstar; the one-year Treasury rates are from the Federal Reserve; and the Shiller-Case home price returns and the 10-year Treasury yields are provided by Robert Shiller’s website.
In the first scenario, the retiree does not use a reverse mortgage. She takes a $40,388 dollar distribution from her $1 million IRA balance in the first year of retirement and adjusts those distributions for inflation in subsequent years over a 30-year retirement period. As this was the historical sequence that triggered the 4% rule, her IRA balance is reduced to $396 (effectively $0) after 30 years. Her home value has grown over retirement to be worth $992,270 at the end. The combined net worth she has created for heirs at the end of retirement is $992,666. The full details are provided in the Scenario 1 table below.
Retiree does not use a HECM reverse mortgage
HECM Loan Balance
Net Worth: IRA + Home – Loan
Next, in Scenario 2, she uses a reverse mortgage. In particular, at age 74, which corresponds to January 1975 in the series of market returns we are using, the retiree opens a reverse mortgage to cover age-74 spending. Her reasoning is that in the previous two years, the stock market dropped 15% and 26%, respectively. Her IRA balance is $851,784, down approximately 15% from its initial retirement level. With inflation, her age-74 IRA distribution would be $65,781, which is 7.7% of her remaining portfolio balance. This is getting to be on the high side and it would be nice to provide some relief for the investment portfolio during this stressful market period. I did not model the RMD, but if she does not have other IRA assets outside what we focus on, she could take her RMD and immediately reinvest it into a taxable account to keep the stock holdings intact.
Her home is worth $307,354 as she finishes her 73rd year. Her reverse mortgage will be based on the 10-year Treasury rate of 7.5% at that time, along with a 0.5% ongoing mortgage premium and a lender’s margin of 2.5%. The loan balance growth is based on the 0.5% mortgage premium, 2.5% lender’s margin and the variable one-year Treasury rate. The full retail fees to set up the reverse mortgage include a $5,074 loan-origination fee, a $6,147 upfront mortgage insurance premium and $2,500 of closing costs. This total of $13,721 in fees, which will surely create some “sticker shock,” will be financed into the loan balance of the reverse mortgage. As for spending, because reverse mortgage dollars are proceeds from a loan, they are not taxable income like her IRA distributions. Assuming a 22% marginal tax rate, she needs only $51,309 from the reverse mortgage to cover her age-74 spending, since the rest of the IRA distribution would be used to pay taxes. With fees, her total reverse mortgage spending at age 74 is $65,030. The Scenario 2 table below shows this analysis.
Retiree uses a HECM reverse mortgage to protect investment portfolio
HECM Loan Balance (Amount Due)
Net Worth: IRA + Home – Loan
By sourcing the age-74 retirement distribution from the reverse mortgage, the portfolio was protected from further decline at this key point in retirement. Rather than entering into a downward spiral that left the portfolio essential depleted by age 95 as in Scenario 1, the portfolio was able to recover in Scenario 2 and $817,851 remained at the end of the retirement horizon. The portfolio balance is $817,455 larger in the reverse mortgage scenario 2, and this portfolio gain has been the key benefit overlooked by those saying reverse mortgages are too expensive.
Meanwhile, the reverse mortgage loan balance does grow substantially throughout retirement. The loan balance grows to $633,784, which is nearly 10-times as large as the proceeds used. This is where opponents of reverse mortgages would step in and say they are too expensive.
However, money is fungible and we need to assess the household’s overall situation. Our retiree’s net worth is the IRA balance plus the home’s value, less the loan balance due, which is $1,176,336. This is $183,670 larger than the net worth in Scenario 1 without the reverse mortgage.
This is the key. If heirs wish to keep the home, they could repay the loan balance and still have $183,670 more left over as an additional windfall provided by this strategy.
Again, those only doing a partial analysis will focus on the reverse mortgage costs and conclude that the reverse mortgage is just too expensive. But even after repaying the loan balance, the net legacy value of assets is still $183,670 greater than in Scenario 1, which does not include the reverse mortgage. These gains are because the reverse mortgage protects the investment portfolio from incurring excessive distributions.
The reverse mortgage has helped to preserve a legacy for heirs. It must not be viewed in isolation, but rather as how it contributes to an overall plan. The value of the reverse mortgage can mostly be found in its diversifying benefits for investment assets in retirement. Taking distributions from investments can dig a hole that is hard to recover from, and wise use of a reverse mortgage protects the investment portfolio in retirement. Aside from pointing out relevant caveats, those writing negatively about reverse mortgages are treating them in isolation rather than viewing them as part of a whole financial plan. They are missing this value that recent research has clarified.
To learn more about reverse mortgages, please find the second edition of my book about them, which is available through Amazon.
Wade D. Pfau, Ph.D., CFA, is a professor of retirement income in the Ph.D. program in financial services and retirement planning at The American College in Bryn Mawr, PA. He is also a principal and director at McLean Asset Management and the Chief Planning Scientist for inStream Solutions. He actively blogs at RetirementResearcher.com. See his Google+ profile for more information.
Editors Note: “This is posted to add to the discussion about the future of Social Security/Medicare/Medicaid and how that will impact senior budgets down the line. Readers can believe what they want from this discussion. Any overhaul of the “entitlements” will doublessly impact senior incomes negatively as the new left now claim a piece of Medicare for everyone. As a believer in the HECM income fix, we believe it is time to open our minds to the use of home equity as a hedge against erosion of what is referred to as “entitlements”. Many will argue that they were paid for with SS deductions over many years believing they would be claimed at the 62+ mark and don’t refer to them as entitlements.”
October 16, 2018, 8:15 AM MST Updated on October 16, 2018, 11:16 AM MST
Leader sees little chance of tackling debt without Democrats
GOP passed tax cut bill adding more than $1 trillion in debt
Senate Majority Leader Mitch McConnell says the budget deficit is “very disturbing.”
Senate Majority Leader Mitch McConnell blamed rising federal deficits and debt on a bipartisan unwillingness to contain spending on Medicare, Medicaid and Social Security, and said he sees little chance of a major deficit reduction deal while Republicans control Congress and the White House.
“It’s disappointing, but it’s not a Republican problem,” McConnell said Tuesday in an interview with Bloomberg News when asked about the rising deficits and debt. “It’s a bipartisan problem: unwillingness to address the real drivers of the debt by doing anything to adjust those programs to the demographics of America in the future.”
McConnell’s remarks came a day after the Treasury Department said the U.S. budget deficit grew to $779 billion in Donald Trump’s first full fiscal year as president, the result of the GOP’s tax cuts, bipartisan spending increases and rising interest payments on the national debt. That’s a 77 percent increase from the $439 billion deficit in fiscal 2015, when McConnell became majority leader.
McConnell said it would be “very difficult to do entitlement reform, and we’re talking about Medicare, Social Security and Medicaid,” with one party in charge of Congress and the White House.
“I think it’s pretty safe to say that entitlement changes, which is the real driver of the debt by any objective standard, may well be difficult if not impossible to achieve when you have unified government,” McConnell said.
Shrinking those popular programs — either by reducing benefits or raising the retirement age — without a bipartisan deal would risk a political backlash in the next election. Trump promised during his campaign that he wouldn’t cut Social Security, Medicare or Medicaid, even though his budget proposals have included trims to all three programs.
McConnell said he had many conversations on the issue with former President Barack Obama, a Democrat.
“He was a very smart guy, understood exactly what the problem was, understood divided government was the time to do it, but didn’t want to, because it was not part of his agenda,” McConnell said.
“I think it would be safe to say that the single biggest disappointment of my time in Congress has been our failure to address the entitlement issue, and it’s a shame, because now the Democrats are promising ‘Medicare for all,”’ he said. “I mean, my gosh, we can’t sustain the Medicare we have at the rate we’re going and that’s the height of irresponsibility.”
McConnell said the last major deal to overhaul entitlements occurred in the Reagan administration, when a Social Security package including an increase in the retirement age passed under divided government.
McConnell said he was the GOP Senate whip in 2005 when Republican President George W. Bush attempted a Social Security overhaul and couldn’t find any Democratic supporters.
“Their view was, you want to fix Social Security, you’ve got the presidency, you’ve got the White House, you’ve got the Senate, you go right ahead,” McConnell said. The effort collapsed.
The Office of Management and Budget has projected a deficit in the coming year of $1.085 trillion despite a healthy economy. And the Congressional Budget Office has forecast a return to trillion-dollar deficits by fiscal 2020.
During Trump’s presidency, Democrats and Republicans agreed to a sweeping deal to increase discretionary spending on defense and domestic programs, while his efforts to shrink spending on Obamacare mostly fell flat.
Republicans in December 2017 also passed a tax cutprojected to add more than $1 trillion to the debt over a decade after leaders gave up on creating a plan that wouldn’t increase the debt under the Senate’s scoring rules.
At the time, McConnell told reporters, “I not only don’t think it will increase the deficit, I think it will be beyond revenue-neutral.” He added, “In other words, I think it will produce more than enough to fill that gap.”
Senate Minority Leader Chuck Schumer of New York responded Tuesday by saying McConnell and other Republicans “blew a $2 trillion hole in the federal deficit to fund a tax cut for the rich. To now suggest cutting earned middle-class programs like Medicare, Social Security and Medicaid as the only fiscally responsible solution to solve the debt problem is nothing short of gaslighting.”
House Minority Leader Nancy Pelosi of California said in a statement, “Under the GOP’s twisted agenda, we can afford tax cuts for billionaires, but not the benefits our seniors have earned.”
Yes, you already knew this but now you know for sure — there are fixes on the way (if you are willing to learn how to live happily with less and …) if you have home equity and are wiling to use it with Home Equity Conversion Mortgage (HECM).
by Teresa Ghilarducci, Bernard L. and Irene Schwartz Professor of Economics at The New School for Social Research and Director of SCEPA’s Retirement Equity Lab (ReLab); Michael Papadopoulos, ReLab Research Associate; and Anthony Webb, ReLab Research Director
Inadequate retirement accounts will cause 8.5 million middle-class older workers and their spouses – people who earn over twice the official poverty line of $23,340 (if single) or $31,260 (if coupled) – to be downwardly mobile, falling into poverty or near poverty in their old age. • Two in five – or 40% – of older workers and their spouses will be downwardly mobile in retirement.
KEY FINDINGS Table 1: Projected Downward Mobility in Retirement of Individuals in Older, Working Households Sources: Authors’ calculation using the 2014 Survey of Income and Program Participation. Notes: The sample comprises workers ages 50-60 in 2014 and their spouses or partners. They are considered to be downwardly mobile if their household labor market earnings exceed 200% of the Federal Poverty Level (FPL),1 but their household is projected to have income below 200% of FPL in retirement at age 62. Suggested Citation: Ghilarducci, T., Papadopoulos, M. & Webb, A. (2018).
“40% of Older Workers and Their Spouses Will Experience Downward Mobility in Retirement.” Schwartz Center for Economic Policy Analysis and Department of Economics, The New School for Social Research, Policy Note Series.
If workers ages 50-60 retire at age 62, 8.5 million people are projected to fall below twice the Federal Poverty Level, with retirement incomes below $23,340 for singles and $31,260 for couples.
2.6 million of 8.5 downwardly mobile workers and their spouses will have incomes below the poverty level – $11,670 for an individual and $15,730 for a two-person household.
A typical single worker in the middle 40% of earners (earning $25,000-$64,000) can expect an annual income of $18,000 if they retire at age 62, the most common age of retirement.
Couples in the middle 40% of earnings (earning $44,000-$105,000) can expect an annual income of $29,500 if workers retire at age 62. 8.5 million who will be near poor or poor in retirement 37 million older workers and spouses 21.5 million who are not near poor while working.
POLICY NOTES | Downward Mobility in Retirement: 8.5 Million Middle-Class Workers Will Be Poor Retirees Older workers – ages 50-60 and their spouses – are projected to be downwardly mobile in retirement if their household income is currently more than twice the Federal Poverty Level (more than $23,340 for a single individual, and more than $31,260 for a couple in 2014), but is projected to be less than twice the Federal Poverty Level in retirement.
This study treats claiming benefits as synonymous with retirement.
2 The projection assumes that workers retire at age 62 because more than half of workers claim benefits at that age.
3 Because working longer is often touted as a solution to the We project two in five older workers and their spouses will be downwardly mobile in retirement. If workers currently ages 50-60 retire at age 62, 8.5 million people – or 40 percent of these workers and their spouses – are projected to become downwardly mobile, with incomes falling below twice the Federal Poverty Level ($23,340 for a single individual, and $31,260 for a couple) when they retire. Of these, 2.6 million will have incomes of less than the poverty level, or $11,670 for an individual and $15,730 for a two-person household.
PROJECTING DOWNWARD MOBILITY retirement savings crisis, we test the sensitivity of our findings to an alternative assumption that workers retire at age 65 (less than 10 percent retire after that age). We assume that households contribute to their retirement plans until retirement and earn returns on their retirement savings and other financial assets. At retirement, households use their retirement and non-retirement financial wealth to purchase an inflation-indexed lifetime income.
The appendix explains the projection’s assumptions in detail. 8.5 MILLION MIDDLE-CLASS OLDER WORKERS ARE PROJECTED TO EXPERIENCE DOWNWARD MOBILITY IN RETIREMENT
Table 2: Projected Downward Mobility of Older Working Households in Retirement Threshold Assumed Retirement Age Individuals (million) Share Poor 62 2.6 8% 65 1.2 4% Near Poor 62 8.5 40% 65 5.0 19% Source: Authors’ calculation using the 2014 Survey of Income and Program Participation. Notes: The sample comprises workers ages 50-60 in 2014 and their spouses or partners. They are considered to be downwardly mobile if their household labor market earnings exceed the given threshold, but their household is projected to have income below the threshold in retirement.
Numbers of individuals are rounded to the nearest 50,000 and percentages to the nearest percentage point. FEB 18 3 economicpolicyresearch.org | SCEPA WORKING LONGER WILL NOT PREVENT DOWNWARD MOBILITY Due to poor health and lack of employment opportunities, many older workers are unable to delay retirement. However, even if workers delay retirement until age 65, 5 million people will be downwardly mobile and 1.2 million will fall below the Federal Poverty Level.
Delaying couples’ retirement to age 65 increases their projected average annual retirement income by just $8,500, to $38,000. Of the additional $8,500, $6,000 comes from Social Security, $500 from DB pensions, and $1,500 from DC pensions (Table 3). Working longer may help some, but it is not the solution to the retirement savings crisis.
SINGLE HOUSEHOLDS ARE EVEN WORSE OFF DOWNWARD MOBILITY IS CAUSED BY INADEQUATE RETIREMENT SAVINGS
Table 3: Projected Annual Retirement Income of Coupled Households Ages 50-60 Income Source % with income Income if retiring at 62 Income if retiring at 65 All sources 100% $29,500 $38,000 Social Security 100% $23,000 $29,500 DC Savings 66% $4,000 $5,500 DB Pension 18% $1,500 $2,000 Financial Assets 17% $1,000 $1,000 Source: Authors’ calculation using the 2014 Survey of Income and Program Participation Notes: Dollar amounts are means (in 2014 dollars) for the middle 40 percent of earning households (coupled households earning $44,000-$105,000) rounded to the nearest $500. Means are not conditional on having income source. Percentages are rounded to the nearest percentage point. We project the retirement income of single older workers because single households are a large (24 percent) and growing share of older households.
Rising divorce rates among older couples often cause the less wealthy partner to be left in a precarious financial situation.
Single older workers in the middle 40 percent of earners will receive on average $18,500 in retirement income, $14,000 of which will come from Social Security.
An additional $3,000 is expected from DC pensions, $1,000 from DB pensions and $500 from financial assets. Delaying retirement from age 62 to age 65 provides an additional $6,500 in retirement income, of which most ($4,000) comes from Social Security (Table 4).
Table 4: Projected Annual Retirement Income of Single Workers Ages 50-60 Income Source % with income Income if retiring at 62 Income if retiring at 65 All sources 100% $18,500 $25,000 Social Security 100% $14,000 $18,000 DC Savings 55% $3,000 $5,000 DB Pension 12% $1,000 $1,500 Financial Assets 11% $500 $500 Source: Authors’ calculation using the 2014 Survey of Income and Program Participation Notes: Dollar amounts are means (in 2014 dollars) for the middle 40 percent of earning households (coupled households earning $44,000-$105,000) rounded to the nearest $500.
Means are not conditional on having income source. Percentages are rounded to the nearest percentage point. If older workers retire at age 62, couples in the middle 40 percent of the income distribution will receive on average $29,500 in retirement income. Of this total, the largest share comes from Social Security, which contributes $23,000. In contrast, income from defined contribution (DC) and defined benefit (DB) retirement plans average $4,000 and $1,500, respectively, reflecting low levels of coverage and small account balances.
Only 17 percent4 of these couples own nonretirement financial assets, such as money market accounts, CDs, government securities, municipal and corporate bonds, stocks, or annuities. Averaged over all households in the middle 40 percent, yearly income from these sources is a mere $1,000 (Table 3).
POLICY NOTES | Downward Mobility in Retirement: 8.5 Million Middle-Class Workers Will Be Poor Retirees should strengthen Social Security – the most effective vehicle for preventing old-age poverty.
But we also need a strong second tier. Only 65 percent of workers nearing retirement have any retirement wealth (an IRA or 401(k) balance or a defined benefit pension from a current or past job), and the median balance of those with IRA or 401(k) plans is $92,000, which will provide a lifetime income of a mere $300 a month.5 Guaranteed Retirement Accounts (GRAs) are individual accounts requiring employers and employees to contribute with a fair and effective refundable tax credit provided by the government.
GRAs provide a safe, effective vehicle for workers to accumulate personal retirement savings over their working lives.7 1. The Federal Poverty Level for a single-person household in 2014 was $11,670, and $15,730 for a two-person household. 2. Labor market outcomes for those who work after claiming are typically modest and decline rapidly with age. 3. Munnell and Chen (2015).
Financial Assets do not include bank savings accounts. Although bank savings accounts are widespread, their balances are too low to alter retirement income.
Ghilarducci, Papadopoulos, and Webb (2017). 7. Ghilarducci and James (2018). 8. Clingman and Burkhalter (2017). Clingman, M., & Burkhalter, K. 2017. Scaled factors for hypothetical earnings examples under the 2017 Trustees Report assumptions. Social Security Administration, Actuarial Note 2017.3. Ghilarducci, T., & James, T. 2018. Rescuing retirement. Columbia University Press: New York. Ghilarducci, T, Papadopoulos, M, and Webb, A. 2017. Inadequate Retirement Savings for Workers Nearing Retirement. Schwartz Center for Economic Policy Analysis Policy Brief. Johnson, R.W. 2017. Health and income inequality at older ages. Paper presented at the meeting of the International Associate of Gerontology and Geriatrics, San Francisco. Munnell, A.H., & Chen, A. 2015. Trends in Social Security claiming. Center for Retirement Research at Boston College, Issue Brief Number 15-8. POLICY
RECOMMENDATIONS Insufficient savings in DC plans and low coverage by DB plans are among the main drivers of the projected downward mobility of today’s older workers and their households. Working longer, tested here by delaying the assumed retirement age from 62 to 65, will still leave many people with insufficient income. Moreover, for many workers, delaying retirement is not possible.
Some cannot handle the physical demands of work at older ages,5 and some who can work have difficulty finding jobs offering decent pay. Workers forced to delay retirement due to inadequate savings will lose deserved retirement time, and some may die before they retire.
All workers deserve a dignified, financially secure retirement after a lifetime of work. Policymakers ENDNOTES REFERENCES FEB 18 5 economicpolicyresearch.org | SCEPA APPENDIX This brief uses Wave 1 the 2014 Survey of Income and Program Participation (SIPP) and the supplemental questions in the Social Security module. Workers’ individual retirement incomes are projected and summed into households.
Retirement income is the sum of income from Social Security (including spousal benefits), defined benefit (DB) pensions, annuitized defined contribution (DC) savings, and annuitized wealth from other financial assets. For households with two workers ages 50-60, for our age 62 scenario, we assume each spouse retires at age 62, project each spouse’s income to that age, and sum.
For our age 65 scenario, if the younger worker is age 62 or younger at this point, we use their projected retirement income for age 62. If the younger worker is ages 63-65, they receive their projected retirement income at that age. For spouses who have already retired, we take their current reported incomes from each income source. Only heads of household and their spouse (if any) are included as part of a household, and if there are multiple households living together they are treated as separate observations. Because this survey only asks respondents to report their earnings from the most recent year, we must construct profiles of career earnings for each worker.
The Social Security Administration constructs scaled earnings factors for ages 21- 64, and we use these factors to construct ageearnings profiles for each worker.8 The 35 highestearning years in these synthetic age-earnings profiles are then used to project Social Security income in retirement.
We consider all DB plans from current and previous jobs to project DB pension income in retirement. For pensions from current jobs, we assume the worker stays at their current job until retirement, and receives benefits equal to 1.5 percent of the average of their last five years of earnings at the job (using the synthetic age earnings profiles) per year of job tenure. For pensions from past jobs, we assume the same accrual rate of 1.5 percent.
For the purposes of determining earnings when transitioning out of past jobs, workers are assumed to have left past jobs at the same age and same nominal pay as their starting pay on their current job. A worker’s DC savings is the sum of the balances in their savings in 401(k), 401(k)-equivalent accounts, and IRA savings, from current and past jobs.
We project income post-retirement from retirement savings with generous assumptions: (1) workers earn a 4.5 percent real return on investments net of fees; (2) workers contribute 6 percent of earnings to their 401(k) with an employer match of 3 percent; and (3) workers purchase an inflation-indexed annuity when they retire. Although people rarely purchase an inflation-indexed annuity, it provides a higher income than commonly used drawdown strategies and is the only financial product that provides an inflation-indexed lifetime income.
Thus, the assumption yields a conservative estimate of the share of households financially unprepared for retirement. We assume August 2017 annuity rates. We make similar generous assumptions for income from other financial assets. A worker’s financial assets include the value of money market accounts, CDs, government securities, municipal and corporate bonds, stocks, and equity in annuities.
We assume workers earn a 4.5 percent real return on their investments, and purchase an inflation-indexed annuity when they retire. We report the mean retirement income separately for the middle 40 percent of single earners (earning $25,000-$64,000) and for coupled households (earning $44,000 to $105,000). This provides estimates that are close to the median while allowing for individual components of retirement income to be additive.
POLICY NOTES | Downward Mobility in Retirement: 8.5 Million Middle-Class Workers Will Be Poor Retirees.
Los tiempos han cambiado y también las reglas de jubilación. Obtenga consejos prácticos de Robert Merton. Cuando se trata de planificar su jubilación, hay muchos aspectos que debe tener en cuenta. La mayoría de nosotros queremos que esos años dorados estén llenos de eventos emocionantes, una forma de vida cómoda y, por supuesto, que la salud lo respalde.
Pero, ¿hay una forma correcta de acercarse a la jubilación? La jubilación solía ser algo que no tenía muchas variaciones; las personas ingresaron a la fuerza laboral en sus 20 años, se jubilaron en sus 60 y vivieron otros 10 años en el retiro. Los programas de seguridad social y las pensiones estaban bien establecidos y esperados.
Pero el mundo ha cambiado. Las personas ingresan a la fuerza laboral más tarde, se jubilan más tarde, viven más tiempo y el impacto que tiene la jubilación en el bienestar de las personas es diferente al de antes.
La situación financiera de la mayoría de las personas también ha cambiado, ya que las personas están menos preparadas financieramente para prepararse para una jubilación incluso cuando no hay un programa de seguridad social garantizado.
La sabiduría convencional ha sido que las personas deberían tener $ 1 millón de dólares escondidos para cuando se retiren. Si bien ese número puede parecer una gran cantidad de dinero para la mayoría en algún momento, los nuevos datos muestran que puede que ya no sea suficiente.
La edad promedio de jubilación de 63 años no ha cambiado, pero la expectativa de vida es de aproximadamente 85 años, lo que significa que debe planear pasar 22 años en jubilación, de acuerdo con la CNBC. No hay almuerzo gratis. Si parece demasiado bueno para ser verdad, probablemente no lo sea.
El laureado Laurel Robert C. Merton sabe que los tiempos están cambiando rápidamente. Es padre de tres hijos y profesor de finanzas en el MIT. A lo largo de los años, ha mantenido una estrecha vigilancia sobre los desarrollos financieros relacionados con la jubilación y ha tenido muchas conversaciones financieras con la generación más joven.
Se puede desglosar en términos simples y matemáticos. Debido a que las personas viven más tiempo, 40 años de trabajo que solían soportar 50 años de consumo ahora tienen que sustentar 60 años. ¿Qué significa esto para la persona promedio?
“La aritmética es igualmente simple”, dice Merton. “O bien, si desea trabajar el mismo número de años que sus padres, es mejor que viva con un nivel de vida más bajo.
Si tiene el beneficio de vivir más tiempo, va a trabajar por más tiempo “.” Si tuviera una regla, un principio financiero que tenía que enseñar a todos los niños “, dice.
“Les enseñaría que no hay almuerzo gratis. Si parece demasiado bueno para ser verdad, es probable que no lo sea ”. Vea lo que dice Merton sobre la Hipoteca de Conversión del Patrimonio de la Vivienda.
Times have changed and so have the rules for retirement. Get practical tips from Robert Merton here. Nobel Prize economist recipient Robert C Merton explains how Reverse Mortgage is wise for families.
When it comes to planning for your retirement, there are many aspects to keep in mind. Most of us want those golden years to be filled with exciting events, a comfortable way of living and of course that health supports it. But, is there a right way to approach retirement?
Retirement used to be something with not a whole lot of variance to it; people entered the workforce in their 20’s, retired in their 60’s and lived another 10 years in retirement. Social security programs and pensions were well established and expected.
But the world has changed. People are entering the workforce later, retiring later, living longer and the impact retirement has on people’s well-being is different than it was before.
The financial situation of most people has also changed, as individuals are less financially equipped to prepare for a retirement even when no social security program is guaranteed.
The conventional wisdom has been that people should have $1 million USD stashed away for when they want to retire. While that number may have seemed like a huge amount of money for most at one point, new data shows that it may no longer be sufficient. The average retirement age of 63 hasn’t changed but life expectancy has, sitting at about 85, meaning that you should plan to spend 22 years in retirement, according to CNBC.
There’s no free lunch. If it looks too good to be true, it’s probably not true.
Nobel Laureate Robert C. Merton knows that times are changing fast. He’s a father of three and a professor of finance at MIT. Over the years, he has kept a close eye on financial developments around retirement and has had many financial conversations with the younger generation.
It can be broken down in simple terms and math. Because people live longer, 40 years of work that used to support 50 years of consumption now has to support 60 years. What does this mean for the average person?
“The arithmetic is equally simple,” says Merton. “Either, if you want to work the same number of years as your parents, you better live at a lower standard of living. If you’ve got the benefit of living longer, you’re going to work longer.”
“If I had one rule, one finance principle that I had to teach to every kid,” he says. “I would teach them there’s no free lunch. If it looks too good to be true, it’s probably not true.”
See what Merton says about the Home Equity Conversion Mortgage.
Stephanie Moulton, una profesora de la Universidad Estatal de Ohio, ha investigado las hipotecas. CréditGreg Marinero para The New York Times
Stephanie Moulton, una profesora de la Universidad Estatal de Ohio, ha investigado las hipotecas. 26, 2014 Los ejecutivos de las compañías de hipotecas revertidas saben mucho acerca de los sentimientos de los consumidores con respecto a la herencia. Después de todo, están en el negocio de alentar a los estadounidenses mayores a drenar el capital ahora de las casas que pueden transmitir a sus herederos en el futuro.
Pero se atreven a citar a una de estas personas como fuente en esta publicación, como hice la semana pasada. , y este es el tipo de reacción vigorosa que proviene de los lectores: “Ni siquiera puedo imaginar un escenario en el que una hipoteca revertida deba considerarse nada más que radioactiva”, dijo un comentario. Y: “No son más que una estafa que nadie con ningún sentido común debería caer en la cuenta “, según otro.”
Estos vehículos son la provincia de los prestamistas más inescrupulosos y serían prohibidos en una sociedad más civilizada “, dijo un tercero. Estas son cosas fáciles de decir cuando uno tiene suficientes ahorros o pensiones y los ingresos de la Seguridad Social para sobrevivir. Pero dado que las casas de los estadounidenses mayores valen, en promedio, más que sus otros ahorros combinados, existe una inevitablemente escandalosa sobre las hipotecas revertidas.
A medida que más personas se jubilen en las próximas décadas con ahorros modestos y sin pensión privada, necesitarán recuperar parte del capital de la vivienda durante sus vidas cada vez más largas. Ha sido fascinante ver crecer a la industria de hipotecas inversas, o intentar – en años recientes. Por un lado, siempre se ha llenado con compañías sin nombre que usan celebridades de segundo nivel para tratar de vender a las personas mayores en el producto.
Los vendedores no éticos se involucraron en todo tipo de mal comportamiento, persuadieron a los clientes para que retiraran el capital de sus hogares e invirtieran en productos financieros inadecuados o dejaran a los cónyuges fuera de la escritura de la propiedad de una manera que les causara la pérdida de los hogares más tarde. Compañías de marcas como Bank of America, Wells Fargo y MetLife abandonaron el sector con horror.
Pero este verano, BNY Mellon volvió al negocio como administrador y asegurador de los préstamos. Y varios investigadores respetables han respaldado ciertos usos de las hipotecas revertidas; uno incluso ha ido tan lejos como para invertir dinero en un prestamista de hipotecas inversas de nueva creación.
Una serie de cambios legales y regulatorios destinados a reducir el número de incumplimientos también han entrado en vigencia o están a punto de hacerlo. Muchas de las personas que ingresan o examinan el negocio de hipotecas revertidas ahora describen su interés en él como una especie de conversión. Incluso hace media década, Michael Gordon, el jefe de retiro y soluciones estratégicas de BNY Mellon, nunca habría sugerido que la compañía se acercara al producto.
Las compañías que consideran a un cliente potencial generalmente no verificaron para asegurarse de que el prestatario pudiera pagar los impuestos a la propiedad y los pagos del seguro del hogar. Tampoco descalificaron a muchos prestatarios para quienes el préstamo simplemente no era adecuado. Eso está cambiando ahora, y el comunicado de prensa de BNY Mellon sobre sus intenciones estaba repleto de conversaciones felices sobre la compra de préstamos que los prestamistas habían suscrito de manera “socialmente responsable”. El Sr. Gordon se apresura a notar que el producto no es adecuado para todos.
Pero también cree que muchos jubilados con carteras de inversión que son la mitad en acciones y la mitad en bonos no son conscientes de su verdadera asignación de activos. Después de todo, su capital propio es un activo también. Muchas personas tienen una gran cantidad de esto, y quienes compraron una casa de retiro en 2005 saben muy bien cuánto puede desaparecer. “Tenemos esta idea como seres humanos de que vivimos al final de la historia y todos los hechos son conocidos, ” él dijo.
“Pero mi percepción aquí es que todavía estamos descubriendo cómo se supone que su hogar debe encajar con el resto de sus activos”. A lo largo de los años, probablemente haya visto a Alicia H. Munnell citada en esta publicación. Ex miembro del Consejo de Asesores Económicos del presidente Clinton y veterana de 20 años del Banco de la Reserva Federal de Boston, ahora dirige el Centro para la Investigación de la Jubilación en el Boston College.
Si bien el centro recibe apoyo financiero de una larga lista de compañías financieras, incluyendo un prestamista de hipotecas revertidas, nunca pensó en hacer una apuesta de seis cifras en ninguna de ellas. Pero recientemente, la Sra. Munnell de 72 años y su esposo, que probablemente debería estar volviéndose más conservador con su dinero a medida que se levantan en años, invirtió $ 150,000 en un nuevo prestamista de hipoteca inversa llamado Longbridge Financial. “Nunca antes había hecho algo así en toda mi vida”, dijo.
“Creo en eso tanto que utilicé parte de la herencia de mis hijos para invertir”. Su convicción no le produce ninguna alegría particular. “Cuando miro hacia adelante, no veo cómo la gente va a tener suficiente, realmente no”, dijo. Las personas pasan su vida adulta pagando sus hipotecas, y las personas con pensiones a menudo pudieron evitar el uso de ese capital en la jubilación. “Nuestra evaluación sigue adelante
Executives from reverse mortgage companies know plenty about consumers’ feelings around inheritance. After all, they’re in the business of encouraging older Americans to drain equity now from homes they may pass on to their heirs in the future.
But dare to quote one of these people as a source in this publication, as I did last week, and this is the kind of vigorous reaction that comes from readers:
“I can’t even imagine a scenario where a reverse mortgage should be considered anything but radioactive,” said one comment.
And: “They’re nothing but a scam that nobody with any common sense should fall for,” according to another.
“These vehicles are the province of the most unscrupulous of lenders and would be outlawed in a more civilized society,” said a third.
These are easy things to say when you have enough savings or pension and Social Security income to get by. But given that older Americans’ homes are worth, on average, more than their other combined savings, there is a begrudging inevitability about reverse mortgages. As more people enter retirement in the coming decades with modest savings and no private pension, they’re going to need some of that home equity back during their increasingly long lives.
It’s been fascinating to watch the reverse mortgage industry grow up — or try to — in recent years. On one hand, it’s always been filled with no-name companies using second-tier celebrities to try to sell seniors on the product. Unethical salespeople engaged in all manner of bad behavior, persuaded customers to pull equity from their homes and invest it in inappropriate financial products or to leave spouses off the property’s deed in a way that caused them to lose the homes later. Name-brand companies like Bank of America, Wells Fargo and MetLife fled the sector in horror.
But this summer, BNY Mellon got back into the business as a servicer and securitizer of the loans. And several respectable researchers have endorsed certain uses of reverse mortgages; one has even gone so far as to invest money in a start-up reverse mortgage lender. A series of legal and regulatory changes intended to lower the number of defaults have also taken effect or are about to.
Many of the people entering or examining the reverse mortgage business now describe their interest in it as a sort of conversion. Even half a decade ago, Michael Gordon, BNY Mellon’s head of retirement and strategic solutions, would never have suggested that the company come near the product. Companies considering a potential customer generally did not check to make sure that the borrower would be able to afford property taxes and home insurance payments. They also did not disqualify many borrowers for whom the loan was simply not suitable.
That’s changing now, and BNY Mellon’s news release about its intentions was replete with happy talk about buying only loans that lenders had underwritten in a “socially responsible” manner. Mr. Gordon is quick to note that the product is not right for everyone. But he also thinks that many retirees with investment portfolios that are half in stocks and half in bonds are unaware of their true asset allocation. After all, their home equity is an asset too. Many people have an awful lot of it, and those who bought retirement homes in 2005 know all too well how much of it can disappear.
“We have this idea as human beings that we live at the end of history and all facts are known,” he said. “But my sense here is that we’re still figuring out how your home is supposed to fit with the rest of your assets.”
Over the years, you’ve probably seen Alicia H. Munnellquoted in this publication. A former member of the Council of Economic Advisers under President Clinton and a 20-year veteran of the Federal Reserve Bank of Boston, she now runs the Center for Retirement Research at Boston College. While the center receives financial support from a long list of financial companies, including a reverse mortgage lender, she’d never thought to make a six-figure bet on any of them.
But recently, the 72-year-old Ms. Munnell and her husband, who probably ought to be getting more conservative with their money as they get up in years, invested $150,000 in a new reverse mortgage lender called Longbridge Financial. “I’ve never done anything like this before in my whole life,” she said. “I believe in it that much that I used some of my children’s inheritance to invest.”
Her conviction brings her no particular joy. “When I look forward, I don’t see how people are going to have enough, I really don’t,” she said. People spend their adult lives paying off their mortgages, and those with pensions were often able to avoid using that home equity in retirement.
“Our assessment going forward is that it’s a luxury we’re not going to be able to afford,” Ms. Munnell added. “They are going to need money, and this is the place where the money is.”
As a reverse mortgage counselor for an affordable-housing nonprofit in Marion, Ind., a decade ago, Stephanie Moulton at first reflexively adopted the same biases many people have about the products — that they are evil. “But I got to meet a lot of consumers,” she said. “And this started to look like a financial instrument like any other.”
Roughly a decade later, she’s now an associate professor at the John Glenn School of Public Affairs at Ohio State University, publishing research on reverse mortgages. Her most recent work revealed that reverse mortgage consumers were not necessarily desperate people with no assets left aside from their home equity; their average credit scores looked a lot like other older Americans their age. She and two colleagues concluded that if federal regulators required borrowers with FICO credit scores below 580 to set some money aside for future property taxes and insurance premiums, defaults could fall by 45 percent.
At Harold Evensky’s financial planning firm, he and his partners have the types of clients that tend not to default on any of their debt. But they do worry a lot about people having to sell their investments when the markets have fallen, because that locks in losses.
Mr. Evensky hadn’t given reverse mortgages much thought over the years or wondered how they could help stabilize client portfolios. “Like most practitioners, my attitude was that I thought they were terrible and that the costs were usurious,” he said.
But as costs fell and some of the loan rules changed, two of Mr. Evensky’s colleagues at Texas Tech, where he teaches, decided to run the numbers. What the three realized and eventually published in The Journal of Financial Planning was that many retirees could benefit from paying the closing costs necessary to have a reverse mortgage line of credit (which lenders can’t close down, unlike home equity lines of credit) on standby for times when their investments have fallen. People could then borrow money via the reverse mortgage to live on, and repay it once markets recovered and they could get a better price for selling those investments. The net result is that retirement portfolios can last longer.
Mr. Evensky earns no money from recommending reverse mortgages, and he takes pains to be clear on how people should use the loans. “It’s strictly as a risk management tool, not as leverage or an investment vehicle,” he said. “It’s a way of allowing investors to have a long-term portfolio and not be forced to sell at the wrong times.”
Lenders have asked the well-respected Mr. Evensky to use his research in new releases, he said, and are prone to wanting to oversell it or extrapolate it to other uses. The industry, where loan originations have fallen roughly by half in recent years, has a slight whiff of desperation about it.
Still, over the next five or 10 years, more people are probably going to need these loans whether we like it or not. It could happen if they’re completely out of money, in which case they may use so much of their equity for living expenses that there may not be much left if they later need to sell the house and move to a nursing home. Others may want to upgrade their standard of living in their golden years (and worry little about leaving an inheritance, which is certainly their right). Or they may simply want some Evensky-style portfolio insurance.
Call the loans and the lenders and the executives who run them all the names you want. But the tool they sell is one whose time is coming, and people who refuse even to consider a reverse mortgage in the coming years may do themselves a disservice.
Of all the concerns impacting Americans’ retirement today, running out of money, maintaining their lifestyle and rising healthcare expenses continue to top the list. This according to the American Institute of CPAs (AICPA) Personal Financial Planning Trends Survey which was conducted August 20 through September 24, 2018 and includes responses from 631 CPA financial planners.
Running out of money is the top financial concern of clients planning for retirement, cited by 30 percent of CPA financial planners. This reflects an improvement from the AICPA’s 2016 survey, which found 41 percent of clients listing it as a top concern. This is likely due to the economy’s steady improvement over the last few years, with the stock market continuing to climb despite volatility. Clients worried about maintaining their current lifestyle and spending level (28 percent) in retirement was a close second financial concern. Stress from rising health care costs (18 percent) was a distant third. However, with medical costs forecast to continue growing throughout 2019, it is not surprising that this concern is up 7 percentage points from 2016.
COMMENT: Do they actually run out of money in retirement. Yes, as it turns out:
The HECM Reverse Mortgage offers help when money runs dry. Those with home equity can draw on it through a Government guaranteed loan which requires no payments in their lifetime while they keep taxes and homeowners insurance paid up. Contact veteran financial professional Warren Strycker at Patriot Lending for details. See contact information under “information” tab on home page of this website.
Send your answers to email@example.com and I will list them here. We’ve been fending off false remarks about HECM for more than a dozen years wondering where people get their ideas. Now, we know about FAKE NEWS, and why it happens. Do you?
Simply put, a #HECMHOUSE is your home invested in your lifestyle. Those who use their home equity to support retirement income is a step ahead of those who borrow with interest and make payments. A #HECMHOUSE has no need for mortgage payments so budgets are more fluid.
La nueva hipoteca inversa de HECM es una herramienta versátil de fondos de jubilación que se puede utilizar de muchas maneras. Aquí hay sólo algunos de ellos:
Pague su hipoteca a plazo para reducir sus gastos mensuales.
Vuelva a modelar su casa para adaptarse a las limitaciones del envejecimiento
Mantener una línea de crédito (que crece) para emergencias y sorpresas de salud.
Cubra los gastos mensuales y retenga otros activos mientras su valor continúa creciendo.
Cubrir los gastos mensuales y evitar vender activos a valores deprimidos.
Pagar el seguro de salud durante los años de jubilación anticipada hasta que sea elegible para Medicare a los 65 años.
Pague sus costos de Medicare Parte B y Parte D.
Combine los pagos de tenencia de la vida con el Seguro Social y los ingresos generados por los activos para reemplazar su salario y mantener su rutina mensual de pagar las cuentas de los nuevos ingresos.
Pague por la educación universitaria o profesional de sus hijos o nietos.
Mantenga una reserva de efectivo “standby” para pasar por los altibajos de los mercados de inversión y brindarle más flexibilidad
Combine los ingresos con la venta de una casa para comprar una casa nueva sin una hipoteca a plazo y pagos mensuales de la hipoteca.
Pagar por las necesidades de cuidado a largo plazo
Llene la brecha en un plan de jubilación causado por rendimientos menores a los esperados en sus activos.
Pague por cuidados a corto plazo en el hogar o terapia física después de un accidente o episodio médico.
Pagar por un plan de jubilación, plan de patrimonio o un testamento.
Convierta una habitación o sótano en una instalación de vivienda para un padre, pariente o cuidador envejecido.
Configure los arreglos de transporte para cuando ya no esté cómodo conduciendo.
Crear un apartado para pagar los impuestos de bienes raíces y seguros de propiedad.
Retrasar el cobro de los beneficios de la Seguridad Social hasta que alcance el límite a los 70 años.
Elimine las deudas de tarjetas de crédito y evite construir nuevas deudas de crédito.
Cubra los gastos mensuales entre trabajos o durante la transición de la carrera sin utilizar otros activos guardados.
Cubrir gastos y evitar las ganancias de capital, consecuencias fiscales de la venta de otros activos.
Compre tecnología relacionada con la salud que le permita vivir solo en casa.
Pague una cuenta de Uber o Lyft para que tenga movilidad y acceso a citas y actividades sociales.
Ayude a sus hijos adultos a través de emergencias familiares.
26. Utilice su banco de capital de la casa para comprar paneles solares. HAGA ELECTRICIDAD y ahorre a lo grande en servicios públicos, hasta un 85% de ahorro. No hay pagos HECM en su vida. 25+ MANERAS DE UTILIZAR UN HECM (Home Equity Release). https://gofinancial.net/2017/05/25-ways/…
¿Quieres hacer electricidad y ahorrar hasta un 85% en servicios públicos? Use el préstamo HECM y no realice pagos en su vida. Grandes ahorros en sus utilidades. Considera la energía solar en tu techo ahora. Utilice HECM para obtener el mayor apalancamiento. “Háblame”, dice Warren Strycker, veterano profesional, 928 345-1200.
La energía solar limpia y sostenible se está convirtiendo en una estrategia energética moderna y confiable con importantes ventajas financieras y medioambientales.
Facturas de energía más bajas que nunca subirán. Reduciendo nuestra dependencia de los combustibles fósiles. Asegurando un ambiente más limpio para que las generaciones futuras puedan disfrutar. Creación de empleos de calidad para los arizonenses en una industria global en expansión. Hay muchas razones por las que la energía solar se está convirtiendo en una opción energética de elección para los consumidores y empresas comerciales con conocimientos financieros y medioambientales. Otros beneficios a tener en cuenta:
Reducción de costes eléctricos.
Mayor valor de reventa para propiedades
Inversión con tasa de rendimiento garantizada que aumenta a medida que aumenta el costo de vida
Uso libre de culpa de la electricidad para mayor comodidad, eficiencia y conveniencia.
Contribuyendo a un planeta más limpio y saludable.
Escucha la historia solar en Arizona. Supera las tasas crecientes que tienes ahora para hacer “#SUNtricity” a una tarifa plana. Con un HECM, le costará poco o nada de su bolsillo, y “puedo recomendarlo”, dice Strycker. (928 345-1200)
“Sí, te puedo recomendar”, Warren Strycker
Si necesita un traductor, llame al 928 345-1200 y solicite hablar con Armando Pérez.
“Puedes mejorar tu nivel de vida”, Merton
De acuerdo con Robert Merton, los fondos con fecha objetivo son una manera excepcionalmente mala de ahorrar para la jubilación. Pero, dijo, las hipotecas revertidas son una herramienta poderosa, aunque en gran parte sin explotar, para que los jubilados mejoren su nivel de vida.
Merton es profesor de economía en M.I.T. y fue galardonado con el Premio Nobel de economía en 1997 por sus contribuciones al modelo de precios de opción de Black-Scholes.
Merton habló sobre los fondos con fecha objetivo durante su discurso de apertura el 26 de octubre en la conferencia nacional para clientes de BAM Advisor Services, un proveedor de gestión de activos llave en mano para más de 140 firmas de asesoría patrimonial conocidas colectivamente como BAM Alliance, celebrada en St. Louis. En otros lugares (por ejemplo, aquí), ha hablado sobre hipotecas inversas.
La idea de que el diseño de los fondos con fecha objetivo se basa únicamente en la edad de uno no pasa una “prueba mínima de sentido común”, dijo.
Según Merton, las hipotecas revertidas se convertirán en un “medio clave” de ahorro para la jubilación.
Veamos el análisis de Merton de esos dos productos.
El peligro de los fondos de fecha objetivo
Para cada producto de jubilación, dijo Merton, la medición del éxito debe ser el ingreso. El ingreso es cómo uno determina su nivel de vida deseado. No necesitas una suma principal para vivir, dijo. Necesita un cierto nivel de ingreso ajustado a la inflación.
En todas partes, excepto en el mundo de contribución definida (DC), el éxito de la jubilación se mide en ingresos, dijo. Por ejemplo, los planes de pensiones miden el éxito por su “estado financiado”, que en efecto es el grado en que el plan puede cumplir con los pagos de ingresos proyectados de sus participantes. Pero en el mundo de DC, que incluye fondos con fecha objetivo, el éxito se mide como objetivo principal.
“Tienes que establecer una meta y medir el progreso hacia ella de la manera correcta”, dijo Merton.
Sin embargo, los fondos con fecha objetivo tienen una fecha que Merton dijo “te hace sentir bien”. Sin embargo, recordó a la audiencia que los fondos objetivo para 2010 todavía existen, lo que debería hacer que uno cuestione la importancia de la fecha objetivo del fondo.
Más concretamente, Merton dijo que no hay objetivos en el prospecto de los fondos con fecha límite; Hay un proceso, que es el camino de planeo. La fecha, dijo, es la fecha en que el proceso se detiene.
La tecnología ha avanzado, dijo Merton, y mucho más es posible en términos de proporcionar asesoramiento y productos personalizados. El inconveniente es que la complejidad ha aumentado, y también la necesidad de un asesoramiento competente, según Merton.
Los fondos con fecha objetivo se vuelven más conservadores al aumentar la exposición a los ingresos fijos. Pero, dijo Merton, importa qué tipo de bonos tienen. Si le ponen en bonos nominales de tres a cinco años, por ejemplo, no lo protegen contra la inflación.
Su posibilidad de alcanzar un objetivo con una solución personalizada es mucho mayor que con una solución genérica.
Su crítica más estridente fue que los fondos con fecha límite carecen de personalización y se basan únicamente en la edad de uno (o, de manera equivalente, en el momento de la jubilación).
“Imagínese que recibió su consejo médico por edad, sin respetar el género”. Preguntó retóricamente: “¿Se conformaría con eso con sus recetas?”
“¿Por qué pensar que sería remotamente posible que una sola estadística, la edad, fuera lo suficientemente buena como para llevarlo a una jubilación decente?”, Preguntó Merton.
“Para mí eso no pasa la prueba mínima del sentido común”.
Eso es algo bueno para los asesores y la industria financiera, dijo. “Si la respuesta utilizando la edad era lo suficientemente buena, entonces toda esta industria tendría demasiados recursos dedicados a ella”.
“No estoy destrozando fondos de fecha objetivo”, dijo. “¿Pero por qué creerías que la edad era lo suficientemente buena?”
La promesa de hipotecas revertidas.
La tecnología puede haber fallado con respecto a los fondos con fecha límite, pero Merton fue mucho más optimista sobre la promesa de hipotecas revertidas. De hecho, dijo que la tecnología subyace a la promesa de hipotecas revertidas. Dijo que la creencia es una consecuencia del campo de la teoría del crecimiento, por la cual el economista Robert Solow ganó un Premio Nobel. Solow demostró que el crecimiento económico no está impulsado por el crecimiento de la población o las altas tasas de ahorro, sino por el progreso tecnológico. La tecnología nos permite obtener más del trabajo y el capital.
“Uno de los mayores problemas mundiales es cómo financiar la jubilación”, dijo Merton. “Se enfrenta a todos los países, grandes y pequeños”.
La buena noticia es que estamos viviendo más tiempo y teniendo vidas más largas y activas, dijo Merton. Esto es gracias a las mejoras en nutrición y ciencia médica. La distribución de esos beneficios no es igual, agregó, ya que los ricos obtienen una parte desproporcionada de esos beneficios.
Dijo que la tecnología hace posible una solución, y las hipotecas revertidas son una forma importante en que la innovación financiera puede resolver problemas a nivel mundial.
La mala noticia, según Merton, es que debemos pagar por nuestro consumo mientras trabajamos y durante la jubilación. La implicación de la longevidad significa que pasamos de una carrera laboral de 40 años y una jubilación de 10 años a una carrera de 40 años.
For the fifth year in a row, the 60 million people who depend on Social Security have had to settle for historically low increases. For the average recipient the adjustment adds up to a monthly increase of less than $4 a month.
Meanwhile, older Americans report that their household budgets jumped substantially last year, despite the lack of growth in their Social Security benefits, according to a new survey by The Senior Citizens League (TSCL).
“The gap between benefit growth and retiree costs was particularly pronounced due to rising prices of the most essential items in retirees’ budgets, — medical and food costs,” says Mary Johnson, TSCL’s Social Security and Medicare policy analyst. TSCL sent a letter this month to Congressional leaders calling upon them to enact legislation that would provide a modest boost to Social Security benefits.
Johnson discussed with FOX Business these additional findings from the survey, and what you need to know to adjust your household budget.
Boomer: To what did the survey attribute the substantial jump in household budgets for seniors?
Johnson: Two factors. Spending needs typically grow in retirement, and, an extremely low annual cost-of-living adjustment (COLA). Unfortunately the spending jump isn’t unusual, but a pattern that typically occurs in retirement. This is something we can try to plan for in retirement, but it’s also a trend that needs to be addressed by our elected lawmakers in order to maintain the adequacy of Social Security benefits for all Americans.
Over any retirement our needs change. We require more medical services and prescription drugs, our need for different housing and supports like transportation services grow, and life events, like caregiving, or the death of a spouse, have a big impact on spending.
Annual surveys conducted by The Senior Citizens League since 2014 confirm this. About 90 percent of survey participants report that their household budgets rose by at least $39 per month over the 12-month period, in each of the past four years. In each year, the largest percentage of survey participants — 37% in 2017 —report that monthly expenses rose by more than $119. This year survey participants said their biggest cost jumps were for medical expenses and food — two categories that are essential.
The second factor in addition to the typical trend of rising spending over time, are recent low annual Social Security COLAs. The COLA isn’t doing its job keeping pace with the inflation experienced by the majority of retirees.
Boomer: Why is there such a gap between retirees Cola and their spending?
Johnson: A major problem is the consumer price index (CPI) that the government uses to determine the annual boost. One would think that the CPI used to calculate COLAs for retirees would be based on the spending patterns of older people, but it is not. Instead, the COLA is determined by the growth in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). Younger working adults spend a much smaller portion of their income on medical costs, and spend more on transportation and gasoline, categories that have gone down dramatically in recent years. This tends to understate the inflation experienced by the majority of people receiving Social Security who spend more on medical costs and less on transportation and gasoline.
There is a better choice of CPI for calculating the COLA, the Consumer Price Index for the Elderly (CPI-E). It gives greater weight to healthcare and housing, two categories that form a bigger share of spending for older households. The CPI-E would for example have paid a COLA of 0.6 percent in 2016 instead of zero, and 1.5 percent this year instead of 0.3 percent.
Boomer: What can pre retirees do to prepare for the cost of living increases in their household budgets in retirement?
Johnson: Work out a household retirement budget, using spending records from several years back. Think ahead for big costs, like transportation needs, replacing a roof or appliances. Find professional help with the hardest part like planning for growing medical and housing costs in the later part of life. If you don’t have a financial advisor, check your local senior centers, or for classes in your area that can help. The National Council on Aging has a free online tool called “EconomicCheckUp” that’s a great way to get started.
Boomer: Are there any legislative proposals in the works that would boost Social Security benefits?
Johnson: Yes! The Social Security 2100 Act (H.R.1902) would not only keep the Social Security system solvent over the next 75 years and beyond, it would also boost benefits. The bill is estimated to provide both current and new beneficiaries with an average of about $300 more per year. The legislation would also base the Social Security COLA on the Consumer Price Index for the Elderly (CPI-E). According to my estimates, that would boost the current average monthly benefit about $75 after 20 years in retirement. The bill was introduced with the support of 156 original co-sponsors — more than any other comprehensive Social Security reform bill to date. TSCL believes the bill would go a long way in ensuring the retirement security that older Americans have earned and deserve.
Editor’s note: “With lots of talk these days about seniors running out of money in retirement, the following seems apt for input. For those with significant home equity, there’s a lot more money in the hopper to use. The questions are about the ethics of using the money you have. In time, that discussion will go mute when bills come due without enough income. That time is coming and so far there is nothing coming to stop it,” Warren Strycker, veteran financial professional.”
“You can improve your standard of living”, Merton
Target-date funds are an exceptionally bad way to save for retirement, according to Robert Merton. But, he said, reverse mortgages are a powerful – yet largely untapped – tool for retirees to improve their standard of living.
Merton is a professor of economics at M.I.T. and was awarded the Nobel Prize in economics in 1997 for his contributions to the Black-Scholes option-pricing model.
Merton spoke about target-date funds during his keynote speech on October 26 at the national conference for clients of BAM Advisor Services, a turnkey asset management provider for more than 140 wealth advisory firms known collectively as the BAM Alliance, held in St. Louis. In other venues (for example, here), he has spoken about reverse mortgages.
The idea that the design of target-date funds is based solely on one’s age doesn’t pass a “minimal test of common sense,” he said.
According to Merton, reverse mortgages will become a “key means” of saving for retirement.
Let’s look at Merton’s analysis of those two products.
The peril of target-date funds
For every retirement product, Merton said, the measurement of success should be income. Income is how one determines their desired standard of living. You don’t need a principal sum to live, he said. You need a certain level of inflation-adjusted income.
Everywhere, except in the defined-contribution (DC) world, retirement success is measured in income, he said. For example, pension plans measure success by their “funded status,” which in effect is the degree to which the plan can meet its participant’s projected income payments. But in the DC world, which includes target-date funds, success is measured as a principal target.
“You have to set a goal and measure the progress toward it the right way,” said Merton.
Target-date funds have a date, which Merton said “makes you feel good.” He reminded the audience, though, that the 2010-target funds still exist, which should cause one to question the meaningfulness of a fund’s target date.
More to the point, Merton said there are no goals in the prospectus of target-date funds; there is a process, which is the glide path. The date, he said, is the date that the process stops.
Technology has advanced, Merton said, and much more is possible in terms of providing customized advice and products. The downside is that complexity has increased, and so has the need for competent advice, according to Merton.
Target-date funds get more conservative by increasing exposure to fixed-income. But, Merton said, it matters what type of bonds they hold. If they put you in three-five year nominal bonds, for example, they don’t protect you against inflation.
Your chance of getting to a goal with a customized solution is much greater than with a generic solution.
His most strident criticism was that target-date funds lack customization and are based solely on one’s age (or, equivalently, the time to retirement).
“Imagine you got your medical advice by age, without respect to gender.” He asked rhetorically, “Would you settle for that for your prescriptions?”
“Why would think that it would be remotely possible that a single statistic – age – would be good enough to get you to a decent retirement?” Merton asked.
“To me that doesn’t pass the minimal test of common sense.”
That’s a good thing for advisors and the finance industry, he said. “If the answer using age was good enough, then this whole industry would have far too many resources devoted to it.”
“I’m not trashing target-date funds,” he said. “But why would you ever believe that age was good enough?”
The promise of reverse mortgages
Technology may have failed with respect to target-date funds, but Merton was much more optimistic about the promise of reverse mortgages. Indeed, he said technology underlies the promise of reverse mortgages. He said that belief is an outgrowth of the field of growth theory, for which the economist Robert Solow won a Nobel Prize. Solow showed that economic growth is not driven by population growth or high rates of saving, but by technological progress. Technology allows us to get more from labor and capital.
“One of the biggest global issues is how to fund retirement,” Merton said. “It is faced by every country – large and small.”
The good news is we are living longer and having longer active lives, Merton said. This is thanks to improvements in nutrition and medical science. The distribution of those benefits is not equal, he added, since the wealthy get a disproportionate share of those benefits.
Technology makes a solution possible, he said, and reverse mortgages are an important way that financial innovation can solve problems on a global basis.
The bad news, according to Merton, is that we must pay for our consumption while we work and during retirement. The implication of longevity means that we go from a 40-year working career and a 10-year retirement to a 40-year career and a 20-year retirement. The implication, approximately speaking, is that we must save 33% of our working earnings for retirement instead of 20%. Without reverse mortgages, the alternative, Merton said, is to reduce consumption or work longer.
If we can find ways to get more out of the assets we accumulate, Merton said, then we can enjoy greater longevity without sacrificing standard of living.
For the working middle class, the largest and sometimes only major savings and the largest single asset is the house in which they live, according to Merton. Reverse mortgages are ideally suited to un-tap that store of wealth.
However, Merton said, “reverse mortgage” is a terrible name. In Korea, he said, it is called a home pension. It is a practical way to use one’s house as a more efficient way to save for retirement.
In an agrarian economy, you gave the farm to your children and they looked after you. It does not work that way in an industrial economy, according to Merton. Houses get sold; children do not move in.
The house should be viewed as an annuity while you live in it and a financial asset that ultimately gets sold. A reverse mortgage gives up the financial asset when one doesn’t need it, in order to pay for other expenses during retirement that you do need.
Reverse mortgages provide liquidity based on the owners’ age and the value of house, in the form of a loan. Interest accrues on the loan. But no payments on loan are due until the owners leave the house.
Critically, Merton said, reverse mortgages are non-recourse loans. If the value of the house is less than the principal due at the time the owners move out, then there is no recourse.
In this sense, reverse mortgages are designed differently than traditional mortgage loans. Borrowers shouldn’t care about the rate of interest they will pay; their goal should be to maximize the amount of principal loaned.
Moreover, it doesn’t change one’s behavior. A reverse-mortgage user stays in their house.
“This is going to become one of the key means of funding retirement in the future,” Merton said.
The challenge, Merton said, is to implement it cost effectively and efficiently through communication and marketing. Funding is a challenge too, he added. “This is an engineering problem, not a science problem,” Merton said. “This can be done today.”
Also, Merton said a challenge remains in what one does when they get the principal. “If you spend it,” he said, “it defeats the purpose.”
One criticism of reverse mortgages is that it deprives one’s children of a bequest of the remaining value of the house. Merton’s response was that the potential for a bequest still exists with a reverse mortgage. It becomes more like a “lottery ticket” that is won under the most adverse circumstances (when one’s parents die). The children or heirs get an option (a call option) on the value of the house at the time of sale, to the extent that value exceeds the amount due on the reverse mortgage.
More broadly, though, Merton said retirees should place maintaining their own standard of living ahead of leaving a bequest. He said it is similar to the warning that airline attendants give with regard to the use of oxygen masks. They say to place the mask over your own mouth before that of your children.
“It doesn’t help if you can’t make it through retirement without your resources,” he said. “This is about having enough to have a decent retirement.”
Senior living is facing disruption on multiple fronts, but one trend in particular could be a game-changer: the increasing ability of older adults to remain independent and out of congregate housing until later in life.
This was a key finding of “The State of Senior Living: An Industry Grappling with Autonomy,” a new report from architecture firm Perkins Eastman. The survey gathered responses from about 200 industry professionals, mostly C-suite leaders with nonprofit providers.
Perkins Eastman has been conducting the survey on a biennial basis since 2015, but this was the first year that it included questions related to industry disruption. Specifically, Perkins Eastman identified four disruptive forces and asked respondents to rank them.
“Aging in the community — decentralized care and services” ranked as the biggest source of disruption, with 83% of respondents saying this is very or extremely impactful. Technology — ranging from artificial intelligence to virtual reality and home automation — came in next, with 76% of respondents ranking this as very or extremely impactful.
The other two disruptors were “third act,” which refers to alternative definitions of retirement, and paradigm shifts related to climate, politics and finance.
Ranking the Causes of Senior Living Disruption
The disruptive forces are intertwined, the report authors noted. For instance, technology will enable more aging in the community and decentralized care. Indeed, nearly 80% of respondents said that tech that allows people to be autonomous in their care, such as grocery delivery or wearable monitors, will be extremely or very impactful.
“The striking insight from this survey is the interest in alternatives and options that enable the individual to control their own destiny and chart their own path, whether by accessing services in the broader community or creating communities that provide more autonomy and self-directed control of their housing and health care needs,” the authors wrote.
Preferences of aging baby boomers appear to be driving this disruption. Nearly 70% of respondents said that the ability to stay at home and access services would be the most important consideration for boomers as they look for supportive housing.
Still, that number is down somewhat from the 2017 version of the survey, when 75% of respondents said that this would be the boomers’ No. 1 priority. Meanwhile, location has gained in importance as a consideration.
Twenty-six percent of respondents for the 2019 survey said that boomers will be most concerned with being in proximity to an urban location or town center. That’s up from 19% in 2017.
Already, some senior living providers are adjusting their operations and development strategies to account for this expected disruption.
An increasing number of senior living communities are being built in mixed-use, intergenerational developments with easy access to amenities. And smart home tech is being implemented in senior living units to support autonomy and, providers hope, extend length of stay.
The Perkins Eastman survey covered a range of topics in addition to industry disruption. Other notable findings include:
— 83% of respondents believe that reimbursement/health care reform will drive convergence of senior living and health care, up from 74% in 2017
— 59% of respondents said that traditional entry-fee life plan communities are endangered, up from 52% in 2017
— 66% of respondents said that centers for healthy living, or whole-person wellness, are more attractive now than in the past, up from 56% in 2017
On the HECM front, home financing for seniors wishing to downsize and stay independent is the HECM for Purchase scenario in which the borrowers sell their home and move into more manageable quarters. The benefit is a mortgage that has no payments and cash from the arrangement to support an independent lifestyle. See article below and contact veteran mortgage professional Warren Strycker in home page “information” tab for specifics.
En español | Saving for retirement takes a back seat to paying off significant debt for Americans ages 40 to 59, according to a recent survey by AARP and the Ad Council.
The survey is being released as part of a new campaign to encourage more Americans to save for retirement. The effort features public service advertisements (PSAs) and resources available on AceYourRetirement.org. The PSAs introduce viewers to Avo℠, a digital retirement coach who helps break down planning for retirement savings in simple, easy-to-follow steps.
Paying off a significant debt — such as a credit card, student loan or mortgage — was cited by 33 percent of survey respondents as their most important priority, followed by 21 percent who say that building up their retirement fund was most pressing and 11 percent who viewed building up an emergency fund as their top goal.
“Whether we like it or not, Americans are responsible for their financial security in retirement,” says Jean Setzfand, AARP senior vice president for programs. “We know that 7 in 10 Americans approaching retirement (55-64 years old) have less than a year’s income saved for retirement.”
The survey also found that more than half (53 percent) of those who did not save for retirement in 2018 didn’t do so because they couldn’t afford it after meeting such basic expenses as housing and food. An additional 37 percent say unexpected expenses prevented them from saving for retirement.
While the survey clearly indicates a need for adults ages 40 to 59 to step up their savings, it also showed that 69 percent of respondents put aside some money for retirement in 2018. Among those savers, almost half (48 percent) set a retirement savings goal, something that Setzfand says leads to real savings. More than 8 in 10 (84 percent) of those who set a retirement savings goal last year did save some money for retirement in 2018, compared to just 6 in 10 (60 percent) of those who did not set a goal.
Other strategies used by retirement savers last year included:
Increasing contributions to employer-sponsored retirement plans to get the full match (27 percent);
Putting extra income, raises or bonuses directly into retirement savings (18 percent);
Cutting back on everyday expenses and spending (17 percent).
For the survey, 1,611 adults ages 40 to 59 were interviewed between Nov. 28 and Dec. 5. Those polled were employed and had an annual household income of between $40,000 and $99,000. The results have a margin of error of plus or minus 3.3 percentage points.
For those in the 70% who have only one year saved up for retirement at the launch, HECM stands ready to help, says veteran professional Warren Strycker, publisher of this webpage to support options. See information tab on home page for contact information.
Open up this discussion of the HECM for Purchase product used to help retirees scale down to a more affordable living quarters at considerable savings. This is the answer you need.
• Are ready to downsize, upsize, move closer to
family, move to a low-maintenance community, a
more convenient neighborhood, or finally buy their
“dream house”—and don’t want to take on a required
monthly mortgage payment.
• They live on a fixed income; are concerned about
being able to afford a new home via a cash purchase or traditional financing; and/or want
to avoid tapping into their retirement nest egg.
• Their current home no longer fits their lifestyle — For example, the washer and dryer are
down in the basement; the yard is too big to take care of; they need or prefer a one-floor
living situation. They want a new home that’s a better fit for their physical needs.
• They want to increase their purchasing power to buy the home they really want, with the
amenities they need or desire.
• They want to preserve some of proceeds from the sale of their home for a cash reserve or
other retirement savings.
HECM for PURCHASE Let Us Retire 10 Years Ahead of Our Plan
By Mark Olshaker
Beatrice and Andrew Hollimon Borrower Chronicles of Business and Arts, eventually going on to head the Business Department. Beatrice was a child support technician for the State of Missouri, meaning she made sure that parents met their child support payment responsibilities, and went after the ones who didn’t. “She’s a tough cookie,” Andy comments.
They have been married since 1974 and have a grown daughter who works in the insurance industry. “We lived in a small home in St. Louis and paid it off many years ago,” Andy explains. “And we were looking to downsize even more. Throughout the years we had grown to love the tropical climate and environment and were tired of the cold.”
Andy also mentioned that he suffers from severe allergies and began researching areas where they might be substantially less pronounced. “South Florida became a major focus for us and we wanted to be on the Atlantic side. We started vacationing in Fort Lauderdale about six years ago and found we really liked it.” Having retired from teaching and found the area they wanted to live in, Andy and Beatrice set about figuring out how to make it happen financially.
They didn’t think they had enough to trade up to the type of house they aspired to in a resort setting, so they figured that under present circumstances, they would probably have to work another 10 years or so. Andy recalls, “We were playing around with how we were going to pay for it, when we happened to see the Fred Thompson commercial on television. I had seen it maybe a hundred times before, but this time we were intrigued and I thought, ‘Why not check it out?
Borrower Chronicles representative asked me was whether I was considering a HECM loan for refinancing or purchase. I asked him, ‘What’s the difference?’” When the rep explained the distinctions between a reverse mortgage that would keep the Hollimons in their home in St. Louis and a HECM for Purchase, Andy realized that it was the latter that would work best for them.
“As soon as we decided on that, he referred me to the Purchase Division. There, a man named David Marshall spent about 45 minutes on the phone educating me on how it works. He said, ‘Go get a piece of paper and write this down.’ Actually, I ended up taking about 10 or 11 pages of notes. He walked us through the entire process and told us exactly what was involved and what to expect. He went over the advantages and disadvantages. He was quite frank about it.”
Andy notes that as they went about evaluating their op- 12
Andy notes, “above the hustle and bustle of Miami, but we can go down there whenever we want, or up to Palm Beach.” He spends a fair amount of time writing on the Internet and has taken up oil painting. His canvases are both strikingly beautiful and thought provoking, ranging in subject matter from interiors to still lifes, to nature and surrealistic settings.
The obvious talent and professional look belie his assurance that he has never had a single art lesson. Beatrice is a voracious reader and finally has time to pursue that pleasure. She also crochets and does complex, thousand-piece jigsaw puzzles, some of which end up framed on their walls. “And we live on a golf course,” adds Andy. “I have a feeling she is going to pick up some clubs before me.”
Summing up their reverse mortgage experience, he says, “Not only did working to obtain a HECM for Purchase make it possible for us to retire ten years sooner than we thought we could, it allowed us to take advantage of a strong real estate market to buy our dream home.”
Beatrice’s “tough cookie” background in government was put to good use. “She’s very discerning and detail-oriented,” he says. “She looks at financial situations in a very analytical way.” The Hollimons ended up talking to Mr. Marshall several times during their decision-making process and found him helpful each time. “He actually guided us into a price range we felt comfortable with, without depleting our investments.”
While Andy had already begun transitioning into retirement, Beatrice had intended to keep working. But knowing that their retirement vision was now well within their reach, and believing that the real estate market conditions and interest rates were at their most favorable, and probably would not stay that way for very long, she decided to retire as well. Now they are settled in Fort Lauderdale, having sold the house in St. Louis. “We’re in Palm Beach County,”
A surprisingly high percentage of retirees say they’d pick a different spot in which to spend their later years. In a survey of people in their 70’s, researchers at Age Friendly Ventures (the parent organization of Age Friendly Advisor, Mature Caregivers and RetirementJobs.com), found 31% say “no” when asked “if you had to do it all over again, based on what you know now, would you choose where you are currently residing again?”.
Friends did not make the top of the list of factors that influenced a decision of where to retire; the top 3 were family (65 percent), general livability (36 percent) and desired weather conditions (32 percent).
These sentiments are summed up by Louisville, KY resident David Heath, who was tempted to relocate internationally but chose family over fair weather and finances. “I would prefer to be in Costa Rica. The weather is warm year-round and you can be at a beach within an hour’s drive from anywhere in the country. The cost of living is low and a person can live well on $2,000 a month. In my current location, Louisville, KY, I need my retirement and a job to meet my monetary needs. The reason I stayed in the Louisville area is because my children and grandchildren are here. My family is the most important reason for retiring here.”
The financial picture plays a big role for the many who reconsidered their retirement destination, suggesting that consulting with a financial advisor should be a higher priority for older people when they’re on the front end of the retirement destination decision process. A California survey respondent says he and his spouse moved to San Diego for their retirement given the beaches, mountains, weather, people, and general lifestyle. But now, he says “we are being so heavily taxed we can no longer reside here. We will be moving to a state that is senior tax friendly…Property taxes in Nevada and Arizona are less than 50% of California’s for a larger home. Should have left 15 years ago.” Experts from financial services giant MassMutual agree and suggest that pre-retirees talk through the financial what-ifs with a financial advisor before they make their move to help either avoid or prepare for cost of living and other surprises down the line.
Two out of 3 retirees did not do in-depth research to determine where to live in retirement. Three out of 4 indicated that they would find a tool like Age Friendly Advisor helpful in order to know in advance more about what a place is really like, from the perspective of people who are already there. They say they welcome an online community that helps Americans over 50 tap others in “the crowd” for advice about good places to live, work and get care. Age Friendly Advisor executive Daniel McCullough says “we’re hoping to put more of a human face on the research about where to live in your later years. What’s it really like to live there? We’re also giving people a place to inform community leaders about what they like and don’t like about a particular place. If we do our job right, this will lead to improvements and enhanced quality of life”.
Age Friendly Ventures surveyed more than 700 people age 70+ online in December, 2018.
Well, I wound up moving from the Silicon Valley to a place with a much lower cost of living, and MUCH less day-to-day “tensions (e.g., commuting time, insane public officials). Even though I am not much of a believer myself, we picked an area which is very close to my wife’s chosen church (it’s very important to her, and, she deserves to get what she wants). I am a native New Yorker, and I would not have imagined that I would LOVE central Florida…but I do! The weather is (mostly) great, the people are friendlier than I have met anywhere else, all the daily necessities are within 5 or 10 miles, and the prices are from circa 1995! Amazing, since the first time I was ever here was when I got out of the U-Haul at the end of our move!
I am not happy in Enchanted Acres due to they raise the lot rent every year not every 2 years as per our lease agreement ..they say it is for water treatment which is a lie ….every time they make a repair or fix something they raise our lot rent …I want to know what can be done legally as a tenant to stop them from doing this ?
I think the baby-boomer generation is re-writing the Retirement Chapter. I had toiled at a job that afforded me a modest retirement. But because I live, raised my children, cared for elderly parents in a desirable weather local, I must continue to be diligent with my funds, as though I’m still employed. My children can’t afford to live here, because of the lack of job opportunities and cost of living. Yes, there are less expensive areas, which to live. But, as we age, we tend to get set in our ways. The brochure photos of these retirement areas, never seem to live up to the eventual reality, of you having to wake up there.
My retirement decisions would have been different if I had relocated earlier in my career. I passed on opportunities to the east coast and chose to remain in the Midwest mainly because of family. But I think my family would have relocated with me. Perhaps I could have had an easier and longer retirement path with a larger number of job possibilities in my field. I stayed in the Midwest and experienced 2 downsizings in a narrow career path. My retirement savings was used for living expenses and other choices were made causing me to launch my own research business. While something I wanted for a long time but only after a retirement I had planned for.
I hate the weather in the winter. Walking on “ice” not so good for old people; neither is driving. Don’t like the fact that short of casino gambling and shows, not much else to do for the elderly crowd. Don’t like the fact so many Californians are moving here and causing property prices to skyrocket. Don’t like the low wages paid to workers in Reno. Don’t like the poverty I see in Reno. Don’t like the poor education afforded children in Reno. Don’t like the politics in Reno. (Very liberal; I’m very conservative). Not very many good places to eat other in the casinos. The casinos can’t deal with the competition. No, if I had it to do again, I wouldn’t be retired in Reno. Wish I’d gone to Florida!
When I retired, we chose to stay in our home rather than relocate. Doe to local market conditions, the home has declined in value and when coupled with realtor fees, we are taking a $40,000 loss to sell.
I was born and raised in Los Angeles. All my friends and associates live in LA. I would move back to LA or down south where the cost of living is not so high.
Long Island NY has become or also has been young family oriented only. The communities have no tolerance for Senior Citizens which is apparent in the housing they offer. There is retirement development in Nassau. The houses are next door to a public pool, which gets very loud in the summer & offers no backyard at all for seniors who may want to plant a garden or even sit outside (which they couldn¹t because of the kids in the pool).
In 2016 I was laid off from a job. I was planning on working about four more years to allow me to pay some debt off and then I had planned to sell the house and move to Florida. I am in my 70s and haven’t been able to find a job since the layoff. I’m straddled with debt and do not have my house paid off so moving to Florida and getting a small house and retiring is looking less feasible all the time. I am still searching for work.
I love the idea of this website… it is helpful to know what it’s like to retire somewhere from people who have “been there, done that”.
MCM Holdings, Inc. is an FHA approved lender that abides by all of the regulations laid out by the CFPB, FHA, FNMA, etc. The Non-QM loans of today are not like the sub-prime loans that were common before the crash. All of the loans follow the strict guidance of the regulatory committees referenced above and comply with ATR – Ability to Repay.
*ATR CERTIFIED = Ability to Repay
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Anyone being honored by learning how an airplane lands will relate to the nerves that drive the pilot as he sits the plane down on the runway with the slightest bump at landing speed.
Not all landings are like that.
Since airports are all different, each landing starts with the basics, weight, power, airspeed, flaps, crosswinds, etc. Putting them altogether is the key to the touchdown.
For those landing a career into retirement mode, similar adjustments are made to go from the daily grind into testing the preparation for pulling the plug on the career and entering retirement lifestyle with adequate funds to steady your plan on the way down the runway.
That’s where HECM comes in — Home Equity Conversion Mortgage, using power from home equity to take up some of the slack for unaccounted emergencies. HECM can pay off your mortgage easing the debt load. It can provide the line of credit that grows to absorb the runway bumps ahead. Pouring on the coal (power) to get safely to the runway insteading of landing in the grass or worse.
There is lots to know about the HECM, and you came to the right place to learn. Check out these stories and call me with your questions: Warren Strycker, Patriot Lending USA, 928 345-1200 or send me an email firstname.lastname@example.org.
Participants in this comparison of HELOCs and HECM line of credit plans are being asked to compare two types of home equity loans. And just like the participants in a recent RMF-supported study conducted by the National Council on Aging, they ended up liking the reverse mortgage far better than the HELOC. (see this analysis and “HELOC CHALLENGE” below).
So, you are at least 62, have a bunch of home equity and need to downsize. Too many bedrooms to clean, way more than enough bathrooms, stairways to climb — just too much maintenance and you’re tired of it. It’s just too much to do now.
Here’s a HECM idea to consider. Sell your home, get rid of a mortgage and the payments month after month, put the remaining proceeds in a line of credit that earns monthly income instead of monthly costs to use it.
Do it without monthly payments.
Lay back and relax. Your retirement just got a lot easier. Let’s talk about it.
How to “Pensionize” Any IRA or 401(k) Plan STANFORD CENTER ON LONGEVITY Steve Vernon, FSA Research Scholar Stanford Center on Longevity email@example.com November 2017 —
How will ordinary workers retire in a defined contribution (DC) world?
How do they decide if they have enough savings to afford retirement?
How can they generate reliable retirement income?
“When you’re in your 60s” says Steve Vernon, “[and] you’re planning retirement, it’s just smart to look at all your assets, and how you can best deploy them, and that should include your home equity,” Vernon said.
These questions began to nag at me when I started replacing employers’ defined benefit (DB) plans with DC plans in the late 1980s in my role as a consulting actuary working in the private sector. Over the next two decades, I transitioned more than 20 DB plans. All that time, the above questions continued to haunt me. When replacing defined benefit plans with defined contribution plans, it may not have been a good idea to ask ordinary workers to be their own investment manager and actuary.
I didn’t think it was a good idea to ask American workers to be their own investment managers and actuaries. This thought led me on a 30-year quest to help older workers and retirees find viable retirement income solutions – that’s been a primary focus of my current encore career as a retirement researcher and educator. DC world challenges American workers face three challenges in a DC world: 1. Inadequate savings. Various studies show that roughly half of all older American workers (age 55+) have less than $100,000 in retirement savings, not close to adequate for a traditional retirement of “not working.”
1,2 Roughly one-fourth have between $100,000 and $500,000, and another one-fourth have more than $500,000.
2. Leakage. According to one study, an estimated one-fourth of DC accounts experience an outstanding loan, hardship withdrawal, or early withdrawal upon job separation.
3 3. Generating retirement income. Only half of all DC plans offer any options for converting balances into periodic retirement income, and typically fewer than one in five plans offer guaranteed lifetime payouts.
4,5 This paper focuses on solutions to the third challenge – generating retirement income – while acknowledging the importance of the first two challenges.
6,7 Most workers don’t plan like actuaries and investment managers To address the above challenges, employers often suggest that workers consult a financial planner.
But finding an adviser who is both skilled with retirement income planning and isn’t conflicted by how they’re paid can be a roadblock for workers. As a result, only about one-third of workers contact advisers for any purpose.3 Only about one-third of workers contact financial advisers for any purpose.
Without anyone to consult, only about half of older workers attempt to calculate how much money they need to retire.
2 Without anyone to consult, only about half of older workers attempt to calculate how much money they need to retire.1 In fact, the “planning” that most older workers do is to estimate their monthly retirement income and then reduce their living expenses to that level.8
Unfortunately, most workers don’t have the skills to convert their savings into retirement income. In addition, most retirees have very short planning horizons – just a few years – which is far shorter than their remaining life expectancies.8
Retirees tend to exhibit two distinct strategies for deploying their retirement savings: 1. Conserving savings for a rainy day, minimizing their withdrawals and treating savings as an emergency fund,9 or 2. “Winging it” by treating their savings like a checking account to pay for current living expenses, often withdrawing too rapidly at an unsustainable rate.10
Neither strategy seems optimal in a DC world. We need straightforward retirement income solutions There’s a clear need for DC plan sponsors and financial institutions to help their older workers and customers generate reliable, lifetime retirement income – to “pensionize” their IRAs and DC accounts. This would enable middle-income workers to complete the rudimentary retirement planning described previously. Annuities are one viable method to deliver guaranteed lifetime income to retirees, but not many older workers buy annuities on their own. And many employers are reluctant to offer annuities in their DC plans. Furthermore, many employers worry about accepting fiduciary liability when designing and implementing any retirement income solution.
The good news? Recent research by the Stanford Center on Longevity (SCL), collaborating with the Society of Actuaries (SOA), identifies a straightforward retirement strategy that can work for most middle-income retirees and be implemented in virtually any traditional IRA or 401(k) plan.11 This research provides a framework for assessing different retirement income generators (RIGs) and navigating the many tradeoffs that older workers face when making retirement income decisions. 3
Choosing a specific solution that will help workers generate retirement income requires them to make informed tradeoffs between potentially competing goals: • Maximizing lifetime income • Providing access to savings (liquidity) • Planning for bequests • Minimizing implementation complexity and costs • Minimizing income taxes • Protecting against common risks: • Longevity • Inflation • Investment • Death of their spouse • Cognitive decline and mistakes • Fraud • Political/regulatory issues (changes in laws or regulations on retirement plans or Social Security, or the taxation of these benefits)
Unfortunately, there’s no perfect RIG that meets all these goals, although one comes close, as we’ll see below. It should surprise no one that the average American worker isn’t adequately trained to make 4 Retirement planning involves tradeoffs informed decisions regarding retirement income strategies that effectively balance all the above goals. There are many viable retirement income generators
Here are common RIGs that each have their own advantages and disadvantages:
• Social Security
• Pensions • Investing savings and using a systematic withdrawal plan (SWP) to generate a retirement paycheck
• Buying a guaranteed lifetime annuity from an insurance company (think of this as akin to a personal pension) • Working • Real estate rental income or income from other businesses
• Reverse mortgage
It’s important to realize that each of these RIGs produces a different amount of retirement income. In addition, the advantages and disadvantages of some RIGs tend to complement others, which is one reason retirees should diversify their sources of retirement income to satisfy their unique goals and circumstances.
The average American worker isn’t adequately trained to make informed decisions about retirement income strategies. A systematic comparison of retirement income strategies Many analyses of retirement strategies contain significant limitations. For example, they might: • Analyze only a few different retirement income strategies, perhaps limiting the analysis to solutions that their financial institution offers. • Analyze solutions to deploy retirement savings in isolation, without considering how the solution interacts with valuable Social Security benefits. • Not address the various goals that might be important to older workers and the tradeoffs these workers face. The SCL/SOA project analyzed and compared 292 different retirement income strategies, using analytical techniques that many large pension plans use to devise funding and investment strategies. To address these limitations, the SCL/SOA project11 examined 292 different retirement income strategies, including various combinations of: • Starting Social Security at age 65 • Starting Social Security at age 70 • Single premium immediate annuities (SPIA) • Systematic withdrawal plans (SWPs), including the IRS required minimum distribution (RMD) • Guaranteed lifetime withdrawal benefits (GLWB) • Fixed index annuities (FIA) • SPIA/SWP combinations • FIA/SWP combinations • Tenure payment from a reverse mortgage For three hypothetical retirees, we prepared the following analyses: • Stochastic forecasts of income and accessible wealth (liquidity) throughout retirement for each retirement solution • An efficient frontier that compares the tradeoff between expected amount of income vs. liquidity for the solutions we analyzed • Patterns of retirement income over the retirement period to determine if income is expected to keep up with inflation and estimate the potential volatility Stochastic forecasts and efficient frontiers are analytical techniques that many large pension plans use to devise funding and investment strategies. 5 Our economic assumptions reflect the low-interest environment prevalent in 2017. We compared high performing and low-performing solutions to illustrate the impact of net investment performance and institutional vs. retail pricing on retirement outcomes.
For the cost of annuities, we used actual annuity purchase rates that were prevalent at the beginning of 2017. Figure 1 shows one example from our efficient frontier analyses for a hypothetical 65-year-old single female with $250,000 in retirement savings. We used these efficient frontier analyses to narrow the number of solutions – from 292 to 21 – that we examined in more detail, as discussed next.
The retirement income dashboard To help retirees and their advisers make informed tradeoffs regarding the potentially competing goals described previously, we developed eight metrics to help retirees and planners compare different retirement income solutions:
1. Average annual real retirement income expected during retirement
2. Increase or decrease in real income expected during retirement (inflation protection)
3. Average accessible wealth expected throughout retirement (liquidity)
4. Rate that wealth is spent down
5. Average bequest expected upon death
6. Downside volatility (the estimated magnitude of potential future reductions in income)
7. Probability of shortfall relative to a specified minimum threshold of income
8. Magnitude of shortfall 6 We used these eight metrics to prepare detailed comparisons of 21 retirement income solutions.
For these solutions, we prepared a dashboard to compare the results of our analyses. Figure 2 shows one dashboard example from our report for a married couple age 65, with $400,000 in retirement savings. Social Security is close to the perfect retirement income generator Our analyses demonstrate that Social Security meets more retirement planning goals than any other RIG, as follows: • It helps maximize amount of expected retirement income through a thoughtful optimization strategy. • It helps minimize taxes by excluding part or all of income from taxation. • It protects against most common risks: • Longevity • Inflation • Investment • Death of a spouse through the survivor’s benefit • Cognitive decline and mistakes • Fraud Our analyses demonstrate that Social Security income meets more retirement planning goals than any other retirement income generator.
As such, it makes sense for workers to maximize the value of this important benefit, usually by delaying the start of benefits for the primary wage-earner. The optimal strategy for a married couple often depends on their specific circumstances, and it may be desirable to use commonly available software or consult a financial adviser who specializes in Social Security optimization. Many reputable researchers have confirmed the general advantages of a Social Security delay strategy.12,13,14,15,16 These studies typically study Social Security benefits in isolation without considering income from other sources. By using a total retirement portfolio approach, including income generated by savings, our analyses amplify the importance of the analyses prepared by these researchers.
Our analyses show that for many middle-income retirees, Social Security benefits will represent one-half to two-thirds of total retirement income if workers start Social Security at age 65, and from three-fourths to more than 85% of total retirement income if they optimize Social Security by delaying until age 70. As a result, for many middle-income retirees, the total retirement income portfolio reflects the desirable features of Social Security described above. In other words, if Social Security benefits represent 80% of the total retirement income portfolio, then at least 80% of the total portfolio will enjoy Social Security’s advantages listed above. In this case, Social Security may be the only annuity income that many middle income retirees will need, given Social Security’s dominance of their total retirement income portfolio. Figure 3 provides an example of our analyses showing the portion of total retirement income that’s represented by Social Security for the 65-year-old married couple with $400,000 in savings for various retirement income solutions. Pessimists might point out that Social Security is subject to political risk; our leaders can change the amount of benefits paid to current retirees or older workers. When deciding on a Social Security claiming strategy, older workers must weigh this risk against Social Security’s other desirable features. They might also want to consider the likelihood that politicians will make significant benefit reductions for existing retirees and current workers who are close to retirement. 7 Introducing the SS/RMD Spend Safely in Retirement Strategy Our analyses identified a straightforward strategy that produces a reasonable tradeoff among various goals for middle-income retirees.
This strategy delays Social Security until age 70 for the primary wage-earner and uses the IRS required minimum distribution (RMD) to calculate income from savings. We call this strategy the “SS/RMD Strategy” for professional audiences, and the “Spend Safely in Retirement Strategy” for worker and consumer audiences. The best way for an older worker to implement the Spend Safely in Retirement Strategy is to work just enough to pay for living expenses until age 70 in order to enable delaying Social Security benefits. In essence, “Age 70 is the new 65.”
To make this method work, retirees may also need to significantly reduce their living expenses. We acknowledge there can be serious challenges for older Americans who choose to work longer. If a worker isn’t willing or able to delay retirement, the next best way to implement the Spend Safely in Retirement Strategy is to use a portion of savings to enable delaying Social Security benefits as long as possible but no later than age 70. They would then invest their remaining savings and use the RMD to calculate their lifetime retirement income that’s generated by their savings. While analyzing this latter approach, we assumed the worker retires at age 65 but uses a portion of savings to enable starting Social Security at age 70. With remaining savings (after optimizing Social Security), we assumed retirees would use the RMD to calculate retirement income, starting at age 65.
The IRS rules dictate the minimum withdrawal starting at age 70-1/2; at that age, the account balance in taxable retirement accounts (such as traditional IRAs and 401(k) accounts) is divided by the participant’s life expectancy to determine the minimum required withdrawal amount for the coming year. The RMD requires this amount to be withdrawn from the account and included in taxable income for the year. The purpose of the RMD is for the federal government to capture taxable income from retirement accounts. It wasn’t devised as a spend-down strategy, although our analyses show that it happens to meet common retirement planning goals.
The RMD life expectancy tables can be translated into a series of withdrawal percentages. At age 70, the initial withdrawal percentage is 3.65%, and it increases each year thereafter. We assumed a withdrawal percentage of 3.5% from ages 65 to 70, although a more precise method could also be used (by dividing the account balances by the life expectancies in the RMD tables).
See the Appendix for a table of the RMD withdrawal percentages. For married couples, the optimal strategy for claiming Social Security for the spouse who isn’t the primary wage earner typically depends on individual circumstances. Often the optimal strategy for this spouse calls for starting benefits somewhere between the full retirement age (currently age 66) and age 70.
For our analyses, we assumed the spouse who isn’t the primary wage earner would start Social Security at age 66. The primary disadvantage of using savings to enable delaying Social Security benefits is that it can substantially reduce the amount of remaining assets and liquidity throughout retirement. This disadvantage must be weighed against the potential for permanently increased, guaranteed retirement income from a delay strategy. 8 Advantages of the Spend Safely in Retirement Strategy
Our analyses show that the Spend Safely in Retirement Strategy has many key advantages, as follows: • It produces more average total retirement income expected throughout retirement compared to most solutions we analyzed. • It automatically adjusts the RMD withdrawal amounts to recognize investment gains or losses. Withdrawals are increased after years with favorable returns, and vice versa. • It provides a lifetime income, no matter how long the participant lives, and it automatically adjusts the RMD withdrawal each year for remaining life expectancy. • It projects total income that increases moderately in real terms, while many other solutions aren’t projected to keep up with inflation.
The Spend Safely in Retirement Strategy produced projected real increases in income of up to 10% over the retirement period. • It produces a moderate, compromise level of accessible wealth for flexibility and the ability to make future changes. It produces higher accessible wealth compared to strategies that use annuities. It provides less accessible wealth than strategies that maximize flexibility, such as SWPs with low withdrawal rates and/or strategies that don’t use savings to enable the delay of Social Security benefits. • It provides a moderate, compromise level of bequests, for the same reasons listed above. • It produces low measures of downside volatility, with potential future annual reductions in spending typically well under 3%, which is hopefully a manageable amount. • It gives older workers the flexibility to transition from full-time work to part-time to full retirement.
9 The Spend Safely in Retirement Strategy has another significant advantage: It can be readily implemented from virtually any IRA or 401(k) plan without purchasing an annuity. Many administrators can calculate the RMD and automatically pay it according to the frequency elected by the retiree. Several analysts have studied the RMD as a drawdown strategy, and they have concluded it’s a viable way to produce a stream of lifetime retirement income.17,18,19,20
These studies typically analyzed the RMD solution in isolation, not considering the value of Social Security benefits. Once again, by using a total retirement portfolio approach that includes Social Security income, our analyses amplify the importance of the analyses prepared by these researchers.
Our analyses show that the Spend Safely in Retirement Strategy has many key advantages compared to more complex solutions, including simplicity and ease of implementation. In the years leading up to retirement, an older worker might want to use a portion of their retirement savings to build a “retirement transition bucket” that enables them to delay Social Security benefits. While there’s some judgment involved with the necessary size of this bucket, a starting point would be an estimate of the amount of Social Security benefits the retiree would forgo during the delay period.
The retirement transition bucket can also provide a buffer if the older worker is uncertain about the timing of retirement, and it could protect the worker against stock market crashes in the period leading up to retirement. Building a “retirement transition bucket” Investing with the Spend Safely in Retirement Strategy The retirement transition bucket could be invested in a liquid fund with minimal volatility in principal, such as a money market fund, a short-term bond fund, or a stable value fund in a 401(k) plan. This type of fund could protect a substantial amount of retirement income from investment risk as the worker approaches retirement, since the retirement transition bucket would be invested in stable investments and Social Security isn’t impacted by investment returns. Our analyses support investing the RMD portion significantly in stocks – up to 100% – if the retiree can tolerate the volatility. The resulting volatility in the total retirement income portfolio is dampened considerably by the high proportion of income produced by Social Security, which doesn’t drop if the stock market drops. However, our analyses project reasonable results with a typical target date fund for retirees (often a 50% stock allocation) or balanced fund (often a 60% stock allocation), and these funds are commonly available in IRA and 401(k) platforms.
These lower stock allocations would reduce expected income but would also produce lower downside volatility, compared to a 100% stock allocation. These results can significantly simplify retirement investing; to implement this strategy, a retiree could select a low-cost index fund, whether it’s a target date, balanced, or stock fund. Many 401(k) plans, as well as many IRA providers, already offer low-cost index funds as part of their investment choices. Using a low-cost balanced fund, target date fund, or stock index fund can significantly simplify retirement investing.
10 Refinements to the Spend Safely in Retirement Strategy The Spend Safely in Retirement Strategy can be a starting point for devising retirement income strategies, with refinements implemented to meet other retirement planning goals and to personalize the solution to individual circumstances. First, it’s recommended that retirees maintain an emergency fund that would not be used to generate retirement income. Such a fund could be used to pay for planned large, one-time purchases, or for large unforeseen expenses, such as house repairs. Also, some retirees express a desire to spend more money in their early years of their retirement while they’re active and healthy, often for travel expenses. In this case, they could dedicate a portion of their retirement savings to a special bucket for these purposes; this bucket would also not be used to generate retirement income. For example,
if a retiree plans to spend an extra $5,000 per year on travel for each of 10 years, they could set aside $50,000 that’s not used to generate retirement income and withdraw from this savings bucket to pay for their travel expenses. Another refinement might be appropriate for retirees who desire more guaranteed income than produced by the Spend Safely in Retirement Strategy. In this case, they could use a portion of their savings to purchase a low-cost SPIA, GLWB, or FIA, as described previously.
Another possibility, if the retiree has significant home equity, could be to use a tenure payment reverse mortgage to generate additional monthly income. If a worker is unable or unwilling to work longer to postpone drawing Social Security benefits, one possible financial strategy would be to use a reverse mortgage line of credit as a pool of funds to help cover living expenses while delaying Social Security benefits.
Finally, the Spend Safely in Retirement Strategy works best when a retiree delays Social Security until age 70, but delays until earlier ages, such as 67, 68, or 69, still provide significant advantages. Communicating the Spend Safely in Retirement Strategy To communicate the Spend Safely in Retirement Strategy, plan administrators and advisors should characterize Social Security as a secure monthly “retirement paycheck” that a retiree might use to pay for basic living expenses.
They should characterize the RMD withdrawals as a variable annual “retirement bonus” that can fluctuate, which can be used to pay for discretionary living expenses. Many middle-income workers are accustomed to managing their finances with secure paychecks and variable bonuses, so it’s natural to continue this financial discipline in retirement.
The Spend Safely in Retirement Strategy emphasizes that it’s smart for retirees to: • Delay drawing down Social Security and retirement savings. For workers with modest retirement savings, it’s essential to squeeze every dollar out of available retirement resources.
• Automate the payment of retirement income, which will be very helpful for older retirees when they reach their 80s and 90s and are less interested in managing their finances.
• Use low-cost index funds for invested savings.
• Phase from full-time to part-time to full retirement. The “right transition” will be unique to each retiree’s circumstances and goals.
• Adjust withdrawals from savings for investment gains and losses throughout retirement.
• Maintain some accessible savings to respond to changes in circumstances throughout retirement.
As such, the Spend Safely in Retirement Strategy can be characterized as a navigational guide to help older workers decide when to retire and how to deploy their retirement savings. The Spend Safely in Retirement Strategy can be the default retirement income option Auto-enrollment and default investment options have demonstrated the power of default elections for accumulating savings.
As a result, analysts have been seeking a default payout option that can be utilized for retiring workers to improve retirement outcomes. The RMD, combined with the plan’s qualified default investment alternative (QDIA), might be a viable default retirement solution that offers fiduciary protection to the plan sponsor. Using the RMD as a payout strategy complies with IRS regulations; the retiree will incur substantial penalties if the minimum amounts aren’t withdrawn from the plan. As a result, both retirees and plan sponsors have a significant incentive to comply with the RMD. In addition, our analyses show that the RMD helps maximize expected retirement income.
The RMD, combined with the plan’s qualified default investment alternative (QDIA), might be a viable default retirement solution that offers fiduciary protection to the plan sponsor. As a refinement or alternative to the default solution, a retiree can make a positive election to meet various retirement planning goals, such as deploying a portion of retirement savings to build their retirement transition bucket, starting withdrawals before age 70-1/2, or electing another payout option.
The Spend Safely in Retirement Strategy won’t compensate for inadequate savings and other risks By itself, the Spend Safely in Retirement Strategy won’t compensate for inadequate retirement savings as mentioned at the beginning of this article. However, that’s not a criticism of the Spend Safely in Retirement Strategy, since our comparisons show that other retirement income solutions will deliver equal or less retirement income.
Our analyses show that the Spend Safely in Retirement Strategy helps address modest savings by squeezing as much income as possible from existing resources. Furthermore, our analyses show that many older American workers may fall short of typical retirement income goals that are commonly advocated by planners, such as targeting a retirement income that equals 70% to 90% of pre-retirement pay.
This goal may 12 be unattainable for many older workers, given the prevalent levels of savings for older workers. Such retirees may need to live on incomes that fall short of these goals. Also, the Spend Safely in Retirement Strategy won’t address other retirement planning risks, such as the cost of high medical expenses or long-term care. Once again, this isn’t a shortcoming of the Spend Safely in Retirement Strategy, since most other retirement income solutions don’t address these risks either. One smart risk management strategy is to convert large, unexpected medical costs into predictable monthly premiums through Medicare and Medicare supplement policies, which can then be paid from retirement.
Our analyses show that most middle-income retirees will experience significant decreases in their marginal federal income tax bracket in retirement. An expensive long-term care event can overwhelm most retirement income strategies and rapidly drain savings.
Addressing this risk calls for separate strategies, such as purchasing long-term care insurance, holding home equity in reserve, and/or dedicating a separate investment account solely to long term care expenses and not using it to generate retirement income.
Our analyses show that most middle-income retirees will experience significant decreases in their marginal federal income tax bracket in retirement, commonly falling from a 25% bracket to a 15%, 10%, or even a 0% bracket.
This results from: • Low levels of taxable income generated by modest retirement savings,
• The extra federal income tax deduction for taxpayers age 65 and older, and
• Part or all of Social Security benefits being excluded from taxable income. As a result, strategies to minimize income taxes should take a lower priority compared to maximizing expected income and liquidity. In fact, since Social Security benefits enjoy unique tax benefits, maximizing Social Security benefits will help reduce retirees’ income taxes.
Note that the observations on taxes apply to the income tax rules in effect in 2017, which are subject to change. Future research can provide useful insights Future research could help various stakeholders understand:
• Circumstances when the Spend Safely in Retirement Strategy could be most helpful, by examining retirement ages different from age 65, Social Security start dates other than age 70, and various hypothetical employees, • Refining the strategy for married couples,
• Modifying the strategy to address possible future reductions in income (for example, income from working that eventually stops) or future reductions in living expenses (for example, paying off a mortgage),
• The prevalence and number of older workers who could be helped by the strategy, and • Communication strategies to encourage implementation among middle-income retirees.
13 Future research could also explore another possible advantage of the Spend Safely in Retirement Strategy: Plan sponsors could prepare retirement income statements for DC plan participants that don’t involve making assumptions about interest rates or product features. Retirement income statements can help older workers understand their expected retirement income, which will help them decide when they can afford to retire.
In addition, future research could explore considerations for building the retirement transition bucket to enable delaying Social Security benefits, as well as help with a smooth transition from full-time work to part-time work to full retirement. The Spend Safely in Retirement Strategy helps with important life decisions The Spend Safely in Retirement Strategy represents a straightforward way for middle-income workers with between $100,000 and $1 million in savings to generate a stream of lifetime retirement income without purchasing an annuity and without significant involvement from financial advisers. This group might represent as many as half of all workers age 55 and older, based on the numbers at the beginning of this article.
The Spend Safely in Retirement Strategy can also help older workers make important life decisions, such as how long they should continue to work full time, whether they should transition into retirement with part time work, when they can fully retire, and how much money they can spend in retirement. I’ve been studying retirement for my entire professional career, and at age 64, I’ve been thinking seriously about my own retirement. This actuary will be using a version of the Spend Safely in Retirement Strategy, based on my 30+ years of study. My life-long quest may just be coming to an end!
Note: The full report, Optimizing Retirement Income by Integrating Retirement Plans, IRAs, and Home Equity: A framework for evaluating retirement income decisions, contains details on the above analyses and conclusions, other results, graphs, and tables that present our analyses, and details on our assumptions and methods. The co-authors of the study are Wade Pfau, PhD., Joe Tomlinson, FSA, and Steve Vernon, FSA.
The full report can be found at: http://longevity.stanford.edu/scl-publications/ 14 Figure 1: Start with solutions near the efficient frontier • Each symbol represents a retirement income strategy for a 65-year-old single female with $250,000 in retirement savings. • The vertical axis is the average amount of total annual real retirement income expected over the retirement period. • The horizontal axis is the average real amount of accessible wealth expected over the retirement period. 15 Figure 2: Sample dashboard comparing various retirement income solutions for a 65-year-old married couple with $400,000 in retirement savings.
16 Figure 3. For various retirement income solutions, Social Security (the non-gray portion of each graph) delivers 60% to 86% of the total retirement income. The chart is representative of the results for a married couple, both age 65, with $400,000 in savings.
17 70 27.4 3.65% 71 26.5 3.77% 72 25.6 3.91% 73 24.7 4.05% 74 23.8 4.20% 75 22.9 4.37% 76 22.0 4.55% 77 21.2 4.72% 78 20.3 4.93% 79 19.5 5.13% 80 18.7 5.35% 81 17.9 5.59% 82 17.1 5.85% 83 16.3 6.13% 84 15.5 6.45% 85 14.8 6.76% 86 14.1 7.09% 87 13.4 7.46% 88 12.7 7.87% 89 12.0 8.33% 90 11.4 8.77% Appendix: Withdrawal percentages under the IRS Required Minimum Distribution Age Distribution period in years Minimum payout rate Notes: • The RMD table continues beyond age 90. • Use the account holder’s age on their birthday during the calendar year. • If the account holder is married and their spouse is more than 10 years younger, a different table with payout rates that are lower than the above rates applies.
1. Retirement Confidence Survey, Employee Benefit Research Institute, March 2017.
2. Is Home Equity an Underutilized Retirement Asset? Boston College Center for Retirement Research, March 2017.
3. 17th Annual Retirement Survey, Transamerica Center for Retirement Studies, December 2016.
4. 2017 Defined Contribution Trends, Callan Institute.
5. 2017 Hot Topics in Retirement and Financial Wellbeing, AonHewitt.
6. Automatic Enrollment, Employer Match Rates, and Employee Compensation in 401(k) Plans, Monthly Labor Review, Bureau of Labor Statistics, May 2015.
7. Pulse Survey: The Impact of Automatic Enrollment, Aon Hewitt, January 2015.
8. Risks and Processes of Retirement Survey, Society of Actuaries. 2015 survey (eighth edition) published January 2016.
9. Spending the Nest Egg – Retirement Income Decisions Among Older Investors, Vanguard, 2008.
10. A Retirement Literacy Quiz You Need to Pass, by Steve Vernon. CBS MoneyWatch, May 2017.
11. Optimizing Retirement Income by Integrating Retirement Plans, IRAs, and Home Equity: A framework for evaluating retirement income decisions, by Steve Vernon, Wade Pfau, and Joe Tomlinson. Stanford Center on Longevity/Society of Actuaries, October 2017.
12. When Should You Claim Social Security, by Dr. Wade Pfau. 2015.
13. Retirement Income Scenario Matrices, by Dr. William Sharpe. Stanford University, 2017.
14. The Decision to Delay Social Security Benefits: Theory and Evidence, by Dr. John Shoven, Stanford University, and Dr. Sita Slavov, George Mason University. 2012.
15. Innovative Strategies to Help Maximize Social Security Benefits, by James Mahaney FSA. 2017.
16. Get What’s Yours: The Secrets to Maxing Out Your Social Security, by Laurence J. Kotlikoff, Phillip Moeller, and Paul Selman. 2016.
17. Coping with Sequence Risk: How Variable Withdrawal and Annuitization Improve Retirement Outcomes, by Joe Tomlinson. September 2017.
18. Retirement Spending and Required Minimum Distributions, by Dr. Wade Pfau. November 2016.
19. Can Retirees Base Wealth Withdrawals in the Required Minimum Distribution, by Wei Sun and Anthony Webb. October 2012.
20. Optimal Withdrawal Strategy for Retirement Income Portfolios, by David Blanchett, Maciej Kowara, and Peng Chen. 2012. 19
WASHINGTON (November 1, 2016) – The National Reverse Mortgage Lenders Association applauds the Federal Housing Administration today for insuring more than one million reverse mortgages through its Home Equity Conversion Mortgage program, which was first created 27 years ago. FHA endorsed 3,919 loans in October 2016, which brings the total number of older homeowners who have benefitted from FHA-backed reverse mortgages to 1,002,679.
“As an industry, we are proud to offer a financial product that helps older adults supplement their retirement funds while living in their own homes,” said NRMLA President and CEO Peter Bell. “We are grateful to the U.S. Department of Housing and Urban Development, and especially to the work of the late Ed Szymanoski, for modeling the original pilot program that made the HECM program possible.”
The National Housing Act of 1988, Section 255, authorized HUD to create a demonstration program:
To meet the special needs of elderly homeowners by reducing the effect of the economic hardship caused by the increasing costs of meeting health, housing, and subsistence needs at a time of reduced income, through the insurance of home equity conversion mortgages to permit the conversion of a portion of accumulated home equity into liquid assets; and (2) to encourage and increase the involvement of mortgagees and participants in the mortgage markets in the making and servicing of home equity conversion mortgages for elderly homeowners.
In addition to stating the intent of the HECM program, the statute also lists loan requirements which include mandatory third-party counseling for all borrowers. The Fiscal Year 1998 HUD Appropriations Act made HECM a permanent program.
A reverse mortgage is a loan that enables homeowners that are generally 62 years of age or older to use part of their homes’ equity to obtain cash proceeds that can be used in many ways. The loan does not have to be repaid until the last surviving borrower or remaining eligible non-borrowing spouse passes away or permanently leaves the home, or if the homeowners sell the home, or fail to meet the loan obligations, that include paying property taxes and insurance, and keeping their home maintained.
HECM loans account for nearly all of the reverse mortgages on the market today, though other types of reverse mortgage loans are offered by some states and private lenders.
Throughout HECM’s 27 year history, HUD has continually introduced policies to improve and sustain the FHA-backed reverse mortgage program. Recent guidance has included new protections for borrowers and their eligible spouses, efforts to ensure long-term access to equity to support the ability to age in place, and a financial review of borrowers.
About the National Reverse Mortgage Lenders Association
The National Reverse Mortgage Lenders Association (NRMLA) is the national voice for the industry and represents the lenders, loan servicers, credit unions, and housing counseling agencies responsible for more than 90 percent of reverse mortgage transactions in the United States. All NRMLA member companies commit themselves to a Code of Ethics & Professional Responsibility. Learn more at www.nrmlaonline.org.
Because of a mistake in the launch of this great program many years ago now in which the Reverse Mortgage agreement included the name of the lender in the title of the home, a lot of misgivings came about. And, even now, people don’t always realize that lenders do not have the right to place their name on the title of your home — that has been true for many years now on all home mortgages.
Falsehoods are often more difficult to explain than truths. If you are one of those who believe this, consider . . .
We love the truth that lenders do not own your home or have the right to take it away as long as you pay your taxes, keep the homeowners insurance, remain there as your primary residence and clean out the gutters in an agreement to maintain the home.
Just to submit support to the Yuma Sun for printing the information on Tuesday explaining the HECM loan for those interested in using some of their home equity without repayment in their lifetime. The article is accurate and can be used to inform seniors about this great program. No lender will claim title to your home in the Reverse Mortgage process.
I serve Arizona from Yuma for those interested in more information and to start them on the road to liquidity after they reach their 62nd birthday.
Call Warren Strycker for more information: 928 345-1200. I am a veteran loan officer with fifteen years serving Yuma County and now throughout the state of Arizona. I can be trusted to tell you the whole truth about HECM Reverse Mortgages. You’ll like what you hear.
You will love to imagine what you can do with a HECM — see 25 ways below — and then add your own to the list.
Since many Reverse Mortgage lenders refuse to refinance manufactured homes, it is necessary to report that we are happy to do most of them, singles, doubles and triples. The HECM HUD standards include mobiles all the way down to June, 1976 after which manufacturing was overseen by HUD government standards, so there is a wide envelope for refinances here at Patriot Lending USA. Yes, there are some complications in complying with foundation standards and often, upgrading (tiedowns) is required to make them compliant. No payments on this mortgage required in your lifetime as long as you live there as your primary home, pay taxes and insurance and maintain the home.
A MANUFACTURED HOME (FORMERLY KNOWN AS A MOBILE HOME) IS BUILT TO THE MANUFACTURED HOME CONSTRUCTION AND SAFETY STANDARDS (HUD CODE) AND DISPLAYS A RED CERTIFICATION LABEL ON THE EXTERIOR OF EACH TRANSPORTABLE SECTION. MANUFACTURED HOMES ARE BUILT IN THE CONTROLLED ENVIRONMENT OF A MANUFACTURING PLANT AND ARE TRANSPORTED IN ONE OR MORE SECTIONS ON A PERMANENT CHASSIS. Manufactured homes are considered for HECM refinance if constructed after June 15, 1976.
Call with your questions, 928 345-1200. (We consider manufactured homes as worthy of our effort to support senors who live in them comfortably.)
General Information About FHA Insured HECM posted on United States Federal Housing Association webpage for your review :
What is a Reverse Mortgage?
Reverse Mortgage was originally introduced in 1988 for homeowners, aged 62 and older.
It allowed the lender to be added to the title of your home in the early days of the unregulated program. But no longer is that true.
What is a Government Insured HECM program?
HECM stands for Home Equity Conversion Mortgage. It is the federally regulated, insured and guaranteed program by FHA since 1991. The HECM is a safe way for you to access the equity in your home without ever making a mortgage payment. No lender is added to title and you retain full home ownership rights.
How is this Program “safe” for Senior Homeowners?
No matter what happens in the economy, how much money you receive, or how long you live in your home you will never be required to make a mortgage payment. In addition, no matter what happens to your lender or your home’s value you have guaranteed access to your money.
Who owns the home if I proceed with FHA HECM?
You own the home. However, you pledge the home as collateral.
What happens if, in the future, the Loan exceeds the Value of the Home?
Your FHA HECM Mortgage will continue – thanks to the federal insurance. The line of credit will still be available and monthly disbursements you may have set up, will still be sent to you.
How are Reverse Mortgages different today?
Today’s reverse mortgage, the FHA HECM, is highly regulated by State and Federal laws to make it safe and to protect you. Among others, the following FHA HECM regulations apply: You retain title of the home.
– No equity share is allowed, meaning the lender does not slowly take over your home.
– Fees and costs are federally regulated. How does the FHA HECM compare to a Traditional Forward Mortgage? In a traditional forward mortgage, you make monthly payments to the bank eventually paying off the mortgage over time. With the FHA HECM, you receive cash from your lender as lump sum upfront, as monthly installments or as a line of credit that grows over time. As long as you live in your home you never have to pay off a single dollar of the loan.
What restrictions apply to the cash I receive from a FHA Insured HECM?
It is your money and you can use it the way you want. It’s non-taxable and does not affect Social Security payments. We do recommend that you talk to a competent financial advisor to determine the effect on any other benefits you may be receiving.
When does a FHA Insured HECM become due and what happens then?
When you no longer live in your home or when you pass away, the FHA HECM become due.
You or your heirs have two options:
1) Pay off the FHA Insured HECM including the accrued interest and retain ownership.
2) Give up ownership of the home and receive the difference between the net sales proceeds and the loan balance. You will not be liable for any shortfall if the sales proceeds do not cover the loan.
What are my obligations under a FHA Insured HECM?
With a FHA HECM you retain title to your home. This means that you also have all your obligations as a home owner. You are responsible for home owner taxes and insurances.
Warren Strycker, producer of this webpage, is a veteran licensed loan professional under the laws of the United States. He reaches out to support your questions and leads you through the application to the close. There is no obligation to complete the application once it is begun and borrowers can opt out of the loan up until three days after “close”. See contact information on home page under “information” tab. Call with any questions, 928 345-1200. “I have witnessed the relief and satisfaction of those who have stepped up to use the home equity in their home to extend income in retirement. Is it a joy to see.”
Nobel Prize economist recipient Robert C Merton explains how Reverse Mortgage is wise for families.
Full Transcript of Steve Chen’s Interview with Bob Merton
Steve: Welcome to the 11th podcast for NewRetirement. Today, we’re going to be talking with Nobel Prize winner Robert Merton, a nationally recognized economist and professor at MIT about the retirement planning landscape, why do we face an impending crisis and what kinds of changes can materially improve retirement outcomes for people.
He has a very big list of accomplishments some of which include:
He’s currently School of Management Distinguished Professor of Finance at MIT and John & Natty McArthur University Professor emeritus at Harvard University
His areas of research include lifecycle and retirement finance, optimal portfolio selection, capital asset pricing, option pricing, credit risk, and dynamics of institutional change
He received the Nobel Prize in Economic Sciences in 1997 for a new method to determine the value of derivative securities
He is past President of the American Finance Association, a member of the National Academy of Sciences and a fellow of the American Academy of Arts and Sciences. He holds honorary degrees from eighteen universities
He’s been recognized across the world for translating financial science into practice
He’s the Resident Scientist at Dimensional Fund Advisors, where he created Target Retirement Solutions
We’ll be talking about target date funds a little bit further down here.
With all that, Professor Merton, welcome to our show. I’m honored that you would take your time to join us.
Merton: Thank you. It’s a great pleasure to be here.
Steve: All right. I’m going to just jump in to some quick questions. First, I’d love to just learn a little bit more about your early life and your education and kind of what led you to economics, because I know that you started with applied math at Caltech.
Merton: Yeah. I started entering mathematics at Columbia and then I went to do a PhD in applied math at Caltech. I got two of my course work, passed my qualifiers and was thinking about a thesis. I bought my first share of stock when I was 10 years old. I’ve always been involved in the markets. Didn’t know what I was doing. Didn’t know I didn’t know what I was doing but learned a lot about markets from the experience and traded all the way through in lots of different things.
I had a lot of experience in all different kinds of financial markets. I never thought of that as a day job. I decided, at one point, I was thinking about what to do with my thesis on, water waves in the tank or plasma physics didn’t excite me. I was thinking about all the economics and things and I kind of felt I had a little flair for that and it’s what intrigued me, got me interested.
Then, I sort of heard of an economist speak in which he talked about solving the major problems of macroeconomics and how the impact of that. Of course, he was very optimistic but as a young person, I said, “Wow, if you could do something even a little something for so many people that would be really cool.” As I thought more about it, I did a crazy thing which was I decided to change fields and I opted and applied to many economics departments having essentially know of formal economics for PhD.
Everybody turned me down except for MIT, which is probably the best department in the world at that time. They gave me money so it made my decision easy. I switched to MIT to do economics and that’s where I did my PhD and now I’m here today.
Steve: Nice. You’ve been trading since you were 10 years old, have you continued to invest as a retail person, a retail investor in the stock market all the way through your life?
Merton: No, not really. I had enough of that. At various times, I guess, when I learned what I didn’t know and I found out what I did know, it just didn’t make a lot of sense for me. I’ve done it for a long time. I don’t trade individual shares or anything like that. I don’t trade options even though I made a big contribution there.
What I do is essentially help design solutions for big institutions, for retirement plans to help people. I find this makes much more sense to use what skills I have to help large numbers of people than what I can do for myself. I really think that this is big disadvantage for individual trying to do it. If it’s a hobby, well, okay. That’s not something I want to spend a lot of my time for myself.
Steve: Nice. I think it’s great that you’ve chosen to apply all of your math skills and economic skills to help as many people as possible. I know that a lot of people speak really highly of the solutions that you’re building at DFA. It’s awesome to see that. Before I move on, since you’ve got this unique experience of winning a Nobel Prize, I was just curious if you could share kind of what it was like at the moment in time when you found out and also how it affected your life once you won that?
Merton: In that case, I could start by saying, I highly recommend it. I mean the call always comes very early in the morning because this comes from Stockholm and I had no expectations to get it. I just actually was walking out the door to catch a plane when they called. When I found out, I was, I guess you could say, really quite surprised, shocked.
It was pretty good. I mean, if you’re a scientist in the area of your field and your field offers that prize. If you were fortunate enough to receive it, there’s really nothing comparable. It may not matter to other people but if you’re in the field where it happens, they only give one in the world every year. Of course, it’s a great recognition.
Also, you have to be lucky. It’s always good to be lucky in the … you have to be to win a prize like that as well. The recognition of your colleagues and others that they think the work was of that quality is really incomparable in terms of what it matters.
Steve: Just a quick question about kind of at the worldwide level. I know that some people look at Japan because it’s got a more rapidly aging population than we do. Do you think that there’s lessons that we can take from what’s happening with their society and economy as they face a much more rapidly aging population?
Merton: Sure. I don’t think Japan … I mean, Japan is a specialist and that it has almost no immigration. I think that people there live longer than almost anywhere else in the world. They don’t even start to think about that they are retiring until at least 75. It’s a different environment. They’ve had, in terms of their stock market over the last generation, I think in, off the top of my head in January of 1990, the Nikkei that’s index for the Japanese stock market was 39,000. Today is 21,000, 28 years later.
Obviously, they haven’t had a lot of growth in their stock market. The interest rates are very low there. Despite that, it’s still a very wealthy nation. I think many people live well certainly in the cities. I think there’s something to be learned but not much. I think the bigger picture is, it’s happening everywhere, the age is everywhere. The other thing I would say is, well, we want to look to the past to learn. Best practice is not good enough.
In other words, if we’re going to rebuild or redesign retirement systems to deal with the future, looking at best practice, which are legacy systems, is like driving your car looking in the rear view mirror. If what’s in front of you is the same as the bus behind you, that works. That’s not the world we’re in. We know the world itself is changing very much, Asia, the whole region that is growing very fast.
Even in the United States, things are changing, the way we work is changing, technology is changing. With all these changes, the way we provide for retirement, what we should be learning has to be on a prospective basis. Using everything we know in terms of available financial technology, in terms of computers and all the technology that we have for facilitating the management of resources and disbursement of them.
We need to use all of that. We can’t just look to the past and learn from who’s done the best job. That’s a starting place but it’s not close to being good enough. We have to be very careful not to just try to too much depending on looking at the different systems and then trying the best parts of them and say that’s what we should do going forward.
Steve: I think it’s pretty interesting when you … we are going through this or have been going through this transition from pensions where the risk was on the company or on some entity that was kind of taking care of the individual to define contribution, where individuals are responsible for saving and then investing properly.
All that risk has been shifted to them. What we are seeing right now is pretty bad metrics as we go through this transition. Right today, half the population essentially has almost nothing saved. The people that do have savings or an average, the savings rates are very low given what people … given the extending time horizons and lifespans, people need to fund.
I know you’ve written a lot about kind of what’s wrong. I want to introduce the idea that one thing you’ve mentioned is, everything has been kind of geared around accumulating assets but I know you believe that we’re looking at the completely wrong metric. We need to be looking at kind of lifetime income. I just want to get your take on how you think we got here and how we go forward.
Merton: Okay. That’s a very good question and a very important one. From now on, at least in terms of our discussion, let’s presume that we’re talking about a defined contribution plan because as you say already, the other types of plan, the members that really don’t have much to think about anything. It’s all run by the company or the sponsor and their responsibility is one way or another to provide what they promised.
If we’re talking about in the DC (Defined Contribution like a 401K plan) world, which is really likely to be the future almost everywhere, how do we think about what is a good retirement? That’s what the system is all about. I would say, this is not original with me for sure, a good retirement is that if you could sustain the standard of living that you’ve enjoyed in the latter part of your work life throughout your retirement for the rest of your life. That would be a good retirement.
We all like more but I’m telling you, someone who’s at that age, you don’t want less. If you accept that as a good goal target, what a good retirement would be is to be able to sustain your standard of living. Then the first question I’ll ask is how do I define a standard living? I have to have something financial to look at in order to decide how to manage the resources and what resources are needed.
If I can visit you in your hometown and I said, “Hey, this is a nice town. I like to move here.” Then, I looked at how you’re living and I said, “Well, I like the way you’re living. What would it take for me to live in your town like you?” I doubt you’d say to me, “You need $3,637,550 in the bank.” I think you’d say, “Well, if you want to live like me here, you have to be earning about so much a year, right?” That’s how people would say. “You got to earn about that amount, you can live like me.”
What is that saying? I was describing a standard living and your response was the amount of income, not a pot of money. I’ll give you another example, social security around the world. When you retire, what do they give you? What do they tell you they have? Do they tell you, you have a pot of money accumulated? No. They tell you, they will pay you so much per month for the rest of your life, and they will adjust it for inflation, right?
One again, an income concept. Then, we talk about defined benefit plans, which most employers, with the type of plan they’ve always had, pensions, they don’t tell you that you have a pot of money. They say, “Here’s what you have, the rights to this for the numbers of years’ worked and we will pay you this much a month, sometimes, protected for inflation, sometimes not, for the rest of your life.”
Again, an income scheme. The only place that I know of in any big place of where the amount of wealth or how much is in your pot as they say, how much you would have retirement money is the issue or even talked about or even used to measure things is in the case of DC plans. It’s the exception, not the norm. Why? There’s a bit of a historical reason and just briefly, when DC plans come in the United States, they grew out of a reason, creation of the whole pension system in the 1970s and it was really a footnote.
It was somebody who slip to one of those things in the big bill and it was really designed for supplemental above your social security and your pension for higher paid workers, who were capped out in their pensions and so forth but wanted to save more. It’s even questionable whether it was really for retirement or whether it was really more almost a nice savings account which had … they got tax benefits or there was tax benefit saving.
Because it was supplemental for hiring from people, nobody paid much attention to it. There wasn’t so much regulatory, I mean, there’s regulation but nobody spend a lot of time worrying about it. Because people already had lots of income in retirement from their social security and their pension plan, some said, “I don’t need to take income. I’ve already got plenty there. I want to have cash. Maybe I’ll just use it to say, get a boat, give some money to people,” or whatever.
That’s the history. That was fine. Now that it’s being used for full retirement, for working middle class people who are fine. They’re not poor, they’re fine. They just don’t have a lot of extra. That’s a very different use of that DC. Now, it needs a lot more attention because if this doesn’t work out, it’s going to be very painful for people.
That focus on money rather than income, it probably comes from that. If you have any doubt about income, I’ll tell you this, if you look at a corporate plan, big corporation, if you are the CFO, the chief financial officer, who’s usually the most senior person who reports about the pension to the board and the CEO. I’ll give you two stories that you could have to go in and ask, “What do you think the CFO would choose?”
Story number one. We made a 20% return on our pension assets but our funded ratio and that’s nothing more than a jargon for saying, the amount of retirement income we could buy with that money has gone down. Assets up 20% but the amount of return income we had plan we could get has gone down. Or, we made 4% on assets and the amount of retirement income that we’ll be able to have is going up.
I promise you, they always take the second one. Why? Because if it’s the first one, then he has to say or she has to say to the board and the CEO, the hundred million that you’re planning to spend on expanding the business, you got to need it for the pension plan. That’s not a good story. The second one, they could say, “Hey, you know the hundred million that you budgeted for the pension? We don’t need it this year. Go spend it on developing the company.”
I say that as the shorthand not into getting to base whether what people will think about. Sure, people want some cash for things but by and large, people like pensions. They always like pensions. I’ve known of no employee group in the world who’s marched in their employers and say, “Get rid of the DP plan.”
Overwhelmingly, I’m trying to make the case the thing that matters for retirement is the amount of income you get and not how big your pot is. Those are very different. Sometimes people say, “If I have enough money, I’ll get the income. It will be fine.” That’s reality. You want a quick reality, let me just give you a simple case I think everybody can imagine.
Ten, 12 years ago in the United States, you could walk into any bank in the United States and get a fully insured certificate of deposit. It gets 4%, 5% on your money. If you had a million dollars, you get 40 or $50,000 a year interest. Okay. Now someone says, “I want to keep you very conservative, so just keep your money in the safe CDs, your principal … your million dollars is absolutely safe, insured.”
Say three, four years ago just to keep it away from today, you go into the bank, what would you get? Not 4%. No, no. You get a tenth of 1%. Today, you can get it up there but you would have gotten the tenth of 1%. To put that for you, that’s $1,000 per million. My million has been absolutely safe, no risk, right? What happened to my income? It went from 40 or $50,000 a year to $1,000 a year. You’re in total trouble.
You’ve lost 98% of your income. If I lost 98% of your retirement wealth, you’d hang me. First, you sue me then you’d hang me. My point is that there’s a big difference between wealth and income. Knowing I have a million dollars doesn’t tell me the lifestyle that I can enjoy from that million and what we care about is the lifestyle. Let’s be clear the goal, the purpose for retirement. Not for the silly other things but for retirement is a stream of income sufficient to sustain standard living and that standard living is measured by income.
What matters for retirement is income not the value of the pot of money. If you measure the wrong thing as we are in DC plans, I’m required if I’m a provider. I have to show all the members the value of their pot. Every time you go in your accounts quarterly, whenever you get a report, it shows a green if the pot is bigger, it shows you a red if the pot is smaller.
If you see it go way up, you smiling. If you see it go way down, you’re frowning. In fact, that’s not really telling you how you’re doing for retirement because what you really want to know is, how much income could I get in retirement from what I have in my account? How far am I from where I would like to be? How far am I from my goal?
That’s the thing that really matters. Just like that CFO, he wants to know or she how close are they to funding what they’ve promised people in income. We’re showing people and we’re required to show people the wrong number. We’re showing them what’s happening to the value of their pot and what they should be and really are worried … should be worried about. Or what is the amount … how close am I to my goal?
If I need a replacement of $56,000 a year to sustain my standard living after I retire, where I don’t to save anymore. I say I was making 80,000 or something and now I need about 56,000 because I’m not saving. What I want to know is, how am I on track to getting that? How close am I in terms of the amount of income, risk-free income not hopeful income but risk-free income, guaranteed income could I buy with what I have.
If that’s 50,000, then I’m 6,000 short. If it’s 40,000, I’m 16,000 short. If it’s 20,000, I’m 36,000 short. Whatever amount of pot it takes to buy that is irrelevant. It’s where I am and how much I can actually buy. As you heard from my example, that depends on where interest rates are. If you look at the real world, the world we’re in, I can tell you that they vary a great deal.
The difference between the high, low and long term interest rates in the United States in the last 10 years, if you retired … with a given pot of money, if you retired and you got an income of a hundred, whatever that means, at the peak of interest rates, when they’re high, you get a hundred. At the trough, at the low end of interest rate, the same amount of money, you’d only get 74.
In other words, you’ll be 26% lower. Think about that, 26% less of income, that’s a big hit especially for working middle class people but for any of us. Just knowing the amount of money you have doesn’t tell you how you can live. That’s the message and we have to get that clear both so that savers and people in plans are trying to figure out how they’re doing. We need to tell them the amount they can buy as an indicator of how close to where they are.
The number of people when they say the pot, they say, “I have $500,000. That’s more money I’ve ever seen in one place. I’m rich.: Until you find out that the amount of money that you can get from that to live on is like $18,000 or $20,000 a year. They say, “Whoa, that doesn’t sound too rich to me.” That’s the kind of things that we have to get. It’s at many, many levels.
We have to have people to know where they are and therefore if they don’t like where they are, they’ll be able to take action to improve it. They need to have the right information so we need to show them the amount of income they can buy and they can relate to that. I just got back from South Africa where we do something like this.
They passed a law there that you got to have to show the amount of income that you could buy with your pot to people on regular basis. Just think of this, let’s say you were living on 10,000 rand a month which that’s about 1,000 US dollars, 10,000 rand a month. Then, you see you have a pot of, I don’t know, 500,000 rand. You say, “Oh, I’m rich.” When you show the amount of income, its 2,000 rand a month.
It doesn’t take anybody. Anybody can understand, they don’t need any education. They just have to have lived. That if they’re living on 10,000 and they’re making 10,000 a month, and that’s how they’re living and someone shows them that the amount they have with their pot will buy them retirement income of 2,000. They realize that they’ve got a long way to go.
A very few people can convert $500,000 or any amount of pot money into that relevant number which is, how am I to where I need to be? I know I’m emphasizing this very strongly because it’s really very important and it’s had some very unfortunate effects by looking at the wrong number, therefore, how we define risk is wrong. If we don’t measure risk correctly, we can’t possibly manage for people directly. That’s the core thing that has to change.
The only thing I would say is … not the only thing, the thing I would say so I don’t sound like Mr. Naysayer Doomsday is slowly but we are as an industry and people, we’re moving from the no attention to this that now more and more you see the discussion of income, the discussion of how much income, discussion of when people get to retirement, how can they convert this to income and what’s the ways to do that and so forth.
In effect, I think we are slowly moving in that direction as are the systems elsewhere in the world. It’s moving pretty slowly and we need to help it to pick up a little bit. That’s, I think, where we are.
Steve: Yeah, that’s great. It’s great to get that context and the history. It’s interesting when you step back and looked at it. Yeah, we’re all focused on wealth and building that number and how that focus has changed the entire ecosystem so now you have wealth managers and their whole job is to make that $500,000, two million bucks.
Then, the way that most of them are paid is strip of assets. If they can earn or get 1% of your million dollars in like 10,000 a year if you, together, grow it to two million, then they’re making $20,000 a year. They’re not having that discussion. Yet, their title itself, wealth manager, it’s not like income manager. It shows you how in grandness this focus is on just growing that top line number.
You’re saying basically we should … just to finish, we should refocus completely in terms of defining risk around the risk of not being able to achieve this income?
Merton: Yes. I don’t see inherently a conflict that people are getting paid on AUM. I think your point is right that we’re measuring the wrong thing. If we measured instead of measuring in dollars, how much is your account worth in dollars, if we just measure it in the amount of retirement income you could buy with your account using market prices. Okay.
Not income earned in the account but how much … if I took the money in the account and bought US treasury’s bonds, they started paying when I retire and paid the cash out throughout or we bought an annuity or something, we could look at those prices. If we measure things in terms of how much retirement income and you paid me a percentage of retirement income, then we could do that. If I increased your retirement income, you pay me more and then I’d be very happy too as a provider.
It isn’t an inherent conflict as so much as it’s … I believe, we’re showing people the wrong number and that has a bad effect. For example, if I do the right thing for you. You’re 62, you’ve done well in your retirement account and I say to you, “Hey, you’ve got enough money to basically lock in your goal. I can buy you inflation protect, US Treasuries with funding that will take care of you throughout retirement guaranteed full faith and credit, the government protected for inflation at this level income, that’s your goal. Then I say, “You do want to increase your goal?” You said, “No, I’m happy with that, that’s my lifestyle. If I have some extra money, I’ll do something with it but basically, I’m happy with that. That’s what I want to live on and the safety and security, that is what matters to me.”
The rationale thing for me, the right for me to do is to buy you those bonds. Your income is absolutely for sure safe but if I buy you those bonds and interest rates go up, the price of those bonds will go down, that’s how bonds work. Interest rates go up, bonds and prices go down, the income stays the same. Yes, the bond price is lower but because the interest rate is higher, you get more dollars of income for each dollar of your bond value. That’s the whole point.
Income is absolutely stable in a bond. Its value will fluctuate with interest rate. If interest rate, especially long-term bonds, which is what you would need for retirement, if the interest rates go up and let’s say your bonds go from 100 to 85 and I send you or put it on your account that your account has gone down 15% and you’re 62, you see that, you’ll go berserk. You’re going to say, “You told me you’re being safe for me and I’ve lost 15% of my retirement.”
In fact, that’s not correct statement. Your retirement is defined by how much income you get for life. That hasn’t changed. The value of that has, that example is the problem at the core. It’s misinformation because we show them the wrong number.
They get happy when it goes up but they’re actually no better off because if interest rates fall, the bond price will go up. They’re richer in terms of money but the bond doesn’t earn as much so their income doesn’t go up. Therefore, they don’t have any better retirement. They see it as, “Oh, I’m richer,” or “I’m poorer,” or “You’ve lost my retirement.”
That, from my experience, is the biggest problem. It’s not a conflict between the asset managers or anything. It’s just, we’re showing them the ruling number and we’ve taught people. They didn’t ask for that number, you didn’t ask for that number to see it when you put your money in.
You know what I’m saying? Most people don’t even know. It’s the number we show them so they get used to doing it. If you’ve been in a DC plan for 30 years, you keep getting the account, you figure they must be … they’re showing the thing with the green or the thing with the red. They’ll show it to you for a reason so that must be what you should look at.
Green means good and red means bad. We’re all that way. This does not have anything to do with I2 or training or anything else. This is just common sense. We’ve taught all the members in DC plans that that’s what they should look at and that they’re better off with that numbers up, green and they’re worse of if it’s red down.
The reality is, that isn’t true. It’s like showing people numbers that aren’t relevant and teaching them to look at them and that creates all kinds of complexity and then the management of the money, not because there’s a conflict in making money but because we’re measuring risk wrong, rules are being written which are … that supposedly reduce risk. All of them are written with the idea of risk of volatility, of the value of the account rather than volatility of the income.
Again, if you bought certificates of deposits or treasury bills for the last 12 years, your million dollars is still worth a million dollars. I don’t know what to say about inflation. The amount of income you’ve got has gone from four, 5% down to practically nothing. That is the message. We have to fix it in several levels but starting with, we have to agree that this is what we should be doing, we should change the way we’re required to present things.
Even if you’re required to show them the account balance, I would put it on page seven. By the way, if you want to liquidate your retirement account, it would be worth a thousand dollars today. Of course, that’s not what you’re going to do so it’s not relevant. What’s relevant is, how close are you to your goal of how much income you need to have a good retirement.
Steve: Got it.
Merton: That’s how it should be.
Steve: Right. We have to kind of retrain a few generations of people about what’s the right thing to focus on is. It’s interesting listening to you describe those. On the one hand, you compare how people talk about pensions, which is in many cases, they’re talking about, “Hey, pensions are have all these unfunded liabilities.” Then, that’s probably because lo and behold, maybe they’re measuring things right away.
They’re measuring what’s their ability to make good on their publications to pay a stream of payments. They’re actually measuring the right stuff and saying, “Oh, looks like we’re under funded.”
Meanwhile, you got all these people saving and they’re like, “I’m saving big piles of cash but I’m looking at the wrong metric. I don’t really know. How does that translate into me actually having enough income for life?” We’re not really saying exactly how big is that problem and people, I think, I’d rather say concerned about it, but it’s kind of interesting compering how we look at these pension plans through one lens and the DC plans as you’re describing it through another lens.
Merton: Yes. Again, I underscore for pensions with professional managers, CFOs or oversee, that CFO is asking for the right number. He’s asking for how much income or the plan assets be able to buy. That’s what he looks at, she looks at. This is not about when you say retraining people, this is not about retraining people who are professionally in the pension system. They understand that.
They understand that’s what matters is the income. Believe me, the problem in the DC world is for you and I and my 150 IQ brilliant MIT colleagues, three PhDs, nanotechnology designs and they don’t know what to do with their account either. No, that’s true. Why we would expect them to be able to do that?
I’ll give you an example, I have to give them the test history of all the mutual funds that they can invest in, okay? I’m required to give them that. Remember, these are some of the smartest, most curious people in the planet, okay? You won’t find any better educated, smarter, more curious people. I give them that, they don’t know what to do with it. I don’t know what to tell them to do with it. What are they supposed to do with it?
I’m required to give it. What are they supposed to do with that? How are they supposed to look at the past? Pick a good manager for the future.
If you’re in this industry, if you’re in the financial service industry, if you have the skill set to look at the past history, which is available to everyone, of mutual funds, returns and predict who’s going to have good returns in the future? You will get paid millions of dollars a year for that skill. People are, okay? Is it reasonable to expect even my super smart MIT people, in their spare time to be able to look at these things and figure out which managers are going to do well from that data, those data, and do anything meaningful?
Of course, not. It is so absurd to even suggest that. Yet, that’s what we do but we create frustration because then like my colleagues say, “Well, why are they giving it to me? These are serious people. This is retirement system. I must have to do something with it.” The answer is that some of them just get frustrated, they say, “I think, I’m a pretty smart guy or gal, but I don’t know what to do with it and I’m just frustrated.”
Others say, “Oh, I’m smart. I guess what I should do is find whichever funds were up the most the last 10 years and invest in full my money in them.” What else could I think to do? Of course, we all know as professionals, that’s called return chasing. That’s a terrible investment strategy. Chasing after whoever did best last time. We know that whatever is right, that’s not a good one.
Yet, what are they supposed to do? Some part of it, without overbearing this, is some part of it is we have to sit down and just use common sense. What do we expect people even very, very smart educated people? They’re very curious people. What do we expect them to be able to do with this? What decisions are meaningful and what are not? What choices are meaningful and what are not?
I think if you investigate, you’ll find most of what we ask people, what asset allocation they want? How much real estate? Do they want a conservative fund? All of that stuff is meaningless to people. They don’t know what to do with it. They don’t know how to calibrate it and they get frustrated with it. One of the things we can do in connection with getting the right information to people, mainly his income, is to have a rule. A rule says, “Only give people and clients meaningful information and actionable choices. Don’t ask them to make decisions about things that they don’t understand, can understand, don’t have the data and don’t have the experience and don’t have the time to evaluate and the skills.”
It’s like, if your doctor, if you’re going to surgery says, “Mr. Jones, would you rather have 12 or 16 sutures?” That’s a choice, right? Do you have any idea? No, I say to the doctor, “That’s what you’re supposed to do. I had to find you and I have to trust you to do it right. I can’t make that decision.” If you look at most of the financial positions that we ask people to make in DC plans, the choices of funds and risk aversion, all these kinds of things.
Most of it, most of it is of that nature. It’s really not meaningful. In fact, if you just go after the meaningful information, I believe, you can put the meaningful information and the meaningful or actionable choices on one page. Not a lot of complexity, not a lot of investigating funds and so forth and all that sort of things.
It’s a little bit like if somebody gave you all the parts list for your car and said, “Okay, here’s everything. All the information, here’s all the part and now you assemble your own car.” How do you think that would work?
Steve: Yeah, not too well.
Merton: Not too well.
Steve: Right. Do you see any organizations or, I guess, you mentioned South Africa but organizations of countries kind of making a lot more progress in moving down this path of helping people, one, measuring the right things and focusing on the right metrics, income and then making it simpler for people to actually have successful outcomes?
Merton: Yes. We’re talking about a lot in the United States whether we’ll implement it well and how long it will take to implement, I’m not sure. There is no question in my mind here and in the UK, for example. Actually, in most countries, in Hong Kong, Singapore, they’re all talking about that we should be thinking an income.
South Africa has taken this step, others are doing it. By the way, if you’re a provider today, you could put that number up if you wanted to. You still have to show the other, the AUM, but you could put that number up.
The problem is, you won’t train people right. Look, the way they’re training people is if you start putting that number, you have some explanation but people … it’s pretty intuitive to know. Look, you need income to live in retirement and here’s the level of income you can buy. That’s not a hard one. You don’t have to do any translating.
If it’s 2,000 rand you can buy and you’re living on 10,000 rand, you got a long way to go. You don’t need a whole bunch of other analysis. I think, if we start doing that as a rule and we actually de-emphasize the value of the account, you put that on page two or three and call it the liquidation value. That’s what I would say.
Liquidation value is X dollars. If you liquidate your retirement now, this is what you’ll get. That’s not what a retirement account is there for. It’s not there to be liquidated. It’s there to support you in retirement. You put this other number. I think it won’t take long for people to get very used to it because they’ll start … they’ll see their income go up. They’ll see a green arrow and they’ll be happy and they should be.
If they see their income go down, they’ll get on the phone and call up and say, “Why did my income go down?” They’ll get an answer. They may not like the answer but they’ll get it. In other words, they will look at things in the right way. I don’t think it would take that long if it’s uniform. If one provider does it, it’s not going to have the impact.
If we became the law, the regulation, and everybody had to do it and it was done probably, it’s no different from saying you mark portfolio assets properly. Put them on a wish. There are rules for it. You have rules for how you would mark the income. That’s just the detail. I think it wouldn’t take very long at all especially if we have little green and reds.
People will see. I think they’ll find it more intuitive. Just think about it. You know what you’re living on and you know what this will buy. That’s about the easiest thing for you to figure. It’s like someone says, “I give you a race,” you will understand that, right? You don’t need to have to have a financial engineer or a technician or an adviser to spell that one out to you. That’s what I’m trying to … we can do it, I think we will get here.
I hope we could do it better and sooner. This is absolutely a necessity. We can’t keep running a system on the wrong metrics.
Steve: Yeah. I think the reality is that it’s already been tested. I mean, people that had pensions or easily able to assess, “Oh, I’m going to get $40,000 a year starting at age 60 from my pension as being a firefighter.” They completely understand it. They can plan for it. That’s all they know. They can kind of know where they stand.
What I see a lot in our business is people kind of think about safe withdrawal rates. They’re still focused on piling up a bunch of money and then they’re starting to think, “Okay, here’s how I’m going to take this money down. How do I draw it down? What’s my safe withdrawal rate? What’s my sequence of return going to look like? Which assets will I tap at which time?” Then, they’re basically managing the drawdown.
Do you think that’s realistic for people to do, for a lot of people to do or how do you see that building?
Merton: Look, let me start with, first of all, the answers are at some level the same for everyone no matter whether they’re working class, middle class, upper middle class, mass affluent. The super wealthy or the very, very wealthy, this is not an issue period, okay? I mean, their retirement is just not a thing.
For the rest of us, it is different. I mean, if you’re a working middle class person, you’re fine but you don’t have a lot of extra. Then, you’re focusing … you don’t have a lot extra. Therefore, if something goes wrong on your income or like you put your money in stocks and the stock market goes down, that’s going to be very painful.
If you’re upper middle class, you probably have more reserves and if you’re mass affluent, you probably have other reserves, you have various goals maybe you have requests. You want to do some wealth management, intergenerational transfers, you may want to do some philanthropy. Modest. I’m not talking about gazillion dollars.
You have other goals besides a good retirement. That’s fine. People have that money. You have to be careful. I’m talking only … my job is to get you a good retirement. I’m not your financial planner and it’s a very bad thing to integrate into a financial, to a retirement solution like a pension or a retirement, integrate that in your other desires. Do you understand what I mean?
In other words, if you want me to be your financial adviser if you’re affluent or mass affluent, you have adviser, great. Then, their job is to look at your whole package of everything, all the things you want, all the things you wanted, you’re hoping to achieve, all of that stuff and integrate it. That’s great. If it’s retirement that you’re focused on, and as I say, for working middle class people, there really isn’t an awful lot extra beyond that, okay?
It depends on who you are. In every case, what you want to be looking at is drawdowns are risky. Say, “You could take 4% out a year and 96% of the time, you’ll be fine.” You think that’s pretty safe. Actually, what’s the penalty, the other 4%? You ran out of money. You’re there and you literally ran out of money. The 4%, is it a rolling 4% if your portfolio goes down, do you mean 4% of the lower value? That’s like having a floor which is a floor of an elevator.
If you mean literally 4%, so you retire with a million dollars, you say, “I’m going to take $40,000 out every year no matter what.” You could outlive that. If you put it in stocks, your million could become 600,000. That’s what happened between September of 2008 and March of 2009, less than a year, six months. Markets around the world more or less decline about 40%.
Now you’re taking 40% out of 600,000, 40,000 out of 600,000, that’s not 4%, that’s 7%. Do you see what I’m saying? There’s lots of nice rules of thumb and if you’ve got extra things, I say, “Look, if it doesn’t work out, I won’t give that gift to my favorite charity. I’m sorry, I was going to do it but,” if you got that kind of wiggle room, that’s a very different situation when you say, “You know, if my retirement income isn’t there, I’m going to have to move in with the kids or I’m going to have to do something maybe not quite so radical but I’m not going to be happy.”
To answer your question, the way I like to look at it is a little bit like when you get on a plane and they tell you all the things to do, seatbelts? Do you remember when those masks drop down? They always have a picture of a sweet little girl next to you and your natural inclination is to put the mask on her first, right? What do they tell you? No. Put the mask on yourself first. What’s the message?
First, take care of yourself because if you don’t take care of yourself, you can’t help anybody else. You’re going to end up having them having to help you. You’re going to be a burden. That’s the message. That’s my message on retirement.
You ask me about retirement, I say, “First, focus make sure you got your retirement.” One way to do that is if you have a standard living, which you’re happy with or pleased with and we’d all like more. You say, “That’s good enough for that.” Then, one way to do it is to lock that in by buying a life annuity. Life annuity will pay … and you can get ones that are next to inflation, if you want to keep your standard living.
If you lived 120, as all the good books promises or wishes, okay, and maybe your next generation or two will start living that long. Even if you live to 120, you get paid every month. There’s no chance you can run out. Any drawdown policy has a risk that you’ll run down, unless your drawdown is interest. The problem is that’s very expensive. You have to be very, very well off and that’s not the case to do that.
Let me explain to you that once you get to retirement, you have a certain amount of money. I mean, that’s the fact. If you just say, “I’m going to live on interest because I can’t … I don’t know how long I’m going to live. I can’t spend down on principal, because if I spend down on principal, I might outlive my money.” People, where everybody worries of retirement, I don’t care what your IQ is. Everybody worries that they’re going to outlive their money.
That’s why so many people, when they request something, they request it by saying, “You can have my house and you can have all my money, if there’s any, when I die.” I’m really saying, “I’m going to hang on to everything because I may need it and if I don’t need it, you can have it.” That’s not a request function. That’s just an inefficient market because certainly, your beneficiaries … beneficiaries, that’s not a good deal for them. They could use the money when they need it, not when you die and those are usually not the same time but anyway.
To go back to the point, if I just live on interest let’s say it’s, I’m going to give you numbers so you get an idea. I’m earning 2%, now, if I’m willing to buy an annuity with my money or not … you don’t have to put everything in that but let’s say you did everything. What happens? When I buy the annuity with the money, it agrees to pay me every month for the rest of my life.
In return, so they will pay me money for as long as I need money. Then, when I no longer need money, I’m going to some place where I don’t need money, some place better, I hope, okay? I give up money because I don’t need it. That seems to me a pretty good deal.
I’ll give your money for as long as you need money and in return, you give up your money when you don’t need it. If you see of it that way, what’s the amount that you get? Instead of 2%, you get 5%. The deal says, if you hold your bonds, you just spend the 2% interest or whatever, you get 2%. If you give up your money when you don’t need it, which could be tomorrow or 35 years from now, okay? I’ll pay you 5% as long as you need it.
Do you see? For the same amount of money by moving from just living off your portfolio, interest, to accepting that if I don’t need the money, when I don’t need the money, I give it up in return, I can increase my benefit for the rest of my life, even if I live 40 years by 5%. That’s the way to improve benefits without having more money. That’s what’s so powerful about that.
Steve: Right. I think what’s happening as you’re kind of running in … theories running into practice. The reality is a lot of people are uncomfortable giving up their liquidity and want to have access for psychological reasons, that chunk of cash. They don’t want to give it over to an insurance company to get that higher stream of payments.
Merton: Yeah. Okay. Let me just quickly say on that. If it’s expensive to buy, a lousy product, a lousy version of a product doesn’t mean the product is bad. You had a car that only starts one in four times and I ask you, “How do you like the car?” You’d say, “I hate it.” I don’t know whether they’re saying they don’t like it because it’s expensive.
If they say they want liquidity, fine. You keep 10% of your accumulation for liquidity. You don’t need a 100% for liquidity. That’s my point. Remember, what your choice is. You can live on 2% a year or you can live on 5% a year. Sometimes, liquidity is nice but that’s pretty expensive to have liquidity and be able to play in your sandbox with the money. That’s what I’m trying to say. If you’re working in middle class, the difference of getting two or five is huge.
It’s the difference of … and that’s the way you’ve got to look at these things. It’s not like I’ve got so much money, I would like to have this and I like liquidity and I like to have a boat and I’d like to be able to give money away. I’d like all those things too. The reality is, that’s why it’s a crisis. If people have that much extra money and was easy to get there, we wouldn’t be having a crisis. We wouldn’t be talking about this.
Let’s deal with the real world. In the real world, we’re going to have to have people annuitize just the same way they got a pension. They may not like it. They had wished they have more money. When they’re faced with a choice of having a very small fraction, I did an analysis using real numbers from groups that work on that here, work conventional on this.
I said, “For someone in the 75th percentile income in the United State, it’s like $86,000 or whatever it is I forgot the number precisely and if they have a replacement and they show like $56,000 and if they have accumulation of 300,000 in their DC plan and they have a house that they buy a reverse mortgage to it.” All right, I’ll just give you some quick numbers.
Just living on the interest on their accumulation plus social security, you always get social security. They would get to about roughly 50% of their goal. In other words, they would have only half of what they need to have a good retirement, half of the standard living, the replacement ratio they would like. If you annuitize, you get about another, you get from half to about 75%, okay?
Remember, it’s not up this much because we have social security, which is actually an annuity to begin with. Everybody starts with the social security annuity to begin with. That’s why it’s not just proportional as I said before. I will give you numbers. Fifty percent then you annuitize, now you’re 75%. If you do a reverse mortgage on your house and let’s say, you live in the Boston area and you’re that income bracket, you have a 500,000 or $600,000 house or apartment.
You do a reverse mortgage on that, you can get enough to buy an annuity, not to earn interest, to buy an annuity so that you get to the other 25%. You can go to 100% coverage. The difference of just living as you say, a drawdown. This is a drawdown where you’re not taking anything down, just interest. That’s zero withdrawal, you’re living on interest. That would give you 50.
The annuity plus the reverse mortgage in your house and use that money from your house to buy the annuity, which is safe to do because the annuity will pay you for the rest of your life and you don’t have to pay anything on the reverse mortgage until you leave the house, which is at the end of your life. It all works out. That’s the way to move the needle from 50% to 100% coverage.
I’m saying, as a practical matter, and this isn’t just for the United States because it turns out that the saving patterns around the world are very, very similar for working middle class people. The only personal saving they do, I’m not saying about retirement accounts, personal savings, is their house and a bank account. The house is usually the biggest asset that a family has at retirement, often bigger than their pension.
That house, this is true in China, this is true in Hong Kong, Singapore, you name it, Mexico even, believe it or not. That is such a big asset. It is a perfect asset to do this with because it’s an asset that people have. It’s an asset that gives them an annuity itself because they live in it and it’s the house they want to live in so it covers it. If you do a reverse mortgage on it and you do this, you can move yourself that far. Anything that big, in my view, has to be looked at.
I don’t say everyone should get a reverse mortgage. I’m not saying that. I’m saying you need to look at these two things because these are the only two things, the annuity and the reverse mortgage are the only two things for working middle class that will move the needle other than increasing mandatory contributions.
“I’m saying you need to look at these two things because these are the only two things, the annuity and the reverse mortgage are the only two things for working middle class that will move the needle other than increasing mandatory contributions.”
the Government of the United States says, everybody has to contribute, like in Singapore, 31% of the salary, we could do it that way too. I’m saying, under the conditions we are now as a practical matter, you’re not going to get there with the kinds of saving rates we have. We’re not going to change people’s saving behavior. We can mandate it, you understand.
The law says you have to, but if you think you’re going to psychologically prepare people to educate them to do it, forget it. That’s going to take a long, long time. It’s extremely hard to change behavior of that kind. That’s what their parents did, that’s what their friends did. We have to be practical here. They may not like annuities actually I’m saying it’s just like request. Request is a rich person’s consumption good.
If I’m rich enough to give a request then I don’t have a retirement problem. You know what I mean?
Steve: I also think that like for instance with annuities, you’ve got misalignment in the system where if you have a wealth manager who’s making a percent of your assets and then you go them and say, “Hey, I want to take half of my assets, say, a million bucks, I’ll take 500,000 bucks and buy an annuity.” Then, they’re going to stop being paid on that money because it’s going to be parked with an insurance company.
They may dissuade you from doing that because it’s going to drop their income. I also think with the house, a lot of children are probably interested in like, “Do I want my parents to get a reverse on the house when that means it’s going to be less money coming to me at the end.” I just wanted …
Merton: Yeah. Let me respond to that because you’re asked, this is a longer conversation, but I think I need to deal with that. I’ve actually worked a lot on, first of all, how to properly design a reverse mortgage, that’s a longer story. Even with these things, everybody always says this, first, if you were … let’s just start at the beginning.
Supposed you’re a retiree with no beneficiaries, no children. It’s great, right, because anything you leave is wasted. You leave the house it’s wasted. It goes to the state. Or it goes to your 14th cousin you don’t even know. Okay. This is great because what you want to do is get the most money you can from the house because you’re never have to pay anything on it and then you can put the money in annuity and for the rest of your life live better. That’s a pretty easy decision.
They say, “Oh yeah, but with the children they don’t like it.” Let me ask you this, if I’m 65, retiring, you’re my son, you’re probably 38, you’ve got a 9-year-old and 11-year-old. You reach your peak spending for your house, you’re moving in your children, double digit they’ve got more expensive and you also have college in front of you. You have the most housing you need and you have the biggest dispenses you probably need in your life cycle.
I say to you, “Son, when I die you can have the house. In fact, I’m going to give you the house.” That could be 30 days from now or 30 years. If I live to be 95, you will get it when you’re 68. That’s going to be really helpful for you, right, getting this house at 68. You’re not going to move in to it, you’re just going to sell it.
How about this one? Suppose you say, “Dad, don’t do a reverse mortgage because it’s bad for you and I’ll find plenty of literature to say that.” Then, you know how I would talk? I’d say to you, “Okay,” if I’m the person trying to convince your dad I’d say, “Dad, if you do what your son says you have no interest in this so leave the room.” Now I’m going to talk to you. I’m going to say, “Okay, if we did a reverse mortgage, if your dad did the reverse mortgage he would get $500,000 in cash.” I’m just picking a number, it’s a million dollar house, $500,000 in cash.
If he does what you would do, he won’t get any of that, right? He’ll be no worst off. Why don’t we give the $500,000 cash to you right now you’re 38 with two kids nine and 11 living in this house? Here’s the deal for you. You get the house when your father dies, your father and mother, in 30 years or 30 days. By the way, to win this lottery you got to have something bad happen to your parents and most people don’t like to wish for that. It’s not psychologically much fun but let’s follow it through.
Here’s your choice son, your dad is out of the room. Here’s your choice son, you can do what you told your dad and you’ll have this lottery, you’ll get this house someday. Or, I’ll give you $500,000 now today and you have a call option that when you get the house, you can either choose to pay principal and accumulated interest because remember, there’s no interest paid on the mortgage which falls out. There’s no way that you can default on the mortgage by not making a payment because there’s no payment to make. Okay?
Five hundred thousand now plus when the house comes to you whether it’s in 30 days or 30 years, you have the option. You have the option to say to the banker, whoever did this, keep the house forget it. You do that if the house is worth less than you owe, right, okay. You get nothing more, you have your $500,000. What if the house goes up like Southern California houses grew 20 years ago or Singapore houses the last 10 years.
It goes from a million dollar house to a $10 million house. Okay. What happens? You pay the mortgage principal and interest and you have all the upside. I’m offering a choice of $500,000 now, never has to be repay, it’s yours, do whatever you want with it, no matter what happens you got it. Plus, if there’s any big upside of the house, you’ll get it. Versus just getting the full upside in the house someday. I’ll bet you, there are an awful lot of 38-year-olds … and now, we’re not talking about wealthy, we’re talking about 38-year-olds in middle or even upper middle income families.
If you chose, I think there’d be a lot of 38-year-olds who would like to get the $500,000 now when they need it and still have the upside. They’re not selling the house and then they’re going to regret it when they say, “Gee, we sold the house back there at a million and now it’s worth 10.” Because they got the upside but now they have the 500 grand.
Of course, once if you as my 38-year-old person says, “Oh well, I like that I’ll do that.” What have I done? I moved you away from your original statement to your parents don’t do it, right, because now you think it’s a good idea to do. Then, I say to you, “Well, it’s like the old joke, once you establish the principal, we’ll haggle the price. Once I got you say that you’ll do the reverse mortgage, I say, “You know, how about giving dad 100 grand of the 500? You still get 400 and the upside. How about giving a hundred to your dad?
How far I’d go, I don’t know as what that makes. I know that if your dad gets a hundred, he’s better off, right, than if he did what the son said, you agree? He’s happy because he’s got 400 grand plus the upside which is he chooses to do it, that means he like that better than … so do you see, I’m just trying to tell you by showing you that request function that everybody says, “Oh that’s normal,” is so crummy I know I can get a deal.
I don’t want to sound like our president, but I know I can make a deal between the beneficiaries and the retiree, where both of them would be better off. By the way for, more affluent people, this is great. Think of a, what do you call it, I don’t know if you call them, mass affluent people, they’re well off. They’re not super rich but they’re well off. Typically, a big chunk of their net worth is a house that they live in. It’s a very nice house. It’s the one they want to live in the rest of their life. It’s at Florid coast or wherever part of the world or West Coast, whatever. A house is a big thing.
They’re looking at the new tax law, estate taxes and gift taxes and they say, “Hey, we can give away now an extra $5 million,” if that they have that much. We can give away a lot of money tax free and by the way, which is probably a good idea not just because the money would then appreciate outside of our state, but if the other political party gets in, they’re liable to reverse it. That’s happened before.
If you died in 2009, you pay the biggest state tax. If you died in 2010, you paid no state tax. If you died in 2011, you pay the state tax. Plenty of people who have extra money now are saying, “It’s going to be wise idea to take advantage of this new higher amount that you can give away because if you give it away they don’t claw it back if they change the law.”
A lot of people are going to want to give it away. You’re sitting there saying, “But I can’t give away that much money because, well, I’m quite well off a big chunk of my wealth is in the house. I can’t give them half the house. I can’t change the ownership, I’ll get a capital gain. It’s just a nightmare.” Instead, I get a reverse mortgage. I give the money to my children now. I’ve done the estate planning. I’ve gotten that out of my state, it’s like law changes, I’m okay.
What about me? I don’t have to make any payment on it. It’s not like borrowing on a house and then having to pay interest and principal, what happens if I lose my job? What happens if the market goes south? I’m making a leverage bet when I borrow. This thing, I never have to pay anything as long as I stay in the house. If this is house I’m going to live in … I’m trying to get you to see how powerful … and this is far better than getting an extra 50 basis points or a hundred basis points or the alpha or what do you call it, superior performance on your portfolio.
In terms of outcomes, this is the thing that this kind of using the tools that are out there effectively and efficiently is going to add so much more to the experience of people getting to a good place than getting a manager who can add, you’re just killing yourself to get an extra 1% by having a really sharp manager and so forth. I just try and get you to see this in a frame that … and if you don’t get a little of the lyrics of this, it’s like a good song.
If you’ve ever heard a good song that if you don’t like the song, you don’t care. Suppose it’s the song you like, I don’t know about you, but me, if I head a good song I say, “I really like that.” She’s sing and she’s gone what … I have no idea what’s she’s saying.
I like the song so I put it on replay over my machine and I hear it 10, 20, 30 times. I listen to it quite often. Guess what? By the end, I know every lyric. If everything I’ve said to you, you didn’t get all the lyrics, I hope you got the melody that there are many things we can do that are feasible with things that we have today. We can improve them and we should.
What we have today if we do it right, if we do the things, all kinds of things and don’t just sit there and say the same old same old same story, same reason can’t do it, can’t do it this is the way you used to it in the past da, da, da, da, da. That luxury, I’m just trying to point out to you, if you get the melody that we can solve this problem. I don’t consider solving the retirement problem a science problem. It’s an engineering problem. We know how to do it. We can get people to good places. We can’t do magic.
If people save 1% they’re not going to get here. We can get them there. We have the tools to do it. We can design things, we can do things, we can do it but we have to do it. It’s a big task. It’s doable so I guess you could call that overall for a crisis, it’s a crisis where I think we have a way to solve it.
Steve: Right. I appreciate that. Let me just reiterate. One, that 65% of people are worried about retirement and how to pay for it. It’s the number one worry from a financial perspective for people. I’m just going to try and playback to you my take away from our conversation here. One is, first measure the right thing instead of measuring assets, focus on income and what will your lifetime income be.
The second thing is give people simpler controls. Give them more actionable choices, don’t clutter up their heads with like every little detail about all the different fun choices and whatnot. It’s like more, “Hey, what do you need from an income perspective. How much risk are you going to take? How much are you going to save?” What are those big levers that they can pull and kind of illustrate for them what their future looks like based on those simple controls.
I think the third thing is make the whole mechanics of how the investing is done. Not necessarily hidden but just a lot … a more abstract from the person. Don’t make them get involved with every detail but make sure that it’s being done in an efficient way that is focused on this income at the end.
The last thing would be, really focus on … or, be open to using different or existing tools that out there today like annuitization, like accessing home equity through reverse mortgage, target date funds, whatever it is, use the products that are available today to actually realize income versus pulling your hair out trying to manage your portfolio in a perfect way for all these unknowns around inflation, life expectancy, volatility in the market, interest rate changes and everything else. Did I get that right?
Merton: I think so. I think the only thing I would want to underscore, you mentioned target date funds that I don’t think target date fund satisfies solution. I think because they have no goal and because they don’t update information about the person. The only thing that they do is give you a glide path based on your age.
If I know your age today, I know what your age would be a year from now or 40 years from now. That means, they have an investment strategy for you that is designed to manage your money with no updates because you learn nothing. The target date fund, the only thing it uses is age and I know in advance exactly what your age will be.
Would you really think that you could … that the best are approximately best strategy could be something … that something gets complex that you’re starting out at 28 and you’re working doing one thing and you’re going to retire at 68 and you don’t even know where you’re going to be and who you’re responsible for and all the things that will happen in between. Somehow that I don’t need to use any information about you such as for example, you and your twin start out exactly the same, same firm, same everything, the same income, the same job.
One day, you get called in by your boss and he says, “You’re doing a really great job. We think you’re very good. We’re promoting you, we’re going to bump your income up 20,000 a year from 35,000 or 40,000,” big jump, right, 50% income. Your twin didn’t get that. You and your twin were identical just before this, right, you’re getting everything to saying.
Now you’re 50% higher standard living than your twin, do you need the same amount retirement money as your twin? No. Do you have the same investment profile? No, Does the target date fund differentiate? No. You’re the same age, you were born 20 minutes apart.
Target date funds don’t use any new information. It is not conceivable in a world that we’re in that something that simple could solve the problem even closely. Is it better than other things? Oh yeah, I could find lots of things that are worst. Creating four X on your screen after work and your retirement account probably would not do very well, putting all your money in collectibles. I mean, I can find an infinite number of ways that poorly perform.
The fact that it’s better than some of the things we used to do, I give credit to but not much. The thing you need is diverse versions. I’m not going to advertise any but you need a system that adjust to both market and personal information and adjust what is best for you. If your goal changes because you get a big income increase because now you need to have a higher standard of living you’re going to have to do catch up. Why? Because you’ve been saving for one standard of living now you’re going to have to save for a higher standard of living. You have to make up for it for a while to catch up where your twin didn’t.
Target date funds don’t do that. I’m sorry, I won’t sign on to target date funds are good enough. They’re not. A target income fund, target date income fund is better than a target date fund because at least the target date income fund recognizes that income is the goal and puts your fixed income part in appropriate maturity bonds or annuities to match.
Let me be very clear, I do not think that target date funds qualify as a proper retirement solution. We can do much better than that. I just want to make clear, I’m not endorsing as good enough by a long shot from what we can do. One last thing, we all hear about Syntech and robos, well, I’ve been doing Syntech for almost century using computers and other things. It’s not new in that sense.
What it will do is just going to accelerate all of this because we can now do much more complicated things than just look at your age, which requires nothing. Therefore, people are going to get … just by competition, you’re going to find people providing things that allow you to adjust to changing circumstances. They’re going to put in on computers. They’re going to make these services available eventually with trust created by whoever does it. That’s important. They’re going to have it.
You’re sitting there telling people, “It’s good enough. I knew you when you were 28, I know your age when you’re 68. That’s good enough to manage your money for the next 40 years.” I don’t think you’re going to find yourself competitive. I think that it’s not that Syntech is going to be the thing, Syntech is certainly part of the enabler. My guess is that this is going to accelerate the process in which management of money takes place.
I think if you’re a professional on the management side, you better start to realize that life as usual isn’t going to stay that way. Which is, to me, just fine because I think we can build much better things.
Merton: All right. Sorry, I run off on that but I wanted to make sure …
Steve: No, no, no. Yeah, no I appreciate that. It will have to … In another 30 days I’m going to have to ask you, I’ll send you what we’re doing with our planning tool because it does let people build kind of high fidelity or a pretty precise picture of where they are today and then the ideas that it’s a living plan. It does let them kind of model different switches like, “Okay, what if I delay social security? What if I work longer? What if annuitize half of my assets at a certain point? What if I sell my house and downsize or get a reverse mortgage?”
There’s all kinds of things they can model in your tool. We totally agree. Technology is going to enable hopefully better decision making, simplify this for people, make it more efficient, lower cost, which I think everybody wants. Hopefully, lead to much better outcomes, which is what you’re trying to solve and we’re working towards that as well.
Merton: Yeah. Just also, on what you sent me. I had created target retirement solution but somehow it was referred to as target date income funds.
Steve: Target date income funds. Right, is that not correct?
Merton: No, dimensional does have target date income funds and yes because I brought income, l concept and everything to dimensional and so forth, in that sense, I am also at least part creator of that. I do not say that’s a solution. I say it’s better than a target date fund. Target retirement solution is the thing that you know a version of what you know because you did all the programming.
I mean, so you know that it does adjust to changing goals, change personal situations as well as market conditions. I just want to be clear on that because sometimes, if something gets in print or put on the podcast, it never goes away and then someone pulls a clip and says, he said target date funds are fine. I don’t want that ever on the record because that’s not true.
Steve: Yeah. We’ll definitely be clear about it. I will make sure it’s clear. Is the target retirement system, is that live?
Merton: I say we. I just got back from South Africa where it was aversion, it’s a South African version but it was just launched by Alexander Forbes, which is the largest institution for DC in the country. I think it is 25% of the market and DC is the entire retirement system in South Africa. In other words, the safety net is so small you can’t see it and there is no, in that sense, no social security except what you put in your DC plan.
In that sense, it’s kind of similar to Australia but without the safety net. I think the name of their product version of this is called Clarity. It does all the things that I said. Can you improve it? Yes. Does it have to satisfy South Africa law today? Yes. In fact, it does adjust to both personal as well as market conditions. It does focus on income. It does put people’s income part of their portfolio into indexed proper maturity done. It’s essentially immunized based on their retirement dates.
They’re doing it. South Africa, as you know, I don’t know if you’ve looked at it but it’s actually got a fairly sophisticated financial system. It has linkers out to 2050. It’s got a very well developed annuity market. Alexander Forbes is a huge full service thing. It has annuities, it has everything, it has platforms, it has custodian. It’s a very big entity in South Africa. They’ve launched it.
Steve: Awesome. I’m glad to see it getting used out there.
Merton: Yeah. It’s going to launch in some other countries too. It’s a little slower in the US. We got it here but it’s a little slower in the US partly because of regulation but any case.
Steve: Okay. Hopefully it gets fully realized because I think that would be awesome. Thanks Professor Merton for being on our show. Thanks Davorin Robison for being our sound engineer. Anyone listening, thanks for listening hopefully you found this useful. Our goal at NewRetirement is to help anyone plan and manage their retirement so they can make the most of money in time.
We offer our powerful retirement planning tool and educational content that you can access at newretirement.com. We’ve been recognized as best of web by groups like the American Association of Individual Investors.
Raising children has never been inexpensive. But the costs go well beyond daycare and college today, extending far into young adulthood—and that could pose a problem for parents’ retirement plans.
Parents spend $500 billion annually on their adult children—about double what they put into their retirement accounts, according to a study released on Tuesday by Bank of America Merrill Lynch and aging consultancy Age Wave. Nearly 80% of U.S. parents give some financial support to their early-adult children, from helping them with groceries to shelling out substantial sums for weddings, first homes, or even granchildren’s college educations.
“We sense that this cost is increasing because the life stage of early adulthood has elongated,” Ken Dychtwald, head of Age Wave, said in an email. “Adult children take longer to leave home, get established personally and in their careers, and establish financial independence in part because many are saddled with student loan debt.”
Often, the price tag associated with children is the base cost of raising them to 18—about $234,000 in the United States. That estimate doesn’t account for the less visible costs. Only a quarter of households with children use paid childcare. For the other three-quarters, caregiving is typically done by a family member—often a woman.
About 54% of women surveyed took a leave from work when they first became a parent, compared with 42% of men, according to the Merrill Lynch/Age Wave study. Women were also more likely to switch to a job with more flexibility or work from home after the birth of a first child. Men were almost twice as likely to switch to a job that paid more, or take on more hours for greater pay. These dynamics often contribute to the so-called gender gap in pay, which feeds into the gender retirement gap, leaving women with less in savings than men for what often is a longer life.
When it comes to retirement savings, the conventional wisdom has often been that parents will ratchet up their savings in the final sprint to retirement, once they are empty-nesters, to make up for the leaner years when kids took up much of the budget. But the study finds that the priciest phase of parenting is when the children become adults. Other research has supported that finding, with a 2015 paper by the Center for Retirement Research showing less than a percentage-point boost in 401(k) contributions when kids leave home.
The good news is that with retirement, at age 62, comes a new income source in the HECM mortgage where home equity shells out considerable cash to eliminate forward mortgage payments and sometimes provides a nice cash contribution to back up the meager savings parents are left with after the family uses up a big part of the retirement savings.
“So, hmmmmm, call me,” says Warren Strycker veteran financial professional, “Let’s talk. Who knows, I might have answer for you” (See contract information under the “information” tab on the home page here.
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