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.
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). http://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.
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.
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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.
Also consider these stories for your retirement education:
In my book, “Rewirement: Rewiring the Way You Think About Retirement,” I lay out a detailed ten-step process that everyone can use while doing retirement income planning. This is also the same process that is taught to thousands of financial advisers in the Retirement Income Certified Professional education program.
However, in reality, many people are not even taking baby steps to pave the way for a financially secure retirement. For some, retirement planning seems too difficult; for others it seems like retirement won’t ever apply to them. The facts are that most workers will retire someday and, by taking a few basic steps now, they can vastly improve the outlook for their future retirement security.
A secure retirement plan is more than just savings, it’s about generating income. As Managing Director of Clear Path Financial, Brandon Levithan, CFP®, ChFC®, stressed, “many pre-retirees have a plan to accumulate retirement assets, however, they do not have an efficient plan to distribute assets over their lifetime. There are decisions that can be made many years before retirement to create more robust and more efficient income options for retirement.”
Teaching Retirement Planning
THE AMERICAN COLLEGE OF FINANCIAL SERVICES
Envision Your Retirement: To get anywhere in life and achieve success, you need a vision of success. Start by envisioning what you see as a successful and financially secure future in retirement. This technique of creating a mental image of the desired outcome is used by many of the most successful professional athletes and business entrepreneurs. Athletes mentally envision how the perfect race or game will play out long before they take the field. Of course the plan doesn’t always go perfectly, but imagining the future can at least help you develop a game plan. By adopting this technique, you can set goals and realize that the future you want is achievable. Do you want to have financial independence? What does that look like for you? Does that mean you will live independently or with family? Do you want to travel or would you prefer to stay in your community? Any retirement plan starts with setting your own goals and envisioning your desired outcomes.
Review Your Current Situation: After you envision where you want to go, you then need to take a look at where you are today. We can’t get anywhere without first acknowledging and knowing where the starting line is. If you are in the early stages of your career and just getting started with savings, how are you going to handle your investments and debt management? If you are mid-career, is now the time to really ramp up your savings? Or are you in your peak earning years? As State Farm Agent Jen Sias-Lyke points out “many people hit their peak earning years in their 50s and early 60s.” But she also notes that “The closer you get to retirement, the more focus you’ll need on planning.” So as you near retirement, you need to see if your debt is under control, do you know what you are spending each and every year, and do you have a retirement date in mind?
But, for all career and life stages a few important questions always stand out. First, are you managing your debt? Second, and usually tied to the first, are you managing your expenses? The answers might mean you need to set up a more detailed budget and stick to it. And lastly, are you saving and investing appropriately? This means that you are both setting money aside for retirement and investing in assets that will provide you with returns that match your risk tolerance level. At a younger age, you should be willing to take on more risk and be more heavily invested in stocks. As you near retirement, you can take some risk off the table and invest in more bonds, CDs, and annuities.
Review Your Income Sources:
Now that you have examined your income needs in retirement, you can figure out if you will have an adequate retirement income stream. If you realize that you need $50,000 a year in retirement to achieve your goals, you will want to see if you can generate that much income. Make sure you consider all your income sources including Social Security, investment portfolios, home equity (see editor’s footnote for clarification), and possibly remaining longer in the workforce at some level. Social Security benefits depend on how much you have paid into the system, and at what point you begin collecting benefits.
Average benefits are typically around $1,500 a month but can be as high as $3,500. Making an informed and appropriate Social Security claiming decision is crucial. Another decision will be determining how to turn your savings into income, and determining how much income your investment portfolio can provide in retirement.
The 4 percent safe withdrawal rate is a good start, but it is not the solution for everyone. The 4 percent rule says that historically a 50 percent stock and 50 percent bond portfolio mix could generate 4 percent of available funds each year. If adjusted for inflation, this would last for 30 years before the retiree would run out of money. This means if you have $500,000 saved, you can safely generate $20,000 a year from it and not run out of money in retirement. You can get more income from this savings if you are willing to make adjustments to spending in down market years, but it provides a good starting point.
A financially secure retirement starts with planning. Research shows that those who have retirement plans in place have a happier, less stressful, and more financially secure retirement. While earning more money and saving regularly are important factors, you can improve your situation by cutting expenses, prioritizing expenses, and sticking to a good plan. You don’t have to buy into all the doom-and-gloom retirement predictions. Decide to be more proactive, take the first few planning steps, and begin to take charge of your financial future.
I am the Co-Director of the American College’s New York Life Center for Retirement Income and an Associate Professor of Taxation at the American College where I helped develop the Retirement Income Certified Professional® (RICP®) designation.
Americans can access their home equity, and statistics indicate that many will need to utilize this valuable asset to support their retirement. Get a HECM (Home Equity Conversion Mortgage) and CELEBRATE.
See article here: gofinancial.net/2016/02/the-hecm-public-perception/…
But if ye have bitter jealousy and faction in your heart, glory not and lie not against the truth.
“Exagerated truth is a lie, going in”, Warren Strycker
And then, there’s Ben Shapiro…
Ben Shapiro has made a name for himself in conservative circles, appearing daily on radio, TV, and at events around the nation. His off-the-cuff and rapid retorts have solidified him as a favorite commentator among politicos — but what’s Shapiro’s backstory? He recently sat down with “The Billy Hallowell Podcast” to talk about free speech, culture, and the roots of his career.
Shapiro, whose signature line is, “Facts don’t care about your feelings,” decried the crisis of truth that seems to be plaguing the American conscience, explaining his worries that people seem more motivated today by emotion than facts.
“I think that folks now treasure the subjective over the objective,” Shapiro said, adding that this dynamic is the biggest cultural problem of the day. “I think that there are a lot of folks who, the facts don’t make them feel good about themselves — they don’t make them feel good about the narrative that they tell about their own lives.”
As a result, he believes people tend to disown the facts and then avoid viable debate, turning what should be factual arguments into character arguments. This naturally results in the demonization of ideological opponents — something that has plagued culture of late.
Listen to Shapiro discuss abortion, free speech, civility and more:
“Right now, people are getting a lot of pleasure, particularly in the social media era, from just smacking people, and it’s easy to do that from behind a screen,” Shapiro said. “It’s hard to do that when you’re actually in person, and this is one of the problems with having an online society — it’s easier to be mean and nasty when you don’t actually have to look in the face of the person you’re being mean and nasty to.”
Meanwhile, civility and healthy debate aren’t the only casualties, as Shapiro argues that people continue to exchange truth for their own opinions.
“People [are] deciding that facts are significantly less important than self interpretation,” he said. “People using phrases like ‘my truth’ as opposed to ‘the truth’and me saying, ‘Well there’s no such thing as ‘your truth.’ There’s just facts and then there’s your opinion and it’s fine, you’re allowed to have opinions, but let’s not pretend that your opinions are sacrosanct.’”
What does Strycker say about this?
MY FIRST go around with a compass happened in the Boy Scouts, there is “true north” and then there was a “declination” — our own location wherever we are — and so it goes. My dad had a compass in his head, could tell which way was north in the bottom of a well, not looking up.
When I learned how to fly, many years after (and “ago”), the compass was even more important to getting where we wanted to go. On an airplane, there is at least two compassses, a “mag compass” always points to “true” north being attracted by the magnetic power of the North Pole, (Over time, the location of the North Pole changes slightly. Earth’s axis has a slight wobble, and since the pole intersects with the axis, it wobbles along with it. Scientists have calculated that the pole wobbles about 30 feet over seven years. The precise point of the pole at any given moment is known as the instantaneous pole. (So you thought “north” is a fixed location, right?)
We learned to fly the “other” compass because the “real” compass was harder to read and when we took time to correct the one we flew by, we often found we were “off course”, usually more than we wanted to admit.
Now, of course, more of us depend on the GPS to find the street we need to turn on to get to grandma’s house.
Like typing this here on my laptop in a darkened room and getting at least one hand on the wrong position by at least one key and noticing how misspellings were created. My mindset knew where the keys are, but my fingers, well, they were thumping on the wrong keys. Once we realize what is happening, we stop and reset our fingers on the right keys.
Once in awhile, we are benefitted by taking a new reading on the “real” north pole and it can be a baffling recognition how far “off” we can be, believing we are “on course”.
So, taking a “reading” on the current “situation” in Congress, it is pretty obvious we are on the wrong “track” — well, isn’t it? A regular visit to Twitter will establish that soon enough. Folks I know have obviously lost their way — and don’t care (but to be fair “they” look at me the same way and at least one of us is obviously lost — could be we are looking at different poles. OK, there’s some truth to that if not much).
So, let’s consider taking time now to reset our compass.
What I see happening to us is not “true” north, nor is it even close by — and the cliff isn’t far ahead. The time to correct our direction is being reduced day by day.
I choose “truth” for my “true north”. That’s not an easy choice because to choose it will create difficult resets in our belief system, This setting will correct a lot of your misgivings and get you back on course — a road to reconciliation with those who are disagreeing with us,
If the course is on spiritual matters, we need to agree on the source of “our truth” to have a truthful negotiation. Which bible? What translation? What method of worship. Otherwise, we are operating on the idea that north is really east, or maybe even northeast.
If the course is about America, we need to agree on the basis of our country to have a “progressive” discussion. Up until recently, the country has relied on the constitution for a basis of agreement. Some will never agree that the constitution sets the direction of our country decisions. Most of us may be lost somewhere in the middle blaming our condition on interpretation of the documents we were founded on. (Oh yes, that’s why we have a supreme court to wrestle over.
This trail to truth has gotten fuzzy with disagreement on the foundation we rely on. Today, we are being asked to compromise the source of our information, giving credence to others who do not share our “truth”.
As long as that issue prevails, citizens are asked to choose whatever way they wish to go. The confusion is catching up with us, Meanness to “correct” the discussion has entered in and it becomes a “dust storm” of confusion, which may just overwhelm this entire discussion.
Probably a great time to reset our compass, realizing that even the north pole “wobbles” a little to make agreement a little more difficult.
As we have learned, not everyone celebrates Christmas. Some believe in other systems of government. Some drive Chevys and some drive Fords — and there are those who drive Volvos and Mercedes… and we are all stuck here together, forming little clicks of agreement here and there but all expected to drive the same freeway to work swearing at each other to get down the road to our destination.
Somehow, we have to create a unified agreement to pursue our own belief systems, and as you can see, so far, we are lame in finding a peaceful way to do that…
…and meanness is creeping in and chaos is getting even more out of line now.
(NOT THE END).
We’ re going to have to live together peaceably sooner rather than later if I’m correctly reading the way the “grass is bent” (We need Tonto for that).
In the meantime, you can contribute to this “diatribe” by writing to firstname.lastname@example.org. Please try to be peaceful just for the sake of civility and I promise to be the same.
Surely we can find a better way without bloodshed.
“See my personal story at the end of this article,” Warren Strycker
No one is ever ready, emotionally, for the death of a spouse. But you can prepare financially for the decision-making and reduced income you may someday face.
ONE PERFECT FALL MORNING IN 2012, Erin was waiting for her husband to return from dropping off their twins at preschool. He never came home—her 42-year-old husband suffered a massive heart attack in the parking lot of the preschool, and by the time Erin got to the hospital, he had passed away. At the age of 41, Erin found herself a widow with four children, ages 7, 6 and the 4-year-old twins.
Losing her husband at such a young age places Erin in the minority—only 6% of the 1.4 million people who lose their spouses every year are under 441—but the shock and grief she felt are universal emotions that all widows and widowers experience. On top of her grief, Erin very soon found herself dealing with such issues as filing for life insurance and her husband’s Social Security benefits, removing her husband’s name from their joint accounts, and worrying about how she would plan for her children’s financial future—alone. Recalls Erin, “Beyond meeting our day-to-day needs, I was most worried that our c
While older widows and widowers may not be burdened with similar concerns about their children’s financial future, they often find themselves dealing with another serious consideration: Will they be able to afford the care they might one day need? This can be particularly worrying for those who’ve gone through a prolonged and expensive period of caregiving for their lost loved one—a situation many widows find themselves in.
To better understand this profoundly difficult—but for most couples inevitable—life event, Merrill Lynch partnered with Age Wave, a thought leader in the study of aging, to conduct research on widowhood and how this loss can affect the surviving spouse’s life and finances. Among the key findings: Men and women who prepare for losing a spouse fare much better in terms of stress and grieving, but a full 53% of current widows and widowers say they had no plan in place for what to do if one of them died.1
The financial burdens that come with the loss of a partner are immense and immediate. Erin’s position as assistant headmaster for Institutional Advancement of a private boarding school gave her an advantage that few widows have. “I was fortunate that as part of my compensation the boarding school offered housing,” Erin says. According to the Merrill Lynch/Age Wave research, 60% of men and women who lose their spouses are immediately burdened by financial expenses, including housing costs such as mortgages or rent. The fact that 50% of those who lose a spouse also face a 50% reduction in income only compounds the problem.2
“Most widows and widowers—78%—describe the loss of their spouse as the single most difficult and overwhelming life experience.”—Maddy Dychtwald,co-founder of Age Wave
In addition to the financial demands, critical paperwork and decision-making begin their steady creep right away. “Most widows and widowers—78%—describe the loss of their spouse as the single most difficult and overwhelming life experience,” says Maddy Dychtwald, co-founder of Age Wave. “And two-thirds say that they had so many things to do, they were not sure where to even start.” That’s when help from a knowledgeable professional can be invaluable.
For instance, in consulting with her Merrill Lynch private wealth advisor, Richard Salvino, as well as Lilia Shemesh and Matthew Saland of her advisory team, Erin learned that decisions she made about managing the benefit from her husband’s life insurance policy could affect her children’s eligibility for future financial educational aid—a major need for her with four young children.
“Only 14% of widows and widowers say they were making financial decisions by themselves before their spouse died,” Dychtwald says. “But once they are widowed, the overwhelming majority—86%—report having to do so.” 3This is even more daunting when you have dependents at home. “Research suggests that any financial decision that isn’t time-sensitive should be put off until you’re feeling less emotionally vulnerable,” adds Dychtwald.
“The most difficult thing is the constant worry,” notes Erin, pictured with her children at left. “That started early on, and it continues nearly six years later.” Over time, Erin’s advisor helped her work through issues involving her return to full-time work and saving for retirement. “We looked at all sorts of expenses and what decisions would need to be made in order to achieve the goals I had for the kids. What’s realistic; what isn’t. What would need to take place to achieve my family’s goals.”
Erin recalls that the day-to-day financial pressures were so great that she told her advisor she might cut back on what she was setting aside for retirement. “And he advised me not to—that retirement needed to be one of my first priorities so I could take care of myself in the future,” she says.
“Seventy-two percent of widows and widowers say they now consider themselves more financially savvy than other people their age, and that is empowering”—Lisa Margeson,head of retirement client experience and communications at Bank of America Merrill Lynch
Salvino made her long-term financial health a focus. “Given that she was young, continuing to contribute to her retirement plan was important,” he says. “She had many years ahead of her to save and let the compounding effect of wealth work in her favor. You can always borrow for your children’s education, but you can’t borrow for your retirement.”
Finding the courage—and financial confidence—to go on alone
Amid all the pain and difficulty that losing a spouse brings, there is also healing. The Merrill Lynch/Age Wave research found that 77% of the widows and widowers they interviewed said they discovered courage they never knew they had.
“They’re forced to jump into complex financial matters from the start of their journey and adjust to making financial decisions alone,” says Lisa Margeson, head of retirement client experience and communications at Bank of America Merrill Lynch. “In fact, 72% say they now consider themselves more financially savvy than other people their age, and that is empowering,” she says.
Gaining financial confidence can help sustain you through a difficult time. Erin’s private wealth team helped her stay true to her and her husband’s core priorities, she says. “They helped me see myself financially in a bigger picture than I could see myself. It’s been those discussions that have helped me the most.”
The FHA regulated HECM mortgage can put widows and widowers back on the road to security. “Use the time you have to consider it now. Call me when you are ready to talk about it,” says Warren Strycker, veteran mortgage professional. “I became a widower after 49 years and 9 months of marriage, two children and four grandkids, My wife became ill with chronic acute leukemia over a few days. She passed away in a distant city after two weeks, and I was alone. Other than my elderly father who lived with me and my dearest poodle, Sophie, I was alone and devastated.
“I remember feeling like she was the lucky one and here I was alone, swinging in the wind. I know what it’s like to lose a spouse and what happens afterwards. Feeling sorry for myself for awhile, I realized that I only had one income and the bills were coming in. I would soon be broke and there were house payments to make. After a few months, I obtained a HECM mortgage, paid off the house and reduced my cost of living. It was some time before things were more normal. I went over those times when I was angry with her, losing my temper for her lack of cooperation, treating her unkindly to get my way — all that stuff. Eventually I accepted her forgiveness and survived, but it was as tough as this story explains.” See more and contact information on the home page under “Information” or call now 928 345-1200. “Let’s talk about the HECM mortgage. I’ve had one for some years and have confidence it was the right choice to make for me.”
Published 3:16 PM ET Tue, 11 Sept 2018 Updated 22 Hours AgoBankrate.com
Veronica Dy and her husband had their retirement plan all mapped out.
They recently sold their large family home in San Gabriel, California, for $850,000 and walked away with $250,000 in net proceeds to put toward a smaller home in Los Angeles to be closer to their son’s family. They figured it would be easy to find a quaint, two-bedroom home where they could age in place without overspending on housing.
They thought wrong. The couples’ home search came up empty week after week, and the few properties within their budget – about $550,000 – are selling well over asking price almost immediately, Veronica Dy says.
Now, the couple spends roughly $3,200 per month – nearly half of their monthly household income – on rent and other housing-related expenses farther out from the city as they keep looking. While they’re trying to remain optimistic, the uncertainty of their situation makes Veronica Dy, 61, doubt that they’ll retire anytime soon.
“I was waiting to retire when I’m 62 but with our current circumstances, now we’re playing it by ear,” says Dy, who works in health care. “I look every day for houses, but there’s nothing on the market that’s affordable. I wanted to live closer to our son and help them with our grandchildren, but it’s going to be hard.”
The Dys’ struggles are shared by a growing number of older Americans who wrestle with whether to downsize or age in place. The answer, as it turns out, isn’t so simple.
In its just-released 2018 Survey of Home and Community Preferences, AARP found that 76 percent of Americans age 50 and older prefer to remain in their current home, and 77 percent would like to live in their community for as long as possible. However, just 59 percent of older Americans think they’ll be able to stay in their community, either in their current home (46 percent) or in a different home still within their area (13 percent).
Rising mortgage rates, sky-rocketing home prices, and inventory shortages at the lower end of the market are converging to create a new housing crisis – this time for baby boomers, housing experts warn.
Aging in place vs. downsizing: Which is best
By 2016, there were roughly 74.1 million baby boomers (people born between 1946 and 1964) in the U.S, according to a Pew Research analysis of U.S. Census Bureau data. By 2030, when all baby boomers will be between 66 and 84 years old, Census predicts boomers’ numbers will drop to 60 million people.
As boomers age, an alarming trend has emerged: they’re entering their golden years with mortgage debt. Americans over the age of 60 were more than three times as likely to carry mortgage debt in 2015 compared to 1980, according to an analysis of Census data by the Center for Retirement Research at Boston College. Much of the increase in seniors’ mortgage borrowing is in households with below-median incomes and assets, and no pensions, the analysis found.
Generally, past generations aimed to have their mortgage paid off before retirement to better manage their reduced incomes later in life.
Carrying mortgage debt may offer one explanation as to why many baby boomers prefer to remain in their current homes. Other factors, such as retaining home equity, staying in familiar surroundings, or a lack of affordable options, also drive the decision to stay put.
Aging in place, however, can be harder to do if boomers’ homes aren’t equipped to meet their future needs, says Jennifer Molinsky, senior research associate at the Joint Center for Housing Studies of Harvard University.
“There’s a growing linkage between housing and health care, and being able to stay in your house longer,” Molinsky says. “Making your house accessible for [in-home health care] is ideal, but this is harder to manage in lower density areas because of limited transportation and accessibility to doctors in rural areas. Communities need to think about how these services interrelate with housing, because that’s a real challenge for the future.”
Tapping equity to stay put
Mobility and health issues pose the greatest barrier to seniors who want to stay in their current homes. Older homeowners may need to add amenities, such as bathroom grip bars, walk-in showers, wheelchair ramps, and wider hallways and doorways to accommodate walkers or wheelchairs as their mobility declines. Some of these improvements are simple, but when you start redoing bathrooms, for example, remodeling projects can add up quickly.
Seniors who own their homes outright or have significant home equity typically borrow against their homes to help pay for modifications, says Sam Preis, regional director of sales with BBMC Mortgage.
Several loan products can help older homeowners pay for improvements that will make their homes livable for years to come. Preis recommends the following options:
Home equity loan – A home equity loan makes more sense if you have to make several modifications at once and need an upfront lump sum to pay for them.
Home equity line of credit, or HELOC – A HELOC works like a revolving line of credit that lets you withdraw on the line as often (or as little) as you need it for improvements in stages.
VA financing – Many older veterans who served in the military mistakenly think their VA benefits expire, but that’s not true, Preis points out. The VA offers cash-out refinancing, typically with no down payment requirement, to pay for home improvements. The VA also provides special grants for adapted housing for veterans with a service-connected disability. The grants help pay for a remodel or the purchase/building of a new home that accommodates their disability.
Reverse mortgages – A federally insured Home Equity Conversion Mortgage, or HECM, is the most common type of reverse mortgage. Insured by the Federal Housing Administration, HECMs allow people who are 62 or older to tap a portion of their home equity without having to move. You also can use a HECM to buy a home.
Low inventory, rising rates create barriers to downsizing
At the crux of boomers’ dilemma is the shortage of affordable homes on the market. That, along with rising mortgage rates – a trend that’s expected to continue – can create significant barriers to downsizing, says Laurie Goodman, vice president of housing finance policy and codirector of the Housing Finance Policy Center at the Urban Institute.
The national average rate for a 30-year fixed mortgage hit a record low of 3.41 percent in July 2016, according to historical data from Freddie Mac. As of Aug. 30, 2018, the average 30-year fixed rate was 4.52 percent – more than a full percentage point higher.
“Higher rates have a huge effect on mobility for everyone,” Goodman says.
Baby boomers who plan to stay in their current communities are likely to have the upper hand in competing for a smaller, less expensive home if they’ve paid off or have significant equity in their current home thanks to inflated appreciation. The key question is whether they’ll find the right home for their needs amid inventory shortages in the lower end of the market.
Seniors’ mobility could be impeded if they try to relocate to more expensive markets to be closer to family than where they currently live, especially given higher rates and rising prices, Goodman points out.
“There’s a limited supply of homes, along with rising prices – that’s a problem that’s not correcting and it’s getting worse and worse,” Goodman says.
Restrictive zoning laws and higher land costs are pushing builders to focus on producing luxury single-family homes (rather than economical multifamily projects) to remain profitable, Goodman says. The key to encouraging more building is a revamp of local zoning rules to enhance the variety of new housing projects, she adds.
Older Americans thinking outside the traditional housing box
In a lot of U.S. communities, a lack of housing variety complicates the picture for baby boomers who are seeking affordable options. And for some older folks, economic necessity is giving rise to creative solutions that buck tradition.
The AARP survey found that adults age 50 and older are open to housing alternatives, such as home sharing (32 percent), building an accessory dwelling unit (31 percent) and villages that provide services that enable aging in place (56 percent).
Whether it’s for economic viability or to gain companionship, seniors’ willingness to think outside the box is driving the growth of unconventional housing solutions, says Danielle Arigoni, director of livable communities with AARP. The “Golden Girls” style of roommates is one shared-housing arrangement gaining steam. There’s also intergenerational home-sharing; an online platform called Nesterly, for example, matches older adults with college students who are looking for roommates.
“An affordable housing crisis is brewing and, in many places, it’s already here,” Arigoni says. “[These solutions are] becoming less taboo and more accepted. And that’s partially just recognition of the financial realities we’re all accepting.”
The appetite for home-sharing is being driven by a resurgence in accessory dwelling units. An accessory dwelling unit is a smaller, secondary building that’s attached to the primary home or located on the same lot. This type of housing (think granny flat or mother-in-law suite) offers a livable solution for seniors who want to age in place and generate rental income, live near family, or eventually bring in-home care help down the road, Arigoni says. The key roadblock to add accessory dwelling units, though, is securing approval from local zoning or building authorities, she notes.
Whether downsizing or staying put is in your future, housing expenses will undoubtedly play a huge part of your overall retirement picture. Preis, with BBC Mortgage, suggests crafting a financial plan for retirement (if you haven’t already). Sit down with a financial advisor, a mortgage lender (if you plan to finance a home purchase or tap your home’s equity), and your accountant to figure out what options will help you live comfortably while maximizing your retirement income, Preis says.
The decision to downsize or age in place isn’t just about affordability or the place you call home. Consider how close you’ll be to family, friends, doctors, hospitals, transportation, parks, cultural attractions, and other key amenities that make a community truly livable, Arigoni says.
“You can talk to me anytime about this”, says veteran loan officer, Warren Strycker, representing Patriot Lending USA in Arizona. See contact information on the navigation bar on the home page or call me direct, 928 345-1200.
Stolen by Warren Strycker for your rights to failures you’ve had.
UPSIDE DOWN TRUTHS YOU DON’T BELIEVE. You can add these to those other things you don’t believe and wait for the results. Sometimes, it takes a long time for these issues to reinsert themselves into today’s ups and downs. Be brave. Others around you have already accepted the results of these tenants. They blame this on the Devil, as I sometimes do.
I DIDN’T BELIEVE THESE LAWS AT FIRST, BUT HAVE FOUND THEM TO BE TRUE FROM ACTUAL EXPERIENCE!
1. Law of Mechanical Repair – After your hands become coated with grease, your nose will begin to itch and you’ll have to find the facilities.
2. Law of Gravity – Any tool, nut, bolt, screw, when dropped, will roll to the least accessible space.
3. Law of Probability – The probability of being watched is directly proportional to the stupidity of your act.
4. Law of Random Numbers – If you dial a wrong number, you never get a busy signal and someone always answers.
4. Supermarket Law – As soon as you get in the smallest line, the cashier will have to call for help.
6. Variation Law – If you change lines (or traffic lanes), the one you were in will always move faster than the one you are in now.
7. Law of the Bath – When the body is fully immersed in water, the telephone rings.
8. Law of Close Encounters – The probability of meeting someone you know increases dramatically when you are with someone you don’t want to be seen with.
9. Law of the Result – When you try to prove to someone that a machine won’t work, it will.
10. Law of Biomechanics – The severity of the itch is inversely proportional to the reach.
11.. Law of the Theater & Hockey Arena – At any event, the people whose seats are furthest from the aisle, always arrive last. They are the ones who will leave their seats several times to go for food, beer, or the restroom and who leave early before the end of the performance or the game is over. The folks in the aisle seats come early, never move once, have long gangly legs or big bellies and stay to the bitter end of the performance. The aisle people also are very surly folk.
12. The Coffee Law – As soon as you sit down to a cup of hot coffee, your boss will ask you to do something which will last until the coffee is cold.
13. Murphy’s Law of Lockers – If there are only 2 people in a locker room, they will have adjacent lockers.
14. Law of Physical Surfaces – The chances of an open-faced jam sandwich landing face down on a floor, are directly correlated to the newness and cost of the carpet or rug.
15. Law of Logical Argument – Anything is possible if you don’t know what you are talking about.
16. Brown’s Law of Physical Appearance – If the clothes fit, they’re ugly.
17. Oliver’s Law of Public Speaking – A closed mouth gathers no feet.
18. Wilson’s Law of Commercial Marketing Strategy – As soon as you find a product that you really like, they will stop making it.
19. Doctors’ Law – If you don’t feel well, make an appointment to go to the doctor, by the time you get there you’ll feel better… But don’t make an appointment, and you’ll stay sick. This has been proven over and over with taking children to the pediatrician.
Consider the upside values of the HECM (Reverse Mortgage) to make lemons into lemonade and turn LIFE around for you. See “information” in the home page navigation bar for Warren Strycker’s contact information.
A reader named Jesse, 73, called to relay his experience trying to get a reverse mortgage on his house, and to ask for my advice.
He’d seen advertisements by Tom Selleck for a company called American Advisors Group and it seemed to fit his financial circumstances. A reverse mortgage, sometimes called a home equity conversion mortgage, is only available to homeowners over age 62.
Home equity, I should clarify, is the difference between the value of a house and the amount of debt on the house. That means a $300,000 house with a $100,000 mortgage has $200,000 in home equity. A reverse mortgage is a kind of home equity loan, specifically to borrow in old age without having to make payments, if you don’t want to. For Jesse, his idea was to use the money he could pull out of his house to help pay for taxes and insurance in the coming years.
I had never paid much attention to reverse mortgages, although I’d previously had a vaguely negative feeling about them.
In the course of following up on Jesse’s inquiry, I learned two unique and kind of awesome features of reverse mortgages which I have never seen in any other loan product.
First, a borrower can decide to never make any principal and interest payment on the loan. For life! The debt accrues interest of course, meaning it grows over time, but the borrower can choose to never pay on that interest or principal. The lender gets paid back eventually, when the house is either sold or the owner dies, but in the meantime the loan doesn’t require any payments. Ever. I’ve never seen that loan structure before.
Second, as long as the homeowner complies with the mortgage agreement – which means staying current on taxes and insurance – neither the homeowner nor the homeowner’s spouse can be evicted from the house. Ever. It’s a bank loan backed by collateral, but the bank can’t take the collateral for the life of the borrowers. This is also something I’ve never seen before.ll describe my three previous issues with reverse mortgages, as well as my evolving views.
My first worry was that as a relatively unusual loan product, consumers could be more likely to make bad choices about a thing they don’t understand very well. Even a traditional home mortgage can seem complex but it resembles other products we’re familiar with, like an automobile loan or a personal loan.
A reverse mortgage, by contrast, acts a bit like a retirement account or annuity, in that you can take money out over time as you get older. It’s also a bit like a credit card or home equity line of credit, in that it “revolves,” meaning you can take money out but also pay it back as often as you like. But it’s also different than a credit card or home equity loan, because you don’t have to pay it back with regular or even any payments (until you die). One of my guiding principles of finance is simplicity. Reverse mortgages may be a complicated form of debt for some people, and complicated is the enemy of the good.
Somewhat reducing my fear, however, is that every prospective reverse mortgage borrower must take a financial counseling course by phone, mandated by the Federal Housing Authority (FHA), which regulates reverse mortgages. Guy Stidham, owner of Mortgage of Texas and Financial LLC, a San Antonio-based mortgage broker who offers both traditional and reverse mortgages, says these courses cost about $150 and take a few weeks to schedule, which serves as a kind of “cooling off” function for prospective borrowers. (Disclosure: I have done consulting projects for Stidham in the past.)
My second worry was that reverse mortgage would be niche-y, high cost products for borrowers. This fear turns out to be somewhat unfounded, although there’s some nuance to the cost issue.
Joe DeMarkey, Strategic Business Development Leader of Reverse Mortgage Funding, a reverse mortgage lender, estimated fixed rates now between 4.375 and 5.125 percent, in the same ballpark as a traditional 30-year mortgage. So, I should not have been so worried about high interest rates on fixed loans.
Technically, however, DeMarkey points out that 80 percent of reverse mortgages have floating interest rates. With floating rate loans, the initial interest rate often starts out reasonably low but there’s always a risk that future higher interest rates make that same debt more expensive later.
Also, Stidham allows that a broker like him can be compensated more by the lender to sell a reverse mortgage in part because they are a less competitive product. His fee for brokering a reverse mortgage could be up to 3 times higher than with a traditional mortgage.
My third problem with reverse mortgages was that they clashed with my traditional view of the incredible wealth building potential of home ownership – a way to automatically build up a store of wealth by making affordable monthly principal and interest payments on your house over a few decades. Because reverse mortgages drain that value over time, they made me want shout “Wait…But that’s…that’s not how it’s supposed to work!”
But, you know, I can evolve. It remains a noble goal to fully pay off your home mortgage, and we should all aspire to do that. But that’s not reality for everyone in retirement. Reality for many is that accessing the equity built up in our house, without selling it, might be a key to living comfortably in old age.
As my wife reminded me recently, one of my other long-standing theories of personal finance is that kids shouldn’t inherit stuff. Since we don’t intend to bequeath our house to our girls, I shouldn’t be opposed to draining the house of our home equity once we hit our 70s or 80s. At that age, the goal shouldn’t be to continuously build up assets (For what? For whom?) but rather to spend money to make our lives better.
If we planned to stay in our house, my wife and I recently agreed we’d be open to a reverse mortgage in our 70s.
Does this seem like your circumstances?”
For detailed information about whether you should entertain a reverse mortgage (Home Equity Mortgage Conversion (HECM)), open the “information” tab on the home page for contact information, and answers to your questions. There’s lots of information on this webpage designed to help solve your questions. Thank you for considering HECM. “I’d be happy to support you — talking to me won’t cost you anything at all,” Warren Strycker, veteran mortgage professional. (928 345-1200)
Anxious Savers Want to Catch Up, but Worry They May Be Too Late
Key Findings Snapshot:
85% of Chasers worry that if they don’t increase savings soon, it will be too late for them to have a comfortable retirement
54% of Chasers say they have too many other expenses right now to save for retirement
84% of Chasers say they are interested in a financial product that offers growth potential with some protection from loss
MINNEAPOLIS, July 31, 2018 – Although 90% of active retirement savers agree that accumulating enough savings is an important factor in their ability to enjoy their future retirement, a significant subset of these Americans is worried they’re already too far behind to reach their savings goals. According to the Chasing Retirement Study* from Allianz Life Insurance Company of North America (Allianz Life®) of Americans age 45-65 actively saving for retirement, these “Chasers,” who make up half (49%) of the total respondents, think they need to catch up on their retirement savings but need help to understand potential solutions to close their savings gap.
For the purposes of this study, Chasers are defined as those who are saving but have either fallen behind on where they should be, wish they could accumulate savings faster, or worry that if they don’t increase savings soon it will be too late to have a comfortable retirement. More than eight in 10 (85%) Chasers feel they have fallen behind where they should be in saving for retirement compared to just 4% of non-Chasers, and the same percentage worry it will be too late for them to have a comfortable retirement if they don’t increase their savings soon (versus 2% for non-Chasers). The vast majority of Chasers (98%) also say they wish there was a way they could accumulate funds faster to make up for lost time versus 41% for non-Chasers, but nearly two-thirds (63%) of Chasers also say they can’t take the risk of investing in high risk/high reward financial products.
“Among those Americans actively saving for retirement, our study finds a dramatic difference between those who feel on track and those who feel behind, with this subset wishing for ways to catch up but without taking on too much risk,” said Paul Kelash, vice president of Consumer Insights for Allianz Life. “While it’s a positive that they are actively saving for retirement, the level of anxiety is concerning and many are simply not aware of potential solutions to help them catch up.”
Despite having a mean retirement portfolio of more than $400,000, Chasers struggle to keep up with their retirement savings goals and may need more education about financial products. More than half (54%) say they have too many other expenses right now and one in five say they are saving for other financial goals. As a result, two-thirds of Chasers fear they will run out of money in retirement, and more than six in 10 (61%) believe they will need to keep working instead of retiring.
In addition, Chasers own fewer financial products. Only 53% of Chasers have an individual retirement account (IRA), and even fewer own individual stocks (35%), mutual funds (35%), have a pension (37%) or own an annuity (14%). In contrast, a full 70% of confident savers own an IRA while more also own individual stocks (56%), mutual funds (51%), have a pension (53%) or own an annuity (28%).
Although the fastest way to accumulate funds may be to take on more investment risk, Chasers are not very interested in that approach. Only 34% of Chasers said the only way to save enough for a comfortable retirement is “to invest in high risk/high reward financial products.” Instead, Chasers gravitate toward protection as part of their growth options. More than eight in 10 Chasers (84%) say they are interested in a financial product that offers growth potential with some protection from loss, and 71% of Chasers are willing to trade off some upside growth potential to have some protection from losses.
“Although Chasers will likely need to be more aggressive in order to catch up on their retirement savings goals, they still need to maintain some focus on protection because they are closer to retirement,” noted Kelash. “A financial professional can help them determine the right mix of financial products.”
In fact, Chasers are less likely than non-Chasers to say they are currently working with a financial professional. Only 39% of Chasers are currently working with a financial professional, compared to over half (53%) of their more confident counterparts. “Working with a financial professional can help Chasers understand how they could take on more risk, yet still have protection in their portfolio,” added Kelash.
For those behind on their retirement goals, consider the HECM for a big part of your solution. This mortgage rids you of past mortgages, cleans the deck so to speak and doesn’t hold you accountable. Your home/property will stand the debt after you are gone. No one else is held accountable. The lender has his protection too. Using home equity for retirement is smart, legal and available if you have built a home equity wall of security against the very thing you fear. Use it in pride — like much of the citizens worldwide are doing. Give this solution a chance to get you back on the road to solvency. Don’t let the worry warts rule your decisions” says veteran mortgage professional, Warren Strycker. See “Information” tab for additional contacts. “This solution has been tried and tested and brings the USA government into the mix to make sure it protects your interests. All it takes is your attention and trust that you have done the right thing,” says Strycker. “Stop your hand wringing. The time to act is now”, Strycker concludes.
Social Security – signed into law in 1935 as the Old-Age, Survivors, and Disability Insurance program – provides cash benefits to retirees and those unable to work due to disability. It is funded by payroll taxes that are collected from workers and their employers and deposited into interest-earning accounts called trust funds. Since the early 1980s, the income collected by the funds has been greater than the benefits paid to people, so the funds have been able to save money for future years.
SOCIAL SECURITY COSTS WILL BEGIN TO EXCEED INCOME IN 2018
The 2018 trust fund report for Social Security predicts that 2018 will be the first year since 1982 that benefits paid out will exceed money taken in through taxes.
Since 2008, the combined yearly surplus has been declining. Although it reversed course and increased in 2016 and 2017, the Social Security Administration predicts it will fall below zero in 2018.
This means we will have to use the savings to make up the difference between how much money the program makes and how much it pays in benefits.
HOW MUCH DO WE HAVE IN SAVINGS?
The Social Security program encompasses two benefit programs – income insurance for retirees and their spouses and income insurance for people with disabilities. Funds for these programs are kept in two separate trust fund accounts and both contribute what is left after paying benefits to savings.
Trust fund balances
While both trust funds currently have a positive balance, once we start using savings, the extra funds will slowly be used up. The Social Security Administration estimates the trust fund savings for disability will run out by 2032 and the trust fund savings for retirement by 2034.
DOES THIS MEAN PEOPLE WON’T RECEIVE BENEFITS AFTER 2034?
No. Without savings to dig into, the programs will only be able to pay people as much as they receive from taxes. Beneficiaries will still receive payments, but those payments will be less than they are now. After 2034, the trust funds predict they will be able to fund 79% of benefits.
Currently, the average monthly payment is about $1,300 for retirees and $1,000 for people with disabilities.
Average monthly payment (adjusted for inflation)
HOW MANY PEOPLE WILL BE AFFECTED BY REDUCED BENEFITS?
Currently, the retirement trust fund supports 50 million people and the disability fund 10 million people.
ARE THERE SOLUTIONS?
There are a number of options:
Reduce benefits to match income from payroll taxes.
Increase payroll taxes in order to pay the current level of benefits or higher. Currently, income is taxed at 12.4% (6.2% each for employer and employee) and income above $128,900 is not taxed at all. We could either increase the tax or increase or remove the ceiling on taxable income.
Change the retirement age again to delay when people can start collecting benefits.
Reduce or eliminate benefits for wealthy retirees.
Privatize the program and let workers invest their payroll taxes themselves.
Financial data from the Office of Management and Budget, Table 13.1 of the historical tables.
Gofinancial response: Wisdom is on the side of preparation, or as the Boy Scouts would say before they melted down, “Be Prepared”. Those who are nervous about the future of social security income might want to consider the benefits of using home equity to level the income factor. See contact information under the “Information” tab on the home page.
Posted: Aug 15, 2018 12:01 AM (Stossel works nights).
Social Security is running out of money.
You may not believe that, but it’s a fact.
That FICA money taken from your paycheck was not saved for you in a “trust fund.” Politicians misled us. They spent every penny the moment it came in.
This started as soon as they created Social Security. They assumed that FICA payments from young workers would cover the cost of sending checks to older people. After all, at the time, most Americans died before they reached 65.
Now, however, people keep living longer. There just aren’t enough young people to cover my Social Security checks.
So Social Security is going broke. This year, the program went into the red for the first time.
Presidents routinely promise to fix this problem.
George W. Bush said he’d “strengthen and save” Social Security. Barack Obama said he’d “safeguard” it, and Donald Trump said that he’ll “save” it.
But none has done anything to save it.
“There is a plan out there to save it, but it requires some tough choices,” says Heritage Foundation budget analyst Romina Boccia.
Heritage proposes cutting payments to rich people and raising the retirement age to 70.
Good luck with that. Seniors vote. Most vote against politicians who suggest cutting benefits.
This summer, interviewing people for my new video about Social Security’s coming bankruptcy, was the first time I had heard the majority of such a group say they were aware there is a problem. One said, “We’re already at a trillion dollars (deficit) … (I)t’s almost like a big Ponzi scheme.”
Actually, more like a pyramid scheme. Ponzi schemes secretly take your money. But the Social Security trick is written into the law — there for anyone who bothers to look.
Social Security isn’t the only hard choice ahead of us. Medicare will run out of money in just eight years. At that point, benefits will automatically be cut. Social Security hits its wall in 15 years.
Amazingly, as we approach this disaster, Democrats say — spend even more.
Sen. Elizabeth Warren, D-Mass., proudly announced, “Nearly every Democrat in the United States Senate has voted in favor of expandingSocial Security.”
How would they pay for it? “Raise taxes on the wealthy!” is the usual answer.
I tried that on Boccia: “Just raise taxes on the rich!”
“There isn’t enough money, even that the rich would have,” she countered, “to pay for the $200 trillion in unfunded liabilities.”
One partial solution proposed by Heritage and others is to let younger workers put some of their Social Security money into their own personal retirement accounts.
“Imagine being able to own and control your own retirement dollars,” urged Boccia, with genuine excitement. “You could invest it in businesses, grow the economy, whatever rocks your boat.”
If history is any guide, private accounts would almost certainly pay retirees more than Social Security will ever pay.
“Even a conservative portfolio of stocks and bonds that got you about a 5 percent annual return, you would make many times more,” said Boccia.
Editor’s Note: “A recent effort by the President’s daughter (She’s a “well heeled” boomer — it’s not her fault) aims at draining social security even more — tapping social security to pay mother’s to stay home when babies are born to them, so the world’s mother’s will vote against you if you take Social Security, Consider HECM here. Tap into home equity as soon as possible.”
Positive economic growth numbers are always cause for celebration and the second quarter GDP just went vertical. After nearly four years of sub-par growth, the real GDP hit 4.1 percent in the second quarter.
While that economic news has everyday Americans excited that we may be entering a new age of prosperity, drawing a concrete link to the real estate market may be difficult. But by looking long and hard at this uptick and its potential impact on housing, you may get a better idea about buying, selling or standing pat on residential and commercial property.
GDP Report Points To Demand
Among the positive measures from the recent economic report, consumption enjoyed a positive increase. The first quarter numbers were disappointingly sluggish in this area at a modest 0.5 percent. The second quarter took off like a rocket, by comparison, at 2.25 percent.
Although that figure shows an upwardly mobile economy, some experts are calling it discouraging given the extraordinary consumer confidence that has risen to record highs of more than 101.0 since November 2017. This opinion begs the question: why are economy gurus disappointed?
The first part of that answer has to do with the implementation of the Tax Cuts and Jobs Act that is putting more money in American paychecks and rolled back income tax liability. Many economists forecast that this personal wealth growth would turn into solid consumption. While working families have enjoyed a breather in terms of scratching from paycheck to paycheck, home purchases have not gone through the roof.
Home availability remains relatively low. With Millennials scooping up many of the starter-home listings and Baby Boomers downsizing, a significant housing shortfall exists. If you have ever heard the term “seller’s market,” this is it.
Inventory Shortage Means Buy Quickly
There are always naysayers that point to lower than expected consumption and claim the economy is weak. The facts in the GDP report clearly dispute any such ideas.
Business investment spiked to a powerful 11.5 percent and then 7.3 percent in the first two quarters. Fixed business investment is on fire based on deregulation, soaring profits and confidence.
That’s why real estate resources are saying that the only thing holding the market back is inventory. Home sale data is not keeping pace with other sectors of the economy because there simply is not enough inventory to keep up with demand. For first-time buyers, this means get prequalified and act swiftly if you find a dream home. It won’t stay on the market long.
Prospective homebuyers may be relieved to know that positive construction indicators are trending. New homes are expected to improve the inventory shortage heading into 2019. Still, demand is likely to stay ahead of inventory.
Editor’s note: If you are thinking about a HECM Reverse Mortgage to draw some cash out of your home equity, you may be favored with a higher appraisal resulting in a larger cash benefit. The fact that you will get rid of a mortgage payment may be enough to take the bait now. You can discuss this with your HECM lender. That would be Warren Strycker for Patriot Lending. Contact and credential information can be found on the information tab on the home page. Call 928 345-1200 with your questions.
For a rapidly growing share of older Americans, traditional ideas about life in retirement are being upended by a dismal reality: bankruptcy.
The signs of potential trouble — vanishing pensions, soaring medical expenses, inadequate savings — have been building for years. Now, new research sheds light on the scope of the problem: The rate of people 65 and older filing for bankruptcy is three times what it was in 1991, the study found, and the same group accounts for a far greater share of all filers.
Driving the surge, the study suggests, is a three-decade shift of financial risk from government and employers to individuals, who are bearing an ever-greater responsibility for their own financial well-being as the social safety net shrinks.
The transfer has come in the form of, among other things, longer waits for full Social Security benefits, the replacement of employer-provided pensions with 401(k) savings plans and more out-of-pocket spending on health care. Declining incomes, whether in retirement or leading up to it, compound the challenge.
Cheryl Mcleod of Las Vegas filed for bankruptcy in January after struggling to keep up with her mortgage payments and other expenses. “I am 70, and I am working for less money than I ever did in my life,” she said. “This life stuff happens.”
As the study, from the Consumer Bankruptcy Project, explains, older people whose finances are precarious have few places to turn. “When the costs of aging are off-loaded onto a population that simply does not have access to adequate resources, something has to give,” the study says, “and older Americans turn to what little is left of the social safety net — bankruptcy court.”
“You can manage O.K. until there is a little stumble,” said Deborah Thorne, an associate professor of sociology at the University of Idaho and an author of the study. “It doesn’t even take a big thing.”
The forces at work affect many Americans, but older people are often less able to weather them, according to Professor Thorne and her colleagues in the study. Finding, and keeping, one job is hard enough for an older person. Taking on another to pay unexpected bills is almost unfathomable.
Bankruptcy can offer a fresh start for people who need one, but for older Americans it “is too little too late,” the study says. “By the time they file, their wealth has vanished and they simply do not have enough years to get back on their feet.”
The data gathered by the researchers is stark. From February 2013 to November 2016, there were 3.6 bankruptcy filers per 1,000 people 65 to 74; in 1991, there were 1.2.
Not only are more older people seeking relief through bankruptcy, but they also represent a widening slice of all filers: 12.2 percent of filers are now 65 or older, up from 2.1 percent in 1991.
The jump is so pronounced, the study says, that the aging of the baby boom generation cannot explain it.
Although the actual number of older people filing for bankruptcy was relatively small — about 100,000 a year during the period in question — the researchers said it signaled that there were many more people in financial distress.
“The people who show up in bankruptcy are always the tip of the iceberg,” said Robert M. Lawless, a law professor at the University of Illinois and another author of the study.
The next generation nearing retirement age is also filing for bankruptcy in greater numbers, and the average age of filers is rising, the study found.
Given the rate of increase, Professor Thorne said, “the only explanation that makes anysense are structural shifts.”
Ms. Mcleod said she had managed to get by for a while after separating from her husband several years ago. Eventually, though, she struggled to make ends meet on her income alone, and she fell behind on her mortgage payments.
She collects a small Social Security check and works at an adult day care center for people with intellectual disabilities and mental health problems. For $8.75 an hour, she makes sure clients participate in daily activities, calms them when they are irritated and tries to understand what they need when they have trouble expressing themselves.
“When I moved here from Los Angeles, I was wondering why all of these older people were working in convenience stores and fast-food restaurants,” she said. “It’s because they don’t make enough in retirement to support themselves.”
Ms. Mcleod said she hoped that filing for bankruptcy would help her catch up on her mortgage so she could stay in her home. “I am too old to move out of here,” she said. “I am trying to stay stable.”
For about one in three older people who receive Social Security benefits, their monthly check accounts for 90 percent of their income, according to the Social Security Administration. Spending by those over 65 by income is based on Medicare beneficiaries, most of whom are 65 and over; the remainder are younger and disabled. | Source: Kaiser Family Foundation
The bankruptcy project is a long-running effort now led by Professor Thorne; Professor Lawless; Pamela Foohey, a law professor at Indiana University; and Katherine Porter, a law professor at the University of California, Irvine. The project — which is financed by their universities — collects and analyzes court records on a continuing basis and follows up with written questionnaires.
Their latest study —which was posted online on Sunday and has been submitted to an academic journal for peer review — is based on a sample of personal bankruptcy cases and questionnaires completed by 895 filers ages 19 to 92.
The questionnaire asked filers what led them to seek bankruptcy protection. Much like the broader population, people 65 and older usually cited multiple factors. About three in five said unmanageable medical expenses played a role. A little more than two-thirds cited a drop in income. Nearly three-quarters put some blame on hounding by debt collectors.
The study does not delve into those underlying factors, but separate data provides some insight. The median household led by someone 65 or older had liquid savings of $60,600 in 2016, according to the Employee Benefit Research Institute, whereas the bottom 25 percent of households had saved at most $3,260.
That doesn’t provide much of a financial cushion for a catastrophic health problem. Older Americans typically turn to Medicare to pay their medical bills. But gaps in coverage, high premiums and requirements that patients shoulder some costs force many lower-income beneficiaries to spend more of their own income on those bills, the Kaiser Family Foundation found.
By 2013, the average Medicare beneficiary’s out-of-pocket spending on health care consumed 41 percent of the average Social Security check, according to Kaiser, which also estimated that the figure would rise.
More people are also entering their later years carrying debt. For many of them, at least some of the debt is a mortgage — roughly 41 percent in 2016, compared with 21 percent in 1989, according to an Urban Institute analysis.
And those who are carrying debt into retirement are carrying more than members of earlier generations, an analysis by the Employee Benefit Research Institute found.
Perhaps not surprisingly, the lowest-income households led by individuals 55 or older carry the highest debt loads relative to their income. More than 13 percent of such households face debt payments that equal more than 40 percent of their income, nearly double the percentage of such families in 1991, the
Older Americans’ finances are also being strained by the needs of those around them.
A little more than a third of the older filers who answered the researchers’ questionnaire said that helping others, like children or older parents, had contributed to their seeking bankruptcy protection. Marc Stern, a bankruptcy lawyer in Seattle, said he had seen the phenomenon again and again.
Some parents, Mr. Stern said, had co-signed loans for $10,000 or $20,000 for adult children and suddenly could no longer afford them. “When you are living on $2,000 a month and that includes Social Security — and you have rent and savings are minuscule — it is extremely difficult to recover from something like that,” he said.
Others had co-signed their children’s student loans. “I never saw parents with student loans 20 or 30 years ago,” Mr. Stern said.
“It is not uncommon to see student loans of $100,000,” he added. “Then, you see parents who have guaranteed some of these loans. They are no longer working, and they have these student loans that are difficult if not impossible to pay or discharge in bankruptcy, and these are the kids’ loans.”
Keith Morris, chief executive of Elder Law of Michigan, which runs a legal hotline for older adults, said the prospect of bankruptcy was a regular topic for his callers.
“They worked all of their lives, and did what they were supposed to do,” he said, “and through circumstances like a late-life divorce or a death of a spouse or having to raise grandkids, have put them in a situation where they are not able to make the bills.”
For Lawrence Sedita, a 74-year-old former carpenter now living in Las Vegas, the problems began when he lost his health insurance about two years ago. He said he had been on disability since 1991, when a double pack of 12-foot drywall fell on his head at work.
After his union, the New York City District Council of Carpenters, changed the eligibility requirements for his medical, dental and prescription drug insurance, he lost his coverage.
Mr. Sedita, who has Parkinson’s disease, said his medical expenses had risen exponentially. (A spokesman for the union declined to comment.)
A medication that helps reduce the shaking — a Parkinson’s symptom — rose to $1,100 every three months from $70, Mr. Sedita said. “I haven’t taken my medicine in three months since I can’t afford it,” he added.
He said he and his wife, who has cancer, filed for bankruptcy in June after living off their credit cards for a time. Their financial difficulty, he said, “has drained everything out of me.”
Gofinancial’s chief editor, Warren Strycker, is in that age group and works to help people in a financial bind in retirement years. He has a HECM mortgage on his own home to verify his belief system that using home equity is smart and safe for seniors who live longer than their retirement plan provided. The HECM plan is regulated by FHA/HUD and currently serves some 50,000 elderly homeowners annually, aged 62 or more, in the United States.
“It seems to me,” Strycker says, “that a pretty solid case can be made to seniors that using home equity to defend these families from bankruptcy, comes with a lot of logic — talk to me.” For contact information, press the “Information” tab on the home page.
Reverse mortgage credit lines are becoming more and more attractive to younger HECM borrowers amid the specter of rising interest rates, a Wall Street Journal article published today claims.
The story features quotes from multiple financial advisors and retirement experts extolling the virtues of taking out a home equity conversion mortgage line of credit as early as possible to hedge against future fluctuations in the stock market, home prices, and interest rates.
The WSJ cites research from brothers Barry H. and Stephen R. Sacks — a tax attorney and a retired economics professor, respectively — which recommends that borrowers use their lines of credit to weather down stock markets, allowing time for their investments to grow and preventing significant interruptions in lifestyle. This strategy improved the borrower’s chances of retaining wealth into old age, the Journal reported.
The Journal notes multiple potential downsides to the HECM line of credit, advising readers that the origination fees — giving an example of $9,000 on a credit line of approximately $200,000 — make it a less desirable short-term option. The paper also provides the often-mentioned caution about the potential lack of inheritance for the borrower’s heirs.
But overall, the Journal strikes a positive tone about the use of HECM credit lines, ending with this quote from Jamie Hopkins, an associate professor of taxation at the American College of Financial Services: “If home equity is incorporated more strategically in the future, we will see vast improvements in the financial security of retirees.”
Editor’s Note: Patriot Lending and Capital Solutions of Miami Lakes, FL has stepped up their lending to support middle class seniors who are entering retirement now and to give them financial tools when financial ends don’t meet as the cost of living continues to rise against an income that doesn’t. Patriot Lending is launching a capital branch to support seniors who need financing to Fix n Flip real estate and other projects that will fill in the income gaps during retirement years. The HECM mortgage opens up home equity to support reduction of debt and income shortages. This in an effort to provide solutions to tight budgets and limiting income. The following describes the fix a lot of elder retirees find themselves in coming out of (or not) the recent recession.
The analysis offers a useful definition of wealth as the difference between a family’s assets and debt. Wealth is an important dimension of household well-being, notes Fry, because “it’s a measure of a family’s ‘nest egg’ and can be used to sustain consumption during emergencies (for example, job layoffs) as well as provide income during retirement.” Wealth is an index both of resiliency in the face of shocks and of preparation for the future.
In the 30 years that the Federal Reserve Board has been collecting these data, the gap between upper-income and middle-class families has rough doubled. In 1983, the median net worth of upper-income families was 3.4 times that of their middle-income counterparts. In 2013, that figure stood at 6.6 times. Although the increase occurred by fits and starts throughout the past three decades, it accelerated dramatically during the Great Recession and its aftermath.
The key point, however, is not that the ratio doubled but why. Corrected for inflation, the median wealth of upper-income families has doubled since 1983, from $318,000 to $639,000. By contrast, the median wealth of middle-class families has stagnated during that period–$94,000 in 1983, $96,000 today. To be sure, middle-class wealth increased to $158,000 between 1983 and 2007 but the Great Recession reversed that gain, and the middle class has not participated significantly in the stock market surge that began in mid-2009.
While we should welcome the increased pace of job creation and early signs of wage gains, the middle class is unlikely to regain a sense of security until the nest eggs of average families reclaim the ground they have lost since the onset of the Great Recession.
To have a conversation with a Patriot Lending professional, access contact information on the home page navigation bar.
As life expectancy gets longer and longer, the age of retirement is getting pushed back, too, with the highest number on record of Americans aged 85 and up working, an analysis in the Washington Post presented.
“Overall, 255,000 Americans 85 years old or older were working over the past 12 months,” writes Andrew Van Dam. “That’s 4.4 percent of Americans that age, up from 2.6 percent in 2006, before the recession.
According to the analysis, United State Department of Labor figures show U.S. residents are working or looking for work at the highest rates on record for every year of age above 55.
“Baby boomers and their parents are working longer as life expectancies grow, retirement plans shrink, education levels rise and work becomes less physically demanding,” Van Dam writes.
The highest percentage of older workers is in the farming and ranching profession, with most of the other workers scattered in just 26 of the 455 occupations that the Census Bureau tracks. Interestingly, less than a third of the total workforce is in those 26 occupations.
“Workers age 85 and older are more common in less physical industries, such as management and sales, than they are in demanding ones such as manufacturing and construction,” Van Dam writes.
The odds are better that you are over 85 if you are a crossing guard, a musician, work in a funeral home, or are one of the “product demonstrators like those you might find at a warehouse club store,” the article states.
While the article did not cite any specific reasons why an older person would work into their 80s, a photo and caption with the article shows an 87-year-old man who said he is thinking of becoming a truck driver to help pay for his wife’s medical bills. This is one common way that a reverse mortgage can help retirees who qualify, loan originators have said.
Written by Maggie Callahan
“You can talk to me about this,” says Warren Strycker, veteran financial professional at Gofinancial. net. “See contact ‘information’ on the home page under ‘information’ tab. I’ll be waiting for your questions.”
Some of you are retired and you’ll need some extra cash to make ends meet. You can build some rentals or build to sell. But you will need some cash to pay the construction bills.
Construction loans for new-built homes are either obtained by the homebuilder or prospective owner. In pre-recession days, small builders had greater access to capital but now must frequently put the onus on the buyer to get the loan. That’s one reason most new homes rising today are simply “specs” built by big, high-credit corporate conglomerates.
The basics of construction loans
Let’s proceed on the assumption that you’re taking out an individual construction loan. Such loans, which can be tough to get without a previous banking history because of the lack of collateral (a finished home), have special guidelines and include monitoring to ensure timely completion so your repayment can begin promptly.
Construction loans are typically short term with a maximum of one year and have variable rates that move up and down with the prime rate. The rates on this type of loan are higher than rates on permanent mortgage loans. To gain approval, the lender will need to see a construction timetable, detailed plans and a realistic budget, sometimes called the “story” behind the loan.
Once approved, the borrower will be put on a bank-draft, or draw, schedule that follows the project’s construction stages and will typically be expected to make only interest payments during construction.As funds are requested, the lender will usually send someone to check on the job’s progress.
Upon completion, which is defined by a certificate-of-occupancy issuance and full payment of contractors (and often their signatures on lien releases), the borrower’s loan liability will typically roll over into a mortgage, ideally in an arrangement where the borrower pays closing costs only once. Of late, lenders have been combining the two into a single 30-year loan with one closing, called construction-to-permanent financing. Because of the bank’s greater loan-to-value risks in these, I might add, be prepared to put a little more skin in the game: The lender may offer only 80 percent of project costs or even less. If you already own the land, that can serve as equity.
Construction delays due to weather and material/labor availability are fairly common. Be sure to build some allowances for this into the construction timetable.
Why is there so little information or competing lender offers on construction loans online? For starters, these loans represent only a very small percentage of home loans. Plus, they’re a bigger risk. Hence, such financing isn’t the type of thing lenders aggressively market online; you have to hit the streets for it. Regional banks and credit unions are typically the best sources.
But then, there’s Patriot Lending in Arizona that can do it quicker and with less hassle and at less cost. Call me with your questions, 928 345-1200 or check out information tab on home page for contact information.
Without impeccable credit or a strong existing lender relationship, you may be challenged to find an affordable construction loan in today’s lending climate, though a booming local housing market and substantial family income tend to grease approvals.
CNBC included reverse mortgages in a list of “innovative approaches” to protecting retirees’ portfolios in down times, citing a financial advisor who said he and his colleagues would be “remiss” if they didn’t suggest Home Equity Conversion Mortgages as a potential option.
Rob O’Dell, a certified financial planner in the Naples, Fla. office of the Coyle Financial Counsel wealth management firm, told the network’s website that the reverse mortgage industry has “cleaned up this space to benefit the end consumer.”
“The HECM positions the portfolio for longevity, O’Dell said, by having the client tap the line of credit instead of assets when the market is down,” the post notes, echoing an increasingly popular angle for promoting the reverse mortgage. “In this way, assets are preserved and have the opportunity to keep growing through the years.”
The post warns consumers that HECMs still require HUD insurance premiums and lead to the accrual of debt, but generally positions the product as a tax-free way to diversify consumers’ retirement plans.
“The HECM allows the borrowers to be in control of their loan and payment terms, not the lenders,” O’Dell told CNBC.
This whole immigration thing is insane. I am a political refugee who exiled to the USA as an 8 year old child along with my 4 year old sister. My parents sent us to the USA alone when they couldn’t attain the proper immigration papers needed to enter the USA LEGALLY. They remained behind in Cuba until they were able to enter LEGALLY into the USA and apply for political asylum.
My sister and I were placed in a holding camp the USA had set up for the other children like us who were being airlifted to the USA escaping the brutal and oppressive Castro regime. My father was jailed several times by Castro for political dissent, and his business was confiscated. My parents, sent us to safety and freedom, hoping someday soon they could join us. Fourteen thousand Cuban children from the ages of 3-16 sought refuge in the USA in what eventually was called ‘The Pedro Pan Program’.
We were placed in a foster home several weeks after being vetted in the detention center. Because we had left Cuba with very little personal belongings do to Castro’s strict orders, (No toys, 3 sets of clothes, 1 piece of jewelry) and no money, we were provided all our physical needs. We were fed, schooled, clothed, and given shelter in an abandoned military base. We all ate together in the cafeteria, and were assigned to barracks. School rooms were set up.
I was 8 years old, too young to really understand what and why this was happening to us. My parents made me promise I wouldn’t cry so that my little sister would not be scared, so all my fears and sadness were suppressed. It was a trauma I cannot explain to anyone who has not lived through it. However, I can now completely understand the reasons my parents made this tremendous sacrifice, and I still clearly recall my parents faces watching our luggage being ransacked by the armed Cuban soldiers, and the look of sadness knowing they might never see their precious little daughters again.
Thankfully, my parents were able to escape Cuba a year later, and we were reunited with them s couple of weeks after they arrived. They got out of Cuba just in time before the diplomatic relations between the USA and Cuba were suspended due to the October Missile Crisis. We were one of the fortunate families who were able to reunite. Many families remained separated for many years, their children having forgotten even how to speak Spanish.
I am appalled by the way the liberals and the media is portraying what’s happening at our borders. The USA is the most generous, hospitable country in the world. This country has provided so much assistance, shelter and hope to so many in its young existence. ‘The beacon on the hill’ like Reagan so eloquently said.
To see and hear the hatred they use to malign and discredit President Trump simply because he’s attempting to permanently resolve the mess previous administrations have ignored and precipitated, absolutely breaks my heart. I have no words to express the outrage and the sadness I feel watching and hearing them lie, disrespect and show such disdain for this country I love so much.
I love this country and the shelter, opportunity and FREEDOM it provided my family since we were welcomed. Watching the tv images of children being cared for by the overwhelmed border officers and the immigration staff, and the way these anti-American news outlets are using this crisis to advance their anti-Trump hatred campaign is completely out of control. It is frightening. The fact American masses are being manipulated by this constant left-wing indoctrination methods is alarming. Having been subject to brainwashing as a kindergartner in Cuba I recognize the radical tactics. I grew up in a home where political discussion and how precious freedom and opportunity found in the USA is what every person on earth deserves, I am appalled by the recognition of the Marxist ideology this left-wing is aspiring to inject into the USA government.
They are gradually and persistently eroding the strong fiber the USA forefathers so wisely founded this country on. They use emotional sabotage to achieve their objectives. What’s more heartbreaking then exhibiting outrage over children being separated from their parents? Who wouldn’t feel a tug on their heart if all this were the real and complete facts?
However, they are only telling us the part of the story that promotes and advances their narrative. They fail to tell you these immigration laws have been around for decades. I know. I am a recipient of those policies. Do I consider myself a victim? NO!!! AND NO!!!
I am infinitely thankful and grateful for the generosity and kindness this country bestowed on us. I could never find the words to express my gratitude and my love for the country which has given the world’s oppressed the HOPE for SELF DETERMINATION. EQUAL OPPORTUNITY. FREEDOM OF SPEECH to even yell obscenities, mock, and besmirch a leader who has done nothing to deserve it except stand up for the country he loves, the people who volunteer to protect it, the flag and national anthem that represent it, and affirm the constitution many of his fellow citizens seem determined to overthrow and eliminate.
God forbid he should strive to defend its sovereignty. God forbid he should put the citizens he was freely elected to represent above all others. God forbid he should insist on respecting the flag that proudly waves its Stars and Stripes. God forbid he has made a commitment to honor life, even the lives of those unborn innocents. God forbid he should stand up proudly for American exceptionalism and the American way of life. God forbid he has made capitalism work again by lowering taxes, giving entrepreneurs new hope to succeed, jobs to the unemployed.
President Trump has been in the public arena for decades. You would think at some point, while a well known celebrity, somebody might have accused him of racism, fascism, naziism, homophobia, etc.etc.etc. But no. His biggest scandals? Divorce. Sad, but hardly uncommon in today’s world. Bankruptcy. And then recovery, success and wealth regained. Pomposity. True, perhaps. Narcissism. True, but what person confident enough to run for the US presidency can claim humility? None, I would argue.
The abject hatred and rhetoric directed at this man is illogical and crosses the line of normal and acceptable social behavior. I fear for his life, his family, and his supporters. The rancor and violent outbursts of complete and utter disdain is palpable. Frankly, I can no longer justify trying to understand the irrationality of the vitriol. It has surpassed my ability to accept and/or understand. All I am capable of at this point is prayer for protection, strength, guidance and favor for Mr. Trump, his family and those of us who support him.
I believe with all my heart that this man was ordained by God to lead us at this critical time in our history. God picks the most imperfect and unworthy to achieve His biggest purpose and His plans. It’s always darkest before the storm, but I firmly believe in the creator who promised a rainbow at the end of the storm.
The storm is raging. We need to stay strong, faithful and prayerful. Many of us will confront strife and violent stormy weather.
But the rock upon which this country was established on is strong, solid and deep. Those of us who know this are being called to be faithful to speak the message, and courageous enough to stand firmly on the principles that determine and established who we are as individuals and as a nation.
In the Declaration of Independence it clearly and radically affirms that we are to rely on our Creator, and all our rights come inalienably from Him. No power on earth can separate us from Him upon whom our nation has been blessed by throughout the last 250 years.
I pray incessantly for those who mean us harm to cease and desist. I pray for all our representatives to find compromise, guidance and peaceful resolution. I pray wisdom for all those who are blinded by the lies to seek the truth. I pray our flag continues to wave proudly and waves over those who volunteer to secure peace, safety and freedom for us to live by.
As financial planners and scholars increasingly advise certain borrowers to take out Home Equity Conversion Mortgages as early as possible as part of their retirement plans, some loan originators are noticing increased interest for the products from younger borrowers. At the same time, many in the industry are working to adapt their strategies to target individual age subsets of the consumer marketplace for home equity conversion marketplace, each with their own set of concerns.
Laurie MacNaughton, a reverse mortgage specialist at Southern Trust Mortgage in northern Virginia, says an age gap has become more and more apparent in her business as financial advisors increasingly recommend HECM loans for younger borrowers as a retirement-planning option, while elder law attorneys continue to refer clients in their 80s who may applying to meet immediate financial needs.
But for those who didn’t explore HECMs as an option in their early 60s, there may not be a sense of urgency, MacNaughton said — especially as people in their 70s remain active longer and may not think they’ll run into financial issues in the future.
“In the ‘60s, [people in their] 60s were the old people, but now they’re still working and running marathons — it’s kind of an Indian summer,” MacNaughton said, noting that in her home region of the Washington, D.C. suburbs, many who work in government and politics remain on the job as consultants or contractors into their mid-70s. She terms consumers in their 70s the “silent generation” for HECM borrowers — not to be confused with actual Silent Generation, a term for people who were born between 1925 and 1945.
National data from the Department of Housing and Urban Development doesn’t quite back up MacNaughton’s anecdotal observation around the nation’s capital: Borrowers aged 70 to 79 accounted for 39.3% of all HECM loans in fiscal 2016, up from 37.1% in fiscal 2015.
But the age gap in MacNaughton’s practice made sense to Mike Gruley, who highlighted the different approaches he generally uses when reaching out to baby-boom borrowers and older potential clients. Gruley, an executive vice president of reverse mortgage lending at 1st Nations Reverse Mortgage in Ann Arbor, Mich., says people in their 80s tend to be far more suspicious of credit in general, having been raised in a generation where mortgages and other loans were seen as burdens that needed to be retired as quickly as possible.
“We don’t hear about many baby boomers having mortgage-burning parties,” Gruley says, noting that people in their 60s have fewer qualms about using home equity to both cover necessary expenses and pay for indulgences such as vacations and second homes.
As a result, Gruley doesn’t usually take the home-equity approach when working with older borrowers, instead focusing on the practical benefits of securing additional funds to help pay bills and other necessities.
“We don’t need a second house,” he said, summarizing their attitudes. “This one just got paid for.”
See contact information in navigation bar for details.
Do you realize you are sitting on a pile of money you could spend after 62 hiding in your home equity — money you wouldn’t pay tax on and for whatever reason you can imagine? (what a relief it can be). So, it sounds too good to be true and you don’t believe it. That’s OK, that’s the way with this kind of deal — it’s hard to believe it — and you’ll be pinching yourself to see if you are awake.
Hmmmmmmmm. The critics will tell you it’s a crock and you shouldn’t do it. Yes, there is critics and they don’t believe it. What about you? Will you let us explain how it works. That will help you get your feet back on the ground?
The HECM plan came in with President Reagan and a million of your U.S. neighbors have already done it.
You could do something well beyond the norm and feel good about it in this lifetime, watching it spent on things that matter to you.
One of the ways to contribute to charity is to open up home equity to pay for it and then settle up after you leave when your house is sold.
Many of our neighbors have no family to leave this pile of wealth to and can’t imagine what they would fund with this money.
There are so many ways to contribute to causes you care about.
Here are some you may not have thought about.
American Red Cross.
Help refugees get a start in your favorite country.
Support missionaries around the world.
Invest in a family business to support people that matter to you.
How much money is sitting there in your house? (“I can help”, Warren Strycker 928 345-1200.)
Talk to me about this. See “information” tab on home page for contact information.
Retired homeowners are increasingly using their property wealth to get family members onto the property ladder, or to pay for university, a new study has shown.
Figures from Key Retirement showed one in four pensioners were using their homes to help their family, with money going to house deposits, university fees, debt repayments and business start ups.
The percentage using property wealth for gifting increased to 26 per cent from 22 per cent in the first quarter of 2017.
“Gifting is a major motivation for equity release and our data shows it is more a case of parents and grandparents wanting to gift rather than children asking for help,” said Dean Mirfin, chief product officer at Key Retirement.
“They’re motivated by the desire to help when the money is really needed and being around to see the difference that it makes. In addition, equity release enables them to have some control over how the money is ultimately used.”
The figures showed that while many are giving away money from equity release, pensioner debt is also a factor. More than a fifth (21 per cent) of people used proceeds of equity release to pay down mortgages, while 30 per cent using it to clear credit cards and loans.
The average retired homeowner took £74,000 from their home, and the total amount released in the first quarter of the year was £777m. The south east of England accounted for more than a quarter of all equity release sales and nearly 30 per cent of total lending.
The most popular use of the cash was to fund home and garden improvements with 63 per cent of retired homeowners spending money on their houses. But the size of the average amounts being released means 31 per cent were also able to pay for holidays.
The figures showed many more people were taking advantage of more flexible equity release mortgages. Around 68 per cent of all sales were drawdown plans, including 16 per cent in enhanced drawdown which offers enhanced terms to people with health or lifestyle conditions.
Single advance lifetime mortgages accounted for 32 per cent of sales, of which 17 per cent were enhanced products.
Pensioners (retirees) on this side of the pond can learn about the Home Equity Release program by searching on the home page for the “information tab”. The publisher of this webpage is also a veteran mortgage loan officer in Arizona and can give you details to get started including a free analysis to discuss with you the qualifications needed.
The total costs of Social Security will exceed total income this year for the first time since 1982, according to the annual Social Security and Medicare trustees report released on Tuesday, as funds for Medicare are expected to run dry earlier than expected.
While costs have exceeded net income since 2010, this is the first time in more than three decades that spending is expected to outweigh total income, by about $2 billion, meaning asset reserves will decline. Asset reserves as of 2017 were $2.9 trillion.
The trustees forecast that 100% of benefits will be covered through 2034, after which the trust funds for Social Security, which also cover old age and disability insurance programs, will only be able to cover about 79% of benefits.
Meanwhile, Medicare’s hospital insurance trust fund is expected to run dry in 2026, three years earlier than what the trustees had predicted in last year’s report. At that time, funds will be sufficient to cover just 91% of Medicare Part A costs.
Talk to a veteran mortgage professional about social security and home equity release to make up for social security shortages — See “information tab”.
So, you retired, and a lot of your friends retired. It didn’t take long to see how difficult it is to retire without enough financial resources. No pensions. No large 401k to cash out. What can you do about it? Besides the usual list which may include scaling down your lifestyle, you can take out some of your home equity with the use of a HECM mortgage to provide additional cashflow. Pay off the mortgage and reduce the overhead.
But even with those adjustments, some will consider staying in — or going back into — the workplace. There are challenges initiated by the changing workplace as evolving high tech skill sets overwhelm those not adequately trained.
Here are some strategies to consider — recently suggested by an article in the Wall Street Journal. These strategies help veteran employees stay current and valuable as workplaces become younger and more tech-focused.
By Sue Shellenbarger
Updated May 22, 2018
Do your colleagues at the office seem to be getting younger?
It looks that way to the millions of older employees in industries being disrupted in the digital era and favoring younger more digitally savvy workers, such as tech, entertainment, retailing and media. As more workers in their 40s and beyond plan to delay retirement until their mid-60s, a growing number will have to hustle to reassert their value to their employers.
A core question older employees face: Would your boss hire you again with the skills you have now? Being able to answer yes takes some smart moves to keep your skills fresh, your attitude upbeat and your personal style up-to-date.
Waiting to act until a buyout offer or other rumblings of cutbacks surface at your company is too late. “You can’t wait until the axe is falling to get out of the way,” says Judith Gerberg, a New York City executive coach.
Networking with younger colleagues and showing curiosity about what they do can help you stay abreast of changes, says Ellis Chase, a New York career-management consultant and author. “You have to break through your comfort zone and talk to that 28-year-old hotshot. Seek her out and ask, ‘I’d love to learn more about this. Could you spend a half-hour with me? I’ll take you to lunch,’ ” Mr. Chase says.
Jeff Fuerst, 52
Jeff Fuerst, 52, spent eight years in his 40s as an inventory-management executive at Sears HoldingCorp. , the troubled retailer, in hopes of helping it turn around. He stayed abreast of technology and helped start a work-from-home program to help attract young recruits. As Sears continued to close stores, he kept his industry contacts fresh by attending meetings of professional groups.
In a transition initiated by one of those contacts, Mr. Fuerst left Sears three years ago for a position as a senior vice president at Integrated Merchandising Systems, a Morton Grove, Ill., merchandising and marketing agency. There, he’s learning e-commerce and digital-marketing technology, and he has since been promoted to chief logistics officer. “If you don’t react quickly to change, it’s very hard to keep up,” Mr. Fuerst says.
Forming ties and collaborating with colleagues at all levels is an important survival skill, Ms. Gerberg says. Make sure “you have somebody who, if your name comes up at a meeting to be fired, will say, ‘Oh no, that person is great. I’ve worked with them,’ ” she says. If your group is targeted for buyouts, having friends inside the company also improves your chances of transferring to a new assignment in a different unit.
Karen Alber, 54
Karen Alber, 54, continued to advance her skills and build new contacts during stints at three separate beverage and food companies in the past 15 years, enduring major cost cuts and restructuring threats and leaving voluntarily in each case. She earned certifications in a field that didn’t exist when she graduated from college in the 1980s—supply-chain management.
She joined professional groups and spoke at meetings. “I sometimes thought, ‘Really? I have to get on a plane and go to a conference?’ ” Ms. Alber says. “But then I did it anyway.” She took coaching courses because she enjoyed mentoring young colleagues.
She also volunteered for internal projects, including task forces for improving how work got done. She sometimes worried, “If I go on this team, how am I ever going to get my job back?” Ms. Alber says. But she learned valuable skills, including managing cross-functional teams and delegating work she couldn’t do herself, helping her advance to chief information officer.
Karen Alber, 54, stayed up-to-date in part by earning certifications in a field that didn’t even exist when she graduated from college: supply-chain management.
“It became her brand,” says Amy Ruppert, an executive coach who worked with Ms. Alber for years. “People knew, ‘You can throw Karen Alber into anything and she’ll run with it.’ ” Two years ago, Ms. Alber made a planned, voluntary move to a new career, co-founding the Integreship Group, a Chicago leadership-coaching firm, with Ms. Ruppert.
Many people face psychological roadblocks to learning new jobs or skills, says Andy Molinsky, a professor of organizational behavior at Brandeis University and author of a book on stepping outside your comfort zone. Older workers may feel resentful about having to stretch themselves when they’ve already worked for decades. Or they may think, “This doesn’t feel like me,” Dr. Molinsky says.
Some manage to venture into new terrain anyway, by developing a sense of purpose—a belief that making the effort is important for a reason you value deeply. Others manage to tweak, personalize or customize the way they move into new roles, so that they feel more comfortable, he says.
One way to do this, consultants and coaches say, is to develop your personal style. That doesn’t mean overhauling your wardrobe or appearance in an effort to look as hip as younger colleagues. “If you’re in your 30s and you have stubble, maybe it’s hunky. But if you’re 70 and you’ve got gray stubble, it looks like you’re homeless,” says Peter Cappelli, a management professor at the Wharton School and author of “Managing the Older Worker.”
New York image consultant Amanda Sanders advises choosing clothing and accessories that reflect current fashions, but making sure they also fit well and look good on you. Men can update their look by choosing trousers with tapered legs, leather shoes with double monk straps rather than laces, and contemporary glasses with tortoiseshell or colorful transparent frames. While an Apple watch suggests the wearer is tech savvy, “on someone older it looks like they’re trying to be young,” Ms. Sanders says. A better choice might be a classic watch with a leather band, she says.
Women should abandon outdated looks, such as a frumpy cardigan over a dress, in favor of a leather jacket or asymmetrical sweater, Ms. Sanders says.
Those whose hair is thinning can color it with highlights to lend more depth and thickness, she suggests. And gray hair is fine if it’s healthy and styled in a contemporary way, Ms. Sanders says. “Wear your age as a badge of honor,” she says. “If you believe it, they’ll believe it.”
To improve your survival chances late in your career:
If your area is a likely target for cuts, explore potential assignments in other units.
Look for problems you can solve for your employer to demonstrate your strengths.
Consider updating your wardrobe and hairstyle with help from a trusted adviser.
Participate when possible in off-hours socializing or charity events with colleagues.
Take the initiative to get to know younger colleagues with skills you don’t have.
Volunteer to help with training or onboarding programs for new hires.
Raise your hand for internal projects that will strengthen your network or skills.
Update your professional credentials via training or refresher courses.
Stay involved in professional organizations or your college alumni network.
WORK & FAMILY MAILBOX
Q: You wrote recently about employers replacing traditional one-desk-per-employee setups with unassigned desks and a variety of other spaces for meeting and socializing. What impact do these wide-open setups have on introverts?—M.S.
A: Losing your assigned desk can be especially jarring for introverts, who may feel the loss of a home base more keenly than others. Many also miss the predictability of sitting near the same people every day, employers and employees say. New hires in these freewheeling setups typically have to learn more new names and faces immediately.
Some introverts also benefit from being allowed to work from home or other private settings more often. Many employers provide this added flexibility as part of the transition to unassigned seating. These setups also typically include private workspaces for employees to settle down by themselves, focus on their work and think deeply.
Appeared in the May 23, 2018, print edition as ‘Reinvention in a Digital Era Stayin’ Alive.’
Those interested in a HECM should read through information on this website. Ask questions by calling Warren Strycker, a savvy upper aged veteran. See contact information under the “information” tab on the home page.
He and his wife, Brooke, liked to travel and didn’t want to leave their two cats and a dog behind. Brooke is a veterinarian. They were looking forward to cross-country drives to stay with family for weeks at a time, or just picking up and heading out into the country for a long weekend.
Four years ago, the then-San Antonio couple decided to plop down $20,000 in cash for their RV. The sum pretty much ate up their entire $25,000 emergency fund, but with no debt beyond their mortgage, Dooley, now 35, felt comfortable they could replenish it soon.
Ten days later, though, Brooke, 31 at the time, was diagnosed with breast cancer. After half a year of treatment, including chemotherapy and a double mastectomy, Brooke’s cancer was contained and removed. The couple had been able to replenish their savings in less than a year, even after paying $10,000 for an IVF-type procedure that wasn’t covered by insurance, to ensure their ability to one day have children.
“We learned the unexpected can happen, and an RV purchase is far from an emergency,” says Brian, who works in medical marketing.
Millions of Americans understand that lesson.
For the third consecutive year, according to a Bankrate survey, adults most regret not saving for retirement early enough – 18 percent of respondents – and not saving for emergency expenses (14 percent).
Debt was a secondary concern, with 1 in 10 respondents lamenting too much credit card debt and another 8 percent citing high student loans. Seven percent wish they saved more for their child’s college education, while 2 percent cite buying more house than they can afford.
Nearly a quarter said they regretted something else, and 15 percent had no financial regrets whatsoever.
“Time is your greatest ally when saving for the future,” says Greg McBride, CFA, Bankrate chief financial analyst. “To workers of all ages, there is no better time than the present to increase your 401(k) contribution or fund an IRA.”
In the here and now, most adults do not have enough stowed away in a savings account to adequately protect them from going into debt, should disaster (lost job, health scare) occur.
Financial planners recommend an emergency fund comprising six months’ worth of essential expenses in a savings account. That’s about $23,000 for the average household living in a major metropolitan area, according to a recent Bankrate report.
How much does the average American have? Less than $4,000, according to Federal Reserve data, which is why 39 percent of adults wouldn’t pay from an unexpected $1,000 expense out of savings.
Americans, as the latest Bankrate survey finds, simply are nervous about their lack of retirement savings. Just half of middle-income Americans own a retirement account, according to the Fed, with a median holding of only $25,000.
The figures are even more scary if you look at households helmed by someone between the ages of 55 to 64, or the decade before retirement. Only 60 percent of those Americans, who are about to be out of the workforce, are saving for retirement, with a median amount of $120,000. Financial planners estimate you need about 11 times your final paycheck to retire securely.
How you can avoid financial regret
“I’m not surprised the biggest regrets in your survey are about not saving enough,” says Chantel Bonneau, a San Diego-based Northwestern Mutual wealth management adviser and CFP professional. “So many are woefully behind schedule on savings.”
Bonneau sees two distinct problems among her clients who haven’t amassed adequate savings: incentives and anchoring.
Incentives: This issue revolves around the lack of a clear goal. What’s the point if you don’t have a story in your mind to account for why you’re saving? These clients may intellectually understand why saving is better for their finances than spending, but without a clear number in mind, they lose enthusiasm and focus.
“It’s just hard to get excited without a goal,” Bonneau says.
So, create a goal. Make it real. If you want to buy a house, label your savings account “down payment” and start building toward a specific number that will help you afford a home in your price range.
Anchoring: The other issue, especially for retirement, is not adjusting the amount of your savings when your income rises. Some of Bonneau’s clients contributed, say, $50 a month to an IRA when they were 22, but hadn’t increased their contributions as their incomes rose.
“People are locked in on numbers,” Bonneau says. “For instance, I just believe my cable bill should be $80 a month. I’m comfortable with that. The same thing happens with savings.”
The trick is to break yourself of that anchor. Fifty bucks may have made sense on your first salary but is insufficient later in life. In effect, you are living beyond your means by decreasing your savings rate.
Instead of thinking in terms of dollar amounts, then, use percentages. Get used to saving 10 percent of your pay in an employer-sponsored 401(k) including any match, or in an IRA.
You’ll have less to regret later in life.
This study was conducted for Bankrate via landline and cellphone by SSRS on its Omnibus survey platform. Interviews were conducted from May 2-6, 2018, among a sample of 1,004 respondents. The margin of error for total respondents is +/- 3.70% at the 95% confidence level. SSRS Omnibus is a national, weekly, dual-frame bilingual telephone survey. All SSRS Omnibus data are weighted to represent the target population.
So, what to do about it now? The HECM mortgage utilizes home equity to balance the budget in retirement when other income sources fail to cover deficits. Merton and others are now saying it will be the wave of the future in retirement planning. And, while not all those should be based on the numbers in this article, more are weighing in to recommend the HECM mortgage to clean up budget imbalances.
Consider the implications of the HECM mortgage as you browse this website.
Consider the implications of using it for yourself as you near your sixty second birthday by opening up dialogue with Warren Strycker, HECM veteran of many years. See Information tab on the home page for contact information. (https://gofinancial.net/home/)
Also, since many of you believe this is a bad decision, consider what the truth is vs the fake news you’ve been hearing by downloading this brochure for your consideration. (https://gofinancial.net/hecm-brochures/)
“What we have done for ourselves alone dies with us; what we have done for others and the world remains and is immortal.”
— Albert Pike
May is Older Americans Month, and in recognition of this year’s theme, Engage At Every Age, Americans are growing older than ever before. What’s their secret? Possibly telomeres.
What we learned from astronauts
Telomeres — the protective endcaps of our chromosomes, which shorten over time as we age — appear to lengthen in space, a NASA study reveals.
Researchers compared a number of psychological and physiological factors affecting identical twin astronauts, one of whom spent a year in orbit aboard the International Space Station while his brother remained on Earth as a control. Testing confirmed that the off-planet brother returned to Earth with significantly longer telomeres.
While his telomeres shortened again after just a few days back on Earth, it begs the question: is living aboard a spacecraft the ultimate anti-aging tonic?
Ripe for disruption
It’s not just space that affects longevity; there’s a lot of health disruption happening right here at home. We may not be able to lengthen our telomeres (yet) but healthcare innovation has just taken a quantum leap forward: Amazon hired a geriatrician.
Isn’t that a bit odd? What does Amazon know that other businesses don’t?
According to MedCity News, “Healthcare — especially for seniors — is at its breaking point and is ripe for disruption. The old ways of doing things have not been working for patients or providers. That’s why the geriatricians who have been on the front lines are actually some of the most innovative minds who could shift the paradigm.”
Dementia without stigma
We’re also starting to remove the ignominy of memory loss. The inaugural “Dementia Village”, based on the pioneering Netherlands model, opened last month in Chula Vista, California. An adult day care center, known as Town Square, is a simulated town designed for reminiscent therapy, featuring everything from a 1959 car to a working diner and black-and-white movie theater.
While senior residences have seen the benefit of yesteryear-themed design, what’s intriguing about this dementia village is that it’s staffed with seniors, via a national home care franchise. They hope to scale the concept to 100 locations throughout the U.S.
Like Amazon hiring a geriatrician, having seniors support seniors makes perfect sense. Just as Japan is gearing up to care for its burgeoning number of older adults with Alzheimer’s through the concept of “dementia towns”, where residents take responsibility for seniors who need assistance rather than leaving this to immediate family or the medical establishment, dementia villages create a welcoming, immersive experience for elders who need memory care. And it’s stigma-free — inviting, even. The whole environment sounds quite appealing for any nostalgia buff!
For love of the game
For some seniors, working at what they love, whether it involves caring for their cohorts or ushering at a beloved ballgame, keeps those telomeres and the person they pilot in fighting trim to the very end.
That was the ticket for Phil Coyne, a Pittsburgh Pirates fan who retired in April just a few weeks prior to his 100th birthday after — wait for it — 81 years on the job, besting Elena Griffing’s 71-year record (of course, Ms. Griffing is almost a decade younger than Coyne, so she may catch up!)
Whatever their game, when elders love life, and when industry giants such as Amazon and the creators of Town Square continue to focus on the benefits of making senior wellness a priority, life for your reverse mortgage clients and prospects promises to be better than ever. Enjoy honoring your clients this May!
About the author: Amara Rose View all posts by Amara Rose
Amara Rose is a personal and business coach with a broad background in health and positive aging. She holds a social welfare degree with a gerontology emphasis from Penn State, and has written extensively about senior housing, elder health and nutrition, lifelong learning, and the spiritual dimension of aging. A seasoned marketing copywriter, Amara has wordsmithed everything from blogs to brochures to web content. Contact Amara at email@example.com to learn more.
By Craig Copeland, Ph.D., Employee Benefit Research Institute
AT A GLANCE
Much of the attention to retirement preparedness focuses on asset accumulation in individual account retirement plans as well as the presence of defined benefit plans, but the other side of the balance sheet—debt—can potentially have a significant impact on the financial success of an individual’s retirement. Any debt that an elderly or near-elderly family may have accrued entering or during retirement can offset any asset accumulations, resulting in lower levels of retirement income security.
This Issue Brief focuses on the trends in debt levels among older American families with heads ages 55 or older (near-elderly families are defined as those with family heads ages 55–64 and elderly families are defined as those with family heads ages 65 and older), as financial liabilities are a vital but often ignored component of retirement income security. The Federal Reserve’s Survey of Consumer Finances (SCF) is used in this article to determine the debt levels.
Debt is examined in two ways:
Debt payments relative to income.
Debt relative to assets.
Each measure provides insight regarding the financial abilities of older American families to cover their debt before or during retirement. For example, higher debt-to-income ratios may be acceptable for younger families with long working careers ahead of them, because their incomes are likely to rise, and their debt (related to housing or children) is likely to fall in the future. On the other hand, higher debt-to-income ratios may represent more serious concerns for older families, which could be forced to reduce their accumulated assets to service the debt at points where their peak earning years are ending. However, if these older families with high debt-to-income ratios have low debt-to-asset ratios, the effect of paying off the debt may not be as financially difficult as it might be for those with high debt-to-income and high debt-to-asset ratios.
This study by the Employee Benefit Research Institute (EBRI) found various results about the debt holdings of families with heads ages 55 or older.
A higher percentage of American families with heads ages 55 or older have debt, and families with the oldest heads are seeing the greatest increases. In 1992, 53.8 percent of families with heads ages 55 or older had debt and by 2010, 63.4 percent did so. This number continued to increase through 2016 reaching 68.0 percent. After 2007, the increase in debt has been most prevalent among the families with the oldest heads – ages 75 or older – where the percentage having debt has increased by nearly 60 percent (from 31.2 percent in 2007 to 49.8 percent in 2016).
ebri.org Issue Brief • March 5, 2018 • No. 443 2
However, debt levels have decreased from their peaks in 2010, but the oldest families still have debt levels above their 2001 levels. The average debt amount for families with heads ages 55 or older was $82,968 in 2010, but this amount stood at $76,679 in 2016 (both amounts in 2016 dollars). Furthermore, debt payments as a percentage of income fell from 11.4 percent in 2010 to 8.2 percent in 2016. In addition, debt as a percentage of assets declined from 8.4 percent in 2010 to 6.5 percent in 2016. While the overall percentage of families with heads ages 55 or older having debt payments in excess of 40 percent of income (a common threshold for determining if a family has issue with debt) decreased in 2016, the percentage of families with heads ages 75 or older with debt payments in excess of 40 percent of income increased by more than 23 percent from 2007-2016.
Housing debt has been driving the change in the level of debt payments since 2001, while the nonhousing (consumer) debt-payment share of income has held relatively stable since that time. Housing debt payments have been 1 to 3 times larger than those of nonhousing debt payments since 1992. In 2016, housing debt payments fell below both the 2010 and 2013 levels.
Younger families, those with heads younger than age 55, have had a higher probability of having debt and higher debt payments as a percentage of income than older families. However, families with heads ages 55–64 have been more likely to have debt payments in excess of 40 percent of income than any other age group.
While improving in many respects in the most recent years, the overall trends in debt are troubling as far as retirement preparedness is concerned, in that American families just reaching retirement or those newly retired are more likely to have debt—and higher levels of debt—than past generations, specifically those in the 1990s. Furthermore, the percentage of families with heads ages 75 or older whose debt payments are excessive relative to their incomes is near its highest levels since 1992. Consequently, more families that have elderly heads are placing themselves at risk of running short of money in retirement due to their increased likelihood of holding debt while in retirement.
**Editor’s Note: “At the ‘HECM TABLE’, debt is postponed and dealt with after you move, die or choose to pay it off. The debt itself is referred to as “non recourse” meaning the loan is tied to the house — not the owner — and never needs to be paid in his lifetime as long as the homeowner keeps his taxes and HOI paid up” says veteran mortgage professional, Warren Strycker. (See contact information at the home page under “information” — call with questions).
For those concerned about losing their inheritance, read https://gofinancial.net/2015/12/inheritance/ on this webpage. Those worried about losing their house, check out this tab on the home page: https://gofinancial.net/hecm-brochures/ Better yet, call Warren at 928 345-1200 (it’s probably quicker).
Home prices continue to surge, rising for their seventh consecutive month in February, according to the latest Home Price Index from CoreLogic, a property information, analytics and data-enabled solutions provider.
Home prices increased 6.7% across the U.S. from February 2017 to February 2018, and increased 1% from the month before, according to the report.
And this increase was even higher in western states, which continue to have hot housing markets, CoreLogic explained.
“A number of western states have had hot housing markets,” CoreLogic Chief Economist Frank Nothaft said. “Idaho, Nevada, Utah and Washington all had home prices up more than 11% over the last year.”
“With the recent rise in mortgage rates, affordability has fallen sharply in these states,” Nothaft said. “We expect home-price growth to slow over the next 12 months, dropping to 5% to 6% in Idaho, Utah and Washington, and slowing to 9.6% in Nevada.”
For the U.S. overall, CoreLogic’s HPI Forecast shows prices will slow to an increase of 4.7% by February 2019. California, on the other hand, will continue to surge, rising 10.3% year-over-year.
The CoreLogic HPI Forecast is a projection of home prices that is calculated using the CoreLogic HPI and other economic variables. Values are derived from state-level forecasts by weighting indices according to the number of owner-occupied households for each state.
An analysis of the country’s top 100 largest metros based on housing stock shows that 34% are now considered overvalued as of February, CoreLogic reported.
The market conditions indicator analysis categorizes home prices in individual markets as undervalued, at value or overvalued, by comparing home prices to their long-run, sustainable levels, which are supported by local market fundamentals, such as disposable income.
As of February, about 30% of the top 100 metros were undervalued while 36% were at value, the report showed.
“Family income is rising more slowly than home prices and mortgage rates, meaning that the mortgage payment takes a bigger bite out of income for new homebuyers,” CoreLogic President and CEO Frank Martell said. “CoreLogic’s market conditions indicator has identified nearly one-half of the 50 largest metropolitan areas as overvalued.”
“Often buyers are lulled into thinking these high-priced markets will continue, but we find that overvalued markets will tend to have a slowdown in price growth,” Martell said.
Editor’s note: The HECM benefit rises with the Principal Limit tied to home values — so this is good news for those ready to consider the HECM reverse mortgage now. If the market goes back down (as it did recently), less benefit is available. Don’t forget — this mortgage does not require payments in your lifetime as long as you keep taxes and homeowner’s insurance current opening up a great opportunity to reset your budget in retirement, says Warren Strycker, veteran HECM professional. Call 928 345-1200 for a HECM analysis to determine what these facts could mean to you. See “information” tab on home page for contact information.
Loose management of finances, such as taking on too much debt or not saving enough, could lead to irreversible damage when it comes to retirement.
What’s more, you often don’t find out if you’ve made a financial mistake until much later in life. That’s why we decided to survey senior citizens to see what they would change about their financial planning if they could go back to their youth when they first started working. It might be too late for them to make changes, but others certainly can benefit from their advice and benefit of hindsight.
In our latest survey of 1,000 senior citizens, LendEDU sought to uncover how older Americans are faring financially and if they made the right decisions throughout life to live comfortably in their later years.
Are today’s senior citizens sufficiently prepared for retirement or have past financial mistakes impeded their progress? What did older Americans wish they knew about managing finances when they were younger?
Here were a few key takeaways from the study:
55% of senior citizens said they have not saved enough for retirement, 18% were not sure if they had enough saved, and 27% felt as if they did
21% of older Americans, the plurality, indicated that their biggest financial regret from their twenties was not saving enough for retirement
69% of respondents stated that Social Security benefits are a critical part of their financial strategy while 47% said the same regarding life insurance
More Than Half of Senior Citizens Underprepared for Retirement, Most Wish They Started Saving Sooner
To gather the data for LendEDU’s story, we surveyed 1,000 Americans, all of whom were at least 65 years of age.
One of the first questions we asked the respondent pool was the following: “What is the biggest financial regret you have from your twenties?”
The plurality of the respondents, 21.4 percent, indicated that the biggest financial regret from their twenties was not saving enough for retirement. Other popular answer choices included spending too much money on nonessential things (17 percent), not investing (12.3 percent), and getting into too much debt (10 percent).
Circling back, it was quite telling that senior citizens regret not saving enough for retirement in their twenties. Getting a jumpstart on retirement is essential to living a comfortable life in one’s later years. Due to compound interest, the earliest possible start to retirement saving will be the most beneficial as your money will have more time to grow.
Professor Timothy Wiedman of Doane University, 66, agreed with most senior citizens who took this survey in that his biggest regret was not getting a jump on retirement while in his twenties.
“I put off starting to save for retirement and didn’t open my first IRA until I was a bit over 31 years old. I justified this by telling myself that I could always “catch up” later on my long-term financial plans after establishing a solid career and seeing my income increase,” said Wiedman.
Wiedman soon realized the delay had a substantial impact on his ability to save and earn.
“But the earning power of compound interest is based on time, so an initial delay can have severe consequences. Thus, for young folks these days, opening a Roth IRA as early as possible is vital,” he said. “For example, if a 23-year-old fresh out of college puts $3,000 per year into a Roth IRA that earns a 7.8 percent average annual return, 44 years later at retirement, that $132,000 of invested funds will have grown to $1,009,275. On the other hand, starting the same Roth IRA 20 years later will yield very different results.”
So we know that many older Americans seriously regret not saving for retirement early enough. But were they able to salvage that lost time? Are they prepared for retirement?
The following question was proposed to all 1,000 senior citizen respondents: “As of today, do you believe that you have saved enough for retirement?
The strong majority of older Americans, 54.6 percent, admitted that they do not believe they have saved enough for retirement, while only 26.6 percent think they are on the right track, and 18.8 percent are still unsure.
It came as quite a surprise that so many senior citizens believe they are not aptly prepared for life after work when they should be enjoying warm weather and leisure activities.
But once again, it goes to show the potentially crippling effects of not saving enough for retirement at a younger age. Quite a few senior citizen respondents wished they had saved more in their twenties and that sentiment transferred over to this more black-and-white question.
For reference of what is to come, a LendEDU study found that of 500 millennials who consider themselves to be saving for retirement, 41 percent are using a savings account to save for retirement. A savings account – even a high interest savings account – likely won’t produce anywhere near the growth delivered by a 401(k) or individual brokerage account, which 59.4 percent of respondents used.
If those millennials wish to find themselves in a better position than more than half of the baby boomers at the age of retirement, they should probably switch from a savings account to a robo-advisor, 401(k), or brokerage account.
Additionally, when we asked our senior citizen respondents to answer what they know about personal finance today that they had not known at 25, 15.68 percent of the answers were: “I know how to save for retirement.”
The plurality of answers, 28.68 percent, pertained to learning how to live within one’s means, while 25.95 percent of answers were: “I know how to budget.”
Dr. John Story, a 60-year-old college professor at the University of St. Thomas, Houston, summed up this question quite well and further reinforced the importance of getting a jump start on retirement.
“I wish I had known the true cost of debt, and the flipside, the real value of long-term saving.”
With a Lack of Retirement Funds, Many Seniors Relying on Social Security and Life Insurance
As one gets older, there are two components that are thought to be key to achieving a sustained financial comfort. One is life insurance, a product, while the other is Social Security, a benefit.
Life insurance and Social Security benefits become all the more crucial for senior citizens when they have not saved enough for retirement, which is the case for over half of our respondents.
Not surprisingly, many poll participants indicated that they are relying heavily on both things to live their later years comfortably due to a lack of sufficient retirement savings.
In comparison to life insurance, older Americans were more likely to list Social Security benefits as important to their financial strategy. A majority, 69.1 percent, stated that Social Security benefits are a critical component, while 18.7 percent said the opposite, and 12.2 percent were still undecided.
Whereas life insurance must be purchased, Social Security is a benefit that can be qualified for by being of age and by working for a certain number of years (usually 10).
Life insurance is purchased by many senior citizens because it can solidify the financial security of loved ones should the buyer pass away.
While a majority was not achieved, 46.9 percent of senior citizens indicated that life insurance was an important part of their financial strategy. 34.1 percent said that the insurance product does not hold much weight for their financial plan, while 19 percent were unsure.
Considering many of LendEDU’s respondents are not sufficiently prepared for retirement, having life insurance or access to Social Security benefits could become quite pivotal for living comfortably in their later years. Note: Complete survey data and methodology available here.
“Here at Gofinancial, we have prepared for this event. Lots of seniors will run of money in retirement. The HECM insured program ushers in the use of home equity to support shortgages for seniors beginning at age 62.
Yes, you will get to open your home equity “bank”.
Open “information” tab on the home page to access contacts for Patriot Lending, a leading HECM lender where mortgage payments are eliminated and cashflow restored,” says veteran HECM loan officer, Warren Strycker.
THE RETIREMENT TREE IS TOO LARGE, with new expenses cutting into income balance. Cutting Retirement “Tree” down to size introduces products that make it easier to balance the budget. This is about HECM and the Retirement Specialists, sizing up the issue and giving their thoughts here. Call 928 345-1200 for specifics.
The negative perception surrounding reverse mortgages not only stunts the growth potential for these products to reach a wider consumer audience, but also deters financial planners from recommending the use of home equity for retirement income planning.
(Can’t help but ask the obvious question — why does a great program like the HECM continue to suffer from bad press? Does anybody ask if the press is bad (as Trump does), or that government doesn’t intend for you to enjoy the benefits of this successful program (as I do)? (This is not an accident. Something might be afoul here but what it is, is not clear — what is it? Is it possible the government has other plans for your home equity? Just thought I would ask this pesky editor’s question). In any case, if you are one of those who trusts our government’s instincts regarding social security and retirement entitlements, you will believe I have conjured this idea up for the sake of politics. I don’t think so, but I respect your right to think so. Consider these thoughts and move forward in your retirement planning. There are lots ahead to consider. Reach out here with your questions. Let’s be friends: 928 345-1200.
“In short, well-handled reverse mortgages have suffered from the bad press surrounding irresponsible reverse mortgages for too long,” writes Wade Pfau, professor of retirement income at The American College and director of retirement research at McLean Asset Management, in his new book, an excerpt of which appeared in Investment News this week.
Pfau’s book, “Reverse Mortgages: How to Use Reverse Mortgages to Secure Your Retirement,” hit shelves last month and has been generating considerable press in various financial planning news outlets, including Investment News and TIME Money.
Although the media begun to acknowledge the improvements that have taken place for reverse mortgages in recent years, the trend of positive coverage is still a new phenomenon.
And with so much pre-existing bias against these products, Pfau says it can be hard to view reverse mortgages objectively without a clear understanding of how the benefits exceed the costs.
“Reverse mortgages give responsible retirees the option to create liquidity from an otherwise illiquid asset, which can, in turn, potentially support a more efficient retirement income strategy,” he writes book.
At the crux of the book is the concept that retirees must support a variety of expenses if they want to enjoy a successful retirement. So while retirees will have to manage overall lifestyle spending, as well as account for unexpected contingencies and their legacy goals, they will have to look beyond traditional funding sources like Social Security and pensions.
But suppose retirees have two other assets such as an investment portfolio and home equity. The task then, according to Pfau, is to link these assets to spending obligations efficiently while also mitigating retirement risks like longevity market volatility and spending surprises that can impact the person’s plan.
“The fundamental question is this: How can these two assets work to meet spending goals while simultaneously preserving remaining assets to cover contingencies and support a legacy?” he asks.
Since spending from either asset (an investment portfolio and home equity) today means less will be available for future spending, the dilemma becomes how a retiree can best coordinate the use of these two assets to both meet spending goals and still preserve as much legacy as possible.
A reverse mortgage can be one viable option, Pfau notes, but this product is typically only considered as a last resort once the investment portfolio has been depleted.
“The research of the last few years has generally found this conventional wisdom constraining and counterproductive,” he writes. “Initiating the reverse mortgage earlier and coordinating spending from home equity throughout retirement can help meet spending goals while also providing a larger legacy.”
This, he says, is the nature of retirement income efficiency: “using assets in a way that allows for more spending and/or more legacy.”
Read more from Pfau’s book in this excerpt published by Investment News here.
See contact information in navigation bar for details.
Common misconceptions, assumptions, and behavioral biases often prevent people from building robust and flexible retirement plans—and this is an enormous problem. If you don’t know your decisions are based on false assumptions, how can you avoid making serious mistakes?
“Let me preface this by pleading with you to continue to read and not give in to your urge to skip the discussion of reverse mortgages because you have heard negative things about them,” Hopkins writes in “Rewirement: Rewiring the Way You Think About Retirement.”
Rewirement: Rewiring the Way You Think about Retirement! offers a solution. Under the expert guidance of Jamie P. Hopkins, Esq., CFP®, RICP®, you’ll learn to identify problems that might sabotage your savings while learning how to build and implement the retirement plan you need.
Considered one of the top forty financial services professionals under the age of forty by InvestmentNews, Hopkins provides an accessible and actionable ten-step process for building your retirement income plan. You’ll discover the basics of retirement planning, how to tap into home equity, and how best to use employer-sponsored plans. At the same time, you’ll learn how to prepare for long-term care while protecting yourself against market risks.
Essential reading for anyone who needs to make quality financial decisions, Rewirement lays out the process needed to develop a retirement income plan in easily understood steps. Do you need to rewire your retirement thinking? Would you know if you did?
Study: Perilous Debt Levels Put Half of Elderly Households at Risk
New research from the Employee Benefit Research Institute shows that the percentage of households headed by someone 75 and older carrying debt in retirement grew by 60 percent over the past decade from 31.2 percent of households to 49.8 percent.
“The percentage of the oldest families whose debt payments are excessive relative to their incomes is near its highest levels since 1992,” according to the study’s author Craig Copeland, Ph.D. “Consequently, more families that have elderly heads are placing themselves at risk of running short of money in retirement due to their increased likelihood of holding debt while in retirement.”
Housing debt has been driving the trend of increased debt in the last decade. The amount of money people are borrowing for first and even second mortgages seems to be where people are getting into trouble, Copeland told Forbes.com writer Ashlea Ebeling, in her article The New Reason to Pay Off Your Mortgage Now.
Our take here at Gofinancial is a simple — get a HECM mortgage which uses home equity without payments for the rest of your life. Scale down your debt while you can. See information on Information tab on the home page for details.
When developing a new television spot, Reverse Mortgage Funding decided to take page out of the Cola Wars handbook, inviting real consumers to take “the HELOC Challenge.”
(A HELOC promotion is included at end of this study for your comparison. Watch for what it doesn’t say about the cost of the HELOC).
Decades after Pepsi famously dared soda drinkers to see whether they preferred its flagship product over Coca-Cola in a series of iconic commercials, RMF undertook a similar experiment with Home Equity Conversion Mortgage-eligible borrowers. But instead of two cups of cola, the borrowers received information about a traditional home equity line of credit (“Product A”) and a HECM line of credit (“Product B”).
All the participants know upfront are the facts presented, and that they’re 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.
In the two-minute commercial, an announcer explains that participants were told some of the basic differences between the two products, including the “flexible payment options” available for HECM lines of credit — echoing another recent RMF ad — and the government insurance feature.
“Product B almost sounds too good to be true,” one participant says in a voice-over.
“That was a no-brainer,” says another.
The commercial then transitions into the big reveal, showing the stunned faces of participants who overwhelmingly selected the reverse mortgage product over the traditional HELOC.
“I wish I had known about this before I had taken out the home equity line of credit,” says one participant.
“I haven’t heard yet any reason why I shouldn’t pick this product,” says another.
The ad also shows the homeowners admitting that they had negative or incomplete impressions of the reverse mortgage prior to attending the focus group, but that the side-by-side comparison — minus the name — helped them become better informed.
“I don’t think I ever, for some reason, fully understood that a reverse mortgage was, in fact, line of credit,” says one man, shortly before a graphic reveals that 85 of 88 focus group participants selected the HECM line of credit over the HELOC.
The results certainly weren’t surprising to RMF, according to chief marketing officer Jean Noble. The Bloomfield, N.J.-based lender had been conducting similar focus groups around the country since 2016, and after hearing an enthusiastic response from participants, Noble and RMF decided to bring the groups into viewers’ living rooms.
“You’re sitting behind the glass, and they’re like: ‘This product sounds phenomenal!” Noble said. “What better way to debunk the myth of the product by having real people take this HELOC challenge and airing it on TV?”
The filmed spot came from a series of focus groups in Rochester, N.Y., and the participants knew that they could potentially end up in marketing materials or corporate training videos. But they weren’t paid for their time, Noble said, and the reactions were completely genuine.
RMF first began airing the commercials Monday as part of a “soft launch” on cable networks such as CNBC, CNN, and the Smithsonian Channel. And while it’s still too early to determine firm results, Noble said consumers have responded positively on RMF’s website and social media pages.
“This is a great awareness campaign with something completely different than we’ve ever executed before,” Noble said.wq
Consider now, talk to a 12 year HECM veteran loan officer. Access through “Information” tab on home page here. Thanks for taking the HELOC challenge.
The following is taken from HELOC promotional materials and misses the cost of it. You’ll notice above that not only does one not have cost (in one’s lifetime because it is a HECM product) but the LOC actually earns significant growth if left to amortize.
Homeowners who have equity built up in their homes can tap into that equity using a home equity line of credit, or HELOC. This financial tool can be a great way to accomplish a number of financial goals.
Here are four excellent uses of a HELOC for homeowners to consider.
Consolidating Costly Debts
Credit card debt and other types of consumer loans are costly, unless a debtor is lucky enough to have a no-interest card. Borrowers can consolidate that debt into a HELOC, which is much more affordable because it is a secured debt.
This advantage only works if the borrower stops adding to the debt problem. A HELOC becomes a valuable tool to get rid of debt quickly when used properly.
Create An Emergency Fund
Most people do not intend to end up in credit trouble, but emergencies happen. Emergency home repairs, job loss, or car repairs can quickly add up to unwanted debt.
A HELOC provides homeowners the option to have an emergency fund. Should one of these emergencies pop up, the homeowner can use the HELOC for an affordable source of funds.
Home Repairs That Add Value
Some home repairs add value to the property, but are also expensive. A HELOC can provide a source to fund these repairs. Because they put value back into the property, homeowners may be making wise use of their equity when using the HELOC in this way.
To make this work well, homeowners should choose repairs that do add to the home’s value. Since the cost of the repairs comes from the equity, the home’s owner should recoup the costs later when selling the home.
Funds For Investing
Finally, homeowners can use funds from a HELOC to get started in investment. This is risky, because the loan is paid regardless of how successful the investment is, but it can give a homeowner the chance to start investing for the first time.
Similarly, retirees can sometimes use HELOC funds to supplement retirement income if investments are struggling. This is a temporary solution to give investments a chance to recover, but for those living on a fixed income it is very helpful to have this option.
The HELOC is a valuable tool for homeowners that allows them to tap equity when it is needed. Since they have spent years building up this equity, homeowners should not fear using it when it can help with their financial goals.
For decades, the mantra of retirement advisers has been that people need to start saving early and often for a happy retirement.
But it’s only been in recent decades that they have turned their attention to how to best manage those savings once you’re no longer accumulating wealth and living off the proceeds of a life’s work.
The focus on making sure you don’t run out of money before you run out of years started in 1994, when William Bengen developed the “safe withdrawal rule,” more commonly known as the “4 percent rule.”
Editor’s note: Since that, a lot of folks have lived longer and ended up in virtual poverty because they had a problem using home equity to finish well. The HECM Reverse Mortgage was designed for that, and people in retirement mode should know that the thinkers believe you should use home equity to support early in retirement and complete the cycle using home equity resources. Fifty thousand American senior homeowners attest to their home equity support each year. More are expected to join that group as they grow older and wiser in retirement mode.
The “4% rule” doesn’t work.
It is our conclusion that home equity is fair game and should be used more often than it is. More economists and financial planners are dealing with reality. Americans are not carrying enough savings and pensions into retirement to cover the risk of running out of resources. More information on the home page under the “Information” tab.
The Home Equity Conversion Mortgage (HECM) is FHA’s reverse mortgage program, which enables you to withdraw some of the equity in your home. The HECM is a safe plan that can give older Americans greater financial security. Many seniors use it to supplement Social Security, meet unexpected medical expenses, make home improvements and more. It is smart to know more about reverse mortgages, and decide if one is right for you!
Or, if you prefer, call or email Warren Strycker, senior veteran mortgage lender representative to review your thoughts about this amazing product. Call 928 345-1200 or email firstname.lastname@example.org. Strycker is responsible for this information webpage, Gofinancial.net where informational articles investigate the HECM Reverse Mortgage. Strycker recommends the HECM to get your affairs in order.
1. What is a reverse mortgage?
A reverse mortgage is a special type of home loan that lets you convert a portion of the equity in your home into cash. The equity that you built up over years of making mortgage payments can be paid to you. However, unlike a traditional home equity loan or second mortgage, HECM borrowers do not have to repay the HECM loan until the borrowers no longer use the home as their principal residence or fail to meet the obligations of the mortgage. You can also use a HECM to purchase a primary residence if you are able to use cash on hand to pay the difference between the HECM proceeds and the sales price plus closing costs for the property you are purchasing.
2. Can I qualify for FHA’s HECM reverse mortgage?
To be eligible for a FHA HECM, the FHA requires that you be a homeowner 62 years of age or older, own your home outright, or have a low mortgage balance that can be paid off at closing with proceeds from the reverse loan, have the financial resources to pay ongoing property charges including taxes and insurance, and you must live in the home. You are also required to receive consumer information free or at very low cost from a HECM counselor prior to obtaining the loan.
3. Can I apply for a HECM even if I did not buy my present house with FHA mortgage insurance?
Yes. You may apply for a HECM regardless of whether or not you purchased your home with an FHA-insured mortgage.
4. What types of homes are eligible?
To be eligible for the FHA HECM, your home must be a single family home or a 2-4 unit home with one unit occupied by the borrower. HUD-approved condominiums and manufactured homes that meet FHA requirements are also eligible.
5. What are the differences between a reverse mortgage and a home equity loan?
With a second mortgage, or a home equity line of credit, borrowers must make monthly payments on the principal and interest. A reverse mortgage is different, because it pays you – there are no monthly principal and interest payments. With a reverse mortgage, you are required to pay real estate taxes, utilities, and hazard and flood insurance premiums.
6. Will we have an estate that we can leave to heirs?
When the home is sold or no longer used as a primary residence, the cash, interest, and other HECM finance charges must be repaid. All proceeds beyond the amount owed belong to your spouse or estate. This means any remaining equity can be transferred to heirs. No debt is passed along to the estate or heirs.
7. How much money can I get from my home?
The amount varies by borrower and depends on:
Age of the youngest borrower or eligible non-borrowing spouse
Current interest rate; and
Lesser of appraised value or the HECM FHA mortgage limit of $625,500 or the sales price
If there is more than one borrower and no eligible non-borrowing spouse, the age of the youngest borrower is used to determine the amount you can borrow.
8. Should I use an estate planning service to find a reverse mortgage lender?
FHA does NOT recommend using any service that charges a fee for referring a borrower to an FHA-approved lender. You can locate a FHA-approved lender by searching online at www.hud.gov or by contacting a HECM counselor for a listing. Services rendered by HECM counselors are free or at a low cost. To locate a HECM counselor Search online or call (800) 569-4287 toll-free, for the name and location of a HUD-approved housing counseling agency near you
9. How do I receive my payments?
For adjustable interest rate mortgages, you can select one of the following payment plans:
Tenure– equal monthly payments as long as at least one borrower lives and continues to occupy the property as a principal residence.
Term– equal monthly payments for a fixed period of months selected.
Line of Credit– unscheduled payments or in installments, at times and in an amount of your choosing until the line of credit is exhausted.
Modified Tenure– combination of line of credit and scheduled monthly payments for as long as you remain in the home.
Modified Term– combination of line of credit plus monthly payments for a fixed period of months selected by the borrower.
For fixed interest rate mortgages, you will receive the Single Disbursement Lump Sum payment plan.
Single Disbursement Lump Sum – a single lump sum disbursement at mortgage closing.
10. What if I change my mind and no longer want the loan after I go to closing? How do I do this?
By law, you have three calendar days to change your mind and cancel the loan. This is called a three day right of rescission. The process of canceling the loan should be explained at loan closing. Be sure to ask the lender for instructions on this process. Mortgage lenders differ in the process of canceling a loan. You should ask for the names of the appropriate people, phone numbers, fax numbers, addresses, or written instructions on whatever process the company has in place. In most cases, the right of rescission will not be applicable to HECM for purchase transactions.
Consider HUD secretary Ben Carson’s support of the HECM reverse mortgage on these pages. https://gofinancial.net/2017/11/carson/
(TNS)–As a federally insured reverse mortgage program under the Federal Housing Administration, the home equity conversion mortgage program is not designed to help the wealthy. In calculating maximum draw amounts, the highest property value it will recognize is $625,500 (new limit $679,650.00). If your house is worth $1 million or $10 million, you can’t draw more than the amounts available on a home worth $625,500 (new limit $679,650.00). Further, although higher value properties reduce the risk of loss to the FHA, the mortgage insurance premium is the same for a property worth $1 million and one worth $625,500 (new limit $679,650.00).
This does not mean, however, that owners of pricey homes can’t use the HECM program to their advantage. They can, and I’ll explain how in this article.
The key question, which is the same for all senior homeowners, is whether the withdrawable amount available on an owner’s house can make a significant difference in her lifestyle. If the answer is yes, the case for the HECM is as strong when the house is worth $1 million as when it is worth only $679,650.00. The reason is that the owner of a pricey house, who has excess equity upon entering the program, will retain it when leaving the program, whether by selling the home, moving out of it permanently or dying.
An owner with excess equity whose intent is to leave the equity to her estate, can do exactly that. What she cannot do is convert all equity into spendable funds for her own use unless she decides at a future time to downsize by selling her existing house and paying off the HECM. She can then buy a less-pricey house with a new HECM, converting the excess equity into investable funds.
Here are three examples of 65-year-olds looking ahead 12 years who own a million dollar home but have different needs.
Sam Wants to Eliminate a Monthly Payment Sam is 65 with a home worth $1 million that has an outstanding mortgage balance of $300,000. His objective is to rid himself of the monthly payment by paying off the balance with the HECM, while retaining as much of his equity as possible. The HECM he selects is an adjustable with an initial rate of 2.975 percent and origination fee of $3,500. This combination of rate and fee will result in the lowest HECM debt after 12 years, which was his target period.
Sam’s equity after 12 years is the value of his home at that point less his HECM debt. Assuming an annual appreciation rate of 4 percent, which is the figure that the U.S. Department of Housing and Urban Development uses in calculating draw amounts, Sam’s home will be worth about $1.6 million. His HECM debt will be anywhere from $532,000 if the initial rate of 2.975 percent remains unchanged for 12 years, to $884,000 if the rate immediately jumps to the maximum of 7.975 percent. Sam’s estimated equity, therefore, will be somewhere between $717,000 and $1,072,000. This is the amount Sam would realize if he sold the house and paid off the HECM at age 77, and it is also the amount that would go to his estate if he died at that age.
Let’s now assume that Sam is alive and kicking at 77 but no longer needs the house with the HECM. As is the case with many seniors, he wants to downsize. So he sells the house and pays off the HECM, realizing (on the most conservative assumption) about $717,000. If his new house costs $600,000, he can draw about $358,000 on a purchase HECM at age 77, and will pay the balance of $242,000 out of his sales proceeds. That would leave at least $475,000 for investments.
Sue Needs Additional Income Now Sue selects an adjustable HECM at 4.725 percent with a $6,000 origination fee that offers the largest tenure monthly payment—one that lasts as long as she lives in the house—of $1,844. Sue uses less equity than Sam over 12 years because her draws are spread out over the period rather than upfront. Her equity at the end of the period is between $1 million and $1.2 million. Sue has the same option as Sam to downsize by paying off the HECM and taking out another one to purchase a less costly home.
Sheldon Wants Protection against Running Out of Money Sheldon selects the same HECM as Sue because it generates a larger credit line over 12 years than any of the other available HECMs. The line at that time will range from $671,000 to $1,113,000, depending on what happens to his HECM interest rate. This is the amount Sheldon will be able to draw in order to invest in income-earning assets. After this draw, Sheldon would still have equity of anywhere from $451,000 to $908,000. As with Sam and Sue, Sheldon could also downsize if that was where he wanted to go.
In sum, seniors with houses worth more than $679,650.00 retain their excess equity when they take out a HECM reverse mortgage, and if they decide to downsize at some point, they can convert the equity into investable funds. No two seniors, of course, are exactly alike, and each requires a plan that is hand-tailored to their needs, their preferences and their outlook. My HECM calculator was designed for that purpose.
When I wrote about purchasing a house with a HECM reverse mortgage earlier this year, a major issue faced by borrowers was whether to pay a penalty insurance premium in order to maximize the cash draw on the HECM. A few months after the article was written, HUD eliminated the option of paying a lower premium if the borrower drew less cash. The upfront mortgage insurance premium is now 2 percent of property value regardless of how much the borrower draws.
The advantage of buying a house with a HECM has not changed. It remains the case that the HECM does not impose a monthly payment burden on the borrower. The only disadvantage is that the reverse mortgage will cover only about 50-60 percent of the house price, depending on the borrower’s age, requiring the purchaser to find the remaining needed cash elsewhere. The most common source is asset liquidation.
Seniors who go this route have two decisions to make. First, they must decide whether they want an adjustable rate or a fixed-rate HECM. Second, they have to select the lender offering the best terms. I will illustrate these decisions with the case of Charles, who is 72 and wants to purchase a $400,000 house on December 18, 2017.
Fixed Rate or Adjustable Rate?
Most seniors will select the option that provides the larger cash draw. Among five lenders quoting a price to Charles on my website, the largest cash draw on an adjustable rate was $201,800 whereas the largest draw on a fixed-rate was $194,600. The adjustable provided $7,200 more, which could settle the matter.
Or perhaps not. If Charles is concerned with the size of his estate, he will also look at how large his future loan balance would be. Looking ahead 10 years, for example, the balance of the adjustable will be $389,356 compared to a balance on the fixed of $406,386. He will owe $17,030 less on the adjustable.
This is not quite the slam-dunk it may appear, however. The future loan balances are calculated at the interest rates on December 18, which were 3.21 percent on the adjustable and 3.99 percent on the fixed. While the rate on the fixed will remain at 3.99 percent over its life, the rate on the adjustable could rise as high as 8.21 percent if market rates increase. Were that to happen in the near future, the balance on the adjustable would quickly come to exceed the balance on the fixed. It is unlikely that the risk of future rate increases will dissuade Charles from selecting the adjustable, but it could.
Selecting the Lender
The reverse mortgage market is extremely inefficient. Except for those seniors who make their way to my website, few try to shop. As a result, the prices of identical transactions can differ materially from one lender to another.
Even on my website, where participating lenders know that their price quotes will be compared to others, price differences are large. For example, on the day my hypothetical house purchaser was quoted an adjustable rate of 3.21 percent with a cash draw of $201,800, another lender on my site quoted a rate of 4.76 percent and a cash draw of $172,005, or $29,795 less. That was the worst quote among five lenders who lend in California. The quotes of the other three lenders were in-between the best and the worst.
Seniors who want to purchase a house with a HECM and who have no concern regarding the amount of home equity they leave to their heirs can easily shop lenders for the largest cash draw. They can shop multiple lenders with one visit to my site, or by contacting individual lenders one lender at a time. If they shop by contacting individual lenders, the process should be completed within a week ending on a Monday because HECM lenders reset their prices on Tuesday.
Purchasers who do have a concern for what their heirs will inherit will want to see not only cash draws but also projections of future loan balances that are consistent from one lender to another. My site is the only place they will find that.
Those who choose this mortgage loan officer will have the opportunity to make the choices in much the same way as the Mortgage Professor. Access contacts at the “information” tab on the home page. Thanks for asking for Warren Strycker, who manages this information webpage and is a fully licensed veteran (12 years) Arizona loan officer.
This is the story of a HECM loan gone bad — to be more accurate, it was the HECM that got away after every thing imaginable was tried to keep it in.
It was a simple solution, I thought, or was it???
Gentleman called to ask me to come talk about Reverse Mortgage with he and his wife. They were both in their early 90’s (can it be that “early” can ever refer to the 90’s?? Probably not).
Anyway, I went and did my best presentation and they decided to get the required counseling, and so they did.
The home was a modest 3 bedroom, appraised well above a hundred thousand. The “fix” was in, more than $70,000 in cash would be placed in their accounts, well, until the discussion centered on which of the two would get the money in their account.
Life was about to be better for them (or so we thought).
The couple had a trust, only she wasn’t in it. It’s OK, she said, she just needed a place to live and they needed to pay some bills. Lender wouldn’t stand for an unborrowering spouse living in the house without a trust adjustment which would say she had rights to live in the house after he passed, and in the process of writing the paragraph that gave her the rights, his family (and him) halted all discussion as he headed to the hospital for open heart surgery.
That’s when his family entered in. Hmmmm. All negotiations came to a halt while he had bypasses installed (at 92 years of age).
Mrs Stars waited in his hospital room for days on end to see him through the surgery and then she was invited to stay home because… well mostly it was about making sure she didn’t get any rights to the house. One story counted the time she had with him alone in the hospital to talk about all this. It wasn’t about the reverse mortgage that caused the ruckus. It was because she was left out of the proceedings altogether and I was invited to “cease and desist” by the lawyers now filing for divorce. Coming out of the hospital, he moved into the home of his son and daughter in law and she lived in the “big house”.
Oh yes, then she was served with divorce papers for “irreconcilable differences” and partially because she threw a pitcher full of water on the son in law who was staying in their house to protect his dad from his step mother who was still trying to work out an agreement with her husband to stay in the house which now had all locks changed to prevent unagreed entry.
The divorce is set for two days after Christmas.
I’m pretty sure this is a HECM that wasn’t supposed to close. The positive message here is that this not-always-nice lady is now threatened with divorce two days after Christmas when she will be legally invited to leave her home soon after the holidays is now inviting us to eat her chicken soup, and it’s good.
It’s the HECM from HELL that didn’t happen. I am thankful for bunches of others that did. Don’t let this happen to you.
After several months have passed, the nice lady lives in the big house and the husband of eight years lives with his son to protect him from his spouse. The divorce is apparently on hold. Happiness doesn’t live here even with three quarters of a hundred thousand in cash available.
No, it’s not just about the money but it did play a major role. People in their nineties have a sense of stubborn pride that they still play a major role in the family thing — and concession is not an easy thing.
If you live in Arizona and wish to consider a HECM to shore up your finances and take some pressure off, it will be OK to call me for help, but don’t wait until you’re 92 on the way to a heart bypass. See “Information tab” on the home page for particulars.
Put your important papers and copies of legal documents in one place.You can set up a file, put everything in a desk or dresser drawer, or list the information and location of papers in a notebook. If your papers are in a bank safe deposit box, keep copies in a file at home. Check each year to see if there’s anything new to add.
Tell a trusted family member or friend where you put all your important papers. You don’t need to tell this friend or family member about your personal affairs, but someone should know where you keep your papers in case of an emergency. If you don’t have a relative or friend you trust, ask a lawyer to help.
Give permission in advance for your doctor or lawyer to talk with your caregiver as needed. There may be questions about your care, a bill, or a health insurance claim. Without your consent, your caregiver may not be able to get needed information. You can give your okay in advance to Medicare, a credit card company, your bank, or your doctor. You may need to sign and return a form.
Consider HECM Reverse Mortgage to use some of your home equity to shore up finances for this “leg” of your finances. Call HECM veteran Warren Strycker, 928 345-1200 or email/write email@example.com for professional friendship through the process.
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The financial tools we offer are available at many other financial institutions but, we believe that the service we offer here at Patriot Lending is unparalleled.
Are you ready to embrace the flexible, affordable, hassle-free benefits of a reverse mortgage? Call us today to begin the journey towards the home of your dreams!
Consider talking to a reverse mortgage specialist here in Arizona 928 345-1200 or email firstname.lastname@example.org, or access more HECM reverse mortgage information to get started — click here:
Let’s have a conversation today. If you are looking for some answers to the HECM puzzle… answer some of ours — call me (Warren Strycker) 928 928-1200 to start this conversation — let’s talk about HECM. (Strycker is a veteran fully licensed HECM advisor — you’ll get some valuable insights from him).
What year were you born?
Which income streams (will) fund your retirement? a. Pension income; b. 401k distributions; c. Selling home to access equity; d. An annuity or another income vehicle. Will any of these income streams provide a credit line that grows and doesn’t have cost?
Are you or your spouse currently receiving Social Security? yes or no
Are you still working? Are you retired from working?
How secure do you feel in your current retirement portfolio to provide monthly income you need to support ideal lifestyle? 1 through 5.
Do you currently own your home? Are you making mortgage payments now?
Yes, I have one of these on my own home (and it’s OK to talk to me about it).
“I have never before heard a (HUD) secretary (Carson), particularly a new secretary early in their administration, provide such an affirmation of support to the concept of reverse mortgages,” NRMLA Ass’n President Bell said recently.’
A common assumption for retirement withdrawal rate studies, which I’ve used in all of my own research, is that retirees will adjust their withdrawal amounts for inflation in each year of retirement. The assumption is that retirees will want to spend the same amount in real, inflation-adjusted terms for as long as they live.
Ty Bernicke challenges this assumption in a rather significant way. If he is right, then we are playing a whole different ballgame and the 4% rule falls by the wayside. His argument is that as retirees get older and older, they voluntarily reduce their spending. They are just not as interested or able to travel as much, go to so many restaurants, and so on.
I’m not sure if he is right or not, but this is a matter I would like to explore some more, as it is quite important. What percent of the population maintains constant spending? What percent do voluntarily reduce their spending? What percent are forced to increase spending due to entering a nursing home or experience large medical bills? What is the appropriate default assumption? Mr. Bernicke says that reduced spending is true for his clients, which I can fully believe. People who use financial planners are probably more on top of their finances and may find that they can voluntarily reduce spending. But I’m not necessarily convinced that this will be true for everyone or that do-it-yourselfers should rely on the notion that they will not need to spend as much as they get older and older.
Mr. Bernicke uses evidence from the Consumer Expenditure Survey (CES) to show that those aged 75+ spend less than those aged 70-74, who spend less than those aged 65-69, who spend less than those aged 60-64, who spend less than those aged 55-59. This particular results seems hard to dispute, though like all of his results, it is based on aggregate numbers. These are just the averages by age group, but how much variation is there within each age group?
One possible explanation for this reduced spending is the cohort effect: different age groups just happen to spend differently for reasons unrelated to age. He checks this as well by comparing the 1984 and 2004 CES surveys and finds further evidence for the reduced spending.
In order to argue that these reductions are voluntary, he refers to data on median net worth by age and household income quintile to show that older people have more wealth than younger people within each income quintile. If older people are wealthier but are spending less, he concludes that the spending reductions must be voluntary. Again, these are all still just averages. Jonathan Clements brings up a valid criticism of this, though, in a 2006 Wall Street Journal article. These income quintiles are defined for the whole population, and a much higher percentage (43%) of the 75+ individuals are in the bottom income quintile. This makes the comparisons somewhat meaningless. As well, Mr. Clements notes that the median net worth of those aged 75+ is $100,100. But after removing home equity, the median net worth is only $19,205. This would explain lower spending levels very well.
Beyond this as well, since Social Security is adjusted for wage growth prior to retirement but inflation after retirement, older retirees will naturally have lower benefits than younger retirees, another reason for less spending. I haven’t used household data very much in recent years, but a paper that I wrote as part of my dissertation does also show that poverty rates are higher for the older retiree age groups than the younger retiree age groups.
Getting back to the results of Mr. Bernicke’s paper, he then explores the implications of lower spending with a Monte Carlo simulation example. Assuming 3% inflation, he assumes that retirees increase their spending by inflation, but at the same time tend to reduce their overall spending as well. Spending fluctuates, but these two effects mostly cancel out so that nominal spending stays close to its initial value. This allows the failure rate in this “reality case” example to be 0% compared to 87% for the traditional case of constant inflation-adjusted spending.
If we can assume that a retiree’s spending stays the same in nominal terms, the initial withdrawal rate can be higher. Here is a figure I made before with Trinity Study data comparing the inflation-adjusted case with the no inflation-adjustments case.
With no inflation-adjustments, the SAFEMAX (lowest sustainable withdrawal rate in history) was a little above 5.5%, as experienced by the 1929 retiree. However, this is a bit misleading, because the Great Depression was also a time of sustained deflation, with prices falling 24 percent between the start of 1929 and the start of 1933. The January 1929 price level was not seen again until 1943. Thus, even though nominal spending stayed the same, the spending in real terms would have grown. Aside from the deflation-case of the Great Depression, we are looking at a SAFEMAX of more like 6.5 percent. Retirees who plan to reduce their spending as they get older and older can withdraw more at the beginning.
But what is the best assumption to use: constant inflation-adjusted spending, or decreased spending as one ages more? This is a big question that I think is still not fully resolved. I’d like to find a Ph.D. student willing to dig more into the household survey data and to classify different retirees by their spending patterns over time using surveys that do indeed track the same households over long periods.
Retirement Researcher is owned by McLean Asset Management Corporation (MAMC), which is a SEC registered investment adviser. The content of this publication reflects the views of McLean Asset Management Corporation (MAMC) and sources deemed by MAMC to be reliable. There are many different interpretations of investment statistics and many different ideas about how to best use them. Past performance is not indicative of future performance. The information provided is for educational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy or sell securities. There are no warranties, expressed or implied, as to accuracy, completeness, or results obtained from any information on this presentation. Indexes are not available for direct investment. All investments involve risk.
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Editor’s Note: So, our question is this: If seniors had more income available, would they spend more or less? And, another question: Do seniors stick by their “guns” on the opportunity that reverse mortgages offer, because they are proud of their decision to spend less and not more when they could? And another question comes to mind: Are seniors being honest when they quickly respond with a “we’re fine” response when they are truly “not fine at all”, going through much of their retirement cycle, “payday to payday” hoping to escape the pressures that such a lifestyle offers, without responding stubbornly to any kind of fix at all — even when it’s offered as a transition to a much more peaceful replacement such as using a HECM reverse mortgage to smooth out the spikes in income from home equity?
My aged father once set me straight on this. He remembered 1929 when there wasn’t any money so he refused to spend what he had for fear he would run out. As it worked out, I spent his money on his heirs as distributor of his estate, taking my share of it in stride because he wouldn’t budget when he could have.
Those who consider a HECM reverse mortgage will have more to spend. That’s the point of this. See contact information on the tool bar “Information” on home page to further this discussion.
What the 2016 Survey of Consumer Finances tells us about senior homeowners — take a look for yourself…
‘Impediments to extracting home equity (HECM Reverse Mortgage) can be attributed to factors that include an aversion to debt and a general desire to stay financially conservative (Kaul and Goodman 2017), a desire to leave a bequest or save for emergencies, fear of losing the home, product complexity, high costs, and fear of misinformation and fraud directed at the elderly.’ (Editor’s note: these same people can have what they want with a HECM Reverse Mortgage —
In this age of FAKE NEWS, you might be listening to the jaded misinformation of the forward mortgage industry who may well have told you how they can get you into another mortgage with payments and leave you with a little cash for your trouble. Don’t do it until you hear one of us HECM guys explain what can happen to you. First of all, you may not be eligible for a HECM for another year after you do that.
Those who prevail will find truth and WIN HECM BENEFITS. Consider from what source you heard about HECMs and then hear the oft played tune of the competition: “Oh, you DON’T WANT TO GET A REVERSE MORTGAGE” as if they cared what you want if you aren’t buying in to what “they” want. (Be careful — it’s a slippery slope).
And, for proof, these five myths are played for you, hoping you will refinance with them instead of the HECM originator who promises a much better scenario. MAKE NO MISTAKE — If you hook up with another cycle of mortgage payments, you will often disqualify yourself of obtaining the HECM benefits. Read on, and call with your questions, Warren Strycker. See “Information” tab on the home page for credentials and contact information. “I’ve been around the block now with HECM so you’ll soon see the differences.”
Here are some of the most common misconceptions about Home Equity Conversion Mortgages (HECMs)— also known as reverse mortgages — and the truth behind these myths.
“A HECM mortgage requires giving up ownership of your home.”
As the borrower, your name remains on the title and the home is still yours—just as it would be with any mortgage. You’re required to continue paying real estate taxes, homeowner’s insurance, and providing basic maintenance to your home. Once you no longer live in the home as your primary residence, the loan balance, including interest and fees, must be repaid.* This is usually done by the homeowner or their estate selling the house.
“A HECM mortgage should only be used as a last resort.” *If the borrower does not meet loan obligations such as taxes and insurance, then the loan will need to be repaid.
How you use your HECM mortgage proceeds is up to you. Among the most common uses are paying off an existing mortgage or other debt in order to eliminate monthly debt payments; creating a cash reserve; supplementing monthly income; paying for home improvements; or covering medical bills or long-term care expenses.
“I could wind up owing more than my house is worth with a HECM, and leave my heirs with debt.”
A HECM (Home Equity Conversion Mortgage is insured by the Federal Housing Administration. This insurance feature guarantees that you will never owe more than the value of your home when the loan becomes due. No debt will be left to your heirs. And if the loan balance is less than the market value of the home, the additional equity is retained by the homeowner/heirs (if the home is sold).
“There are restrictions on how I can use the money from a HECM mortgage.”
How you use your HECM mortgage proceeds is up to you.
Among the most common uses are paying off an existing mortgage or other debt in order to eliminate monthly debt payments; creating a cash reserve; supplementing monthly income; paying for home improvements; or covering medical bills or long-term care expenses.
“I could wind up owing more than my house is worth with a HECM mortgage, and leave my heirs with debt.”
If you understand how a mortgage works, you’ll quickly understand the HECM — except there are no monthly payments — that’s the major difference. A HECM (Home Equity Conversion Mortgage) reverse mortgage is insured by the Federal Housing Administration. This insurance feature guarantees that you will never owe more than the value of your home when the loan becomes due. No debt will be left to your heirs. And if the loan balance is less than the market value of the home, the additional equity is retained by the homeowner/heirs (if the home is sold).
“Reverse mortgages are too complicated.”
With most financial products, there are a number of factors to consider before you can choose what’s best for you. You can rely on your Senior Loan Officer to be a trusted resource for clear information and responsible guidance. In addition, before you apply for a government-insured Home Equity Conversion Mortgage, you are required to receive HECM mortgage counseling from a third-party counselor who’s approved by the U.S. Department of Housing and Urban Development (HUD). These independent counselors are not affiliated with any mortgage company and their only job is to ensure you fully understand every aspect of your HECM mortgage.
Consider the information on this webpage before you make any decisions, and then see contact information in home page “information” tab and ask for the HECM facts. We’ll not mislead you — that is the truth.
HUD shores up fund to stop “bleeding”, supports HECM financial strength
New federal rules that took effect Oct. 2 will raise upfront costs for some homeowners seeking a reverse mortgage, and reduce maximum loan amounts for most, raising the question: Is a reverse mortgage still worth considering?
Most experts say yes, although the increasingly popular strategy of taking a reverse mortgage line of credit—known as a standby reverse mortgage—may become less useful because credit lines will now grow more slowly.
That type of reverse mortgage “is a much less appealing option moving forward,” says Jamie Hopkins, associate professor at the American College of Financial Services in Bryn Mawr, Pa.
A reverse mortgage is a federally backed loan against a home’s equity that requires no monthly payments and is available to homeowners 62 and older. Proceeds can be taken as a lump sum, monthly income for life or line of credit. Interest charges are added to the debt, which doesn’t have to be paid off until the borrower dies or no longer uses the property as a primary residence. As long as the borrower keeps up with taxes, insurance and maintenance, the lender cannot call the loan, and the lender can never recover more than the home fetches in a sale, even if the debt is larger, protecting the borrower’s other assets.
To protect lenders against loss, the federal government limits the initial loan amount and maintains an insurance fund with premiums paid by borrowers. The Department of Housing and Urban Development, which oversees the dominant reverse-mortgage program, has moved to shore up that fund.
The Gofinancial.net input to this news is that different borrowers will have different results, so wait until you get a HECM analysis to weigh in on HECM.
Access a qualified loan officer to furnish this analysis. See contact information under “Information” on the navigation bar.
Note: *No payments as long as taxes and homeowners insurance is paid promptly.
This paper examines the effect of using reverse mortgage credit lines to supplement retirement income by two types of retirees that have not been addressed in the previous literature: (1) those whose retirement savings are significantly below those of the mass affluent; and (2) those who are “house rich/cash poor.”
Results of this analysis demonstrate an important contrast with the results of the earlier literature; specifically, the greater percentages of home value, when coordinated with the retirement savings portfolio, resulted in substantially greater percentages of the portfolio that can be drawn.
This paper suggests a new alternative to the 4 percent rule that can guide planners and retirees toward an optimal cash withdrawal strategy. This new rule takes into account the total of the retiree’s retirement savings plus his or her home value.
The quantitative analysis in this paper uses the same spreadsheet models and strategies first presented in the Journal by Sacks and Sacks (2012). This paper builds on that work by extending the analysis to a broader range of retirees.
Peter Neuwirth, FSA, FCA, is an actuary with 38 years of experience in retirement and deferred compensation plans. Recently retired from Willis Towers Watson in San Francisco, he now maintains an independent actuarial consulting practice. He has published numerous articles on deferred compensation and a book on balancing time, risk, and money.
Barry H. Sacks, J.D., Ph.D., is a practicing tax attorney in San Francisco. He has specialized in pension-related legal matters since 1973 and has published numerous articles on retirement income planning and on tax-related topics.
Stephen R. Sacks, Ph.D., is professor emeritus of economics at the University of Connecticut. He maintains an economics consulting practice in New York and has published several articles on operations research and on retirement income planning.
Using home equity to enhance retirement income is an emerging topic in the financial planning profession. Research on strategies for tapping home equity to boost the sustainability of retirement income drawn from securities portfolios, such as 401(k) accounts or rollover IRAs, is quite recent. The concept was first introduced in the Journal of Financial Planning by Sacks and Sacks (2012) and Salter, Pfeiffer, and Evensky (2012), both of which focused on home equity accessed by reverse mortgage credit lines.
Research continued in 2013. Pfeiffer, Salter and Evensky (2013) focused their analysis primarily on cash flow sustainability rather than on portfolio survival, which was the focus of their 2012 work. And Wagner (2013) based his analysis of cash flow sustainability on a strategy that used the reverse mortgage annuity.
Pfeiffer, Schaal, and Salter (2014) presented results based on a strategy that used the reverse mortgage credit line as the last resort. And Pfau (2016a) presented a comparison of the strategies from the previous literature, including six strategies using the reverse mortgage credit line and one strategy using the reverse mortgage annuity.
Although the previous literature examined model retirees whose ratio of home value to the value of their retirement savings portfolio was 1:2, Sacks and Sacks (2012) and Pfau (2016a) suggested expanding the research to retirees with different ratios. This paper followed that suggestion, broadening the range of retirees examined using two strategies. Future research might examine how other strategies would apply to the broader range of retirees examined here.
Like much of the existing literature on reverse mortgages, this paper uses the term “reverse mortgage” to mean the Home Equity Conversion Mortgage, or HECM, established and regulated by the federal government.
Home Equity and Retirement Savings
Although data on retirement savings and home equity have been amassed from a number of surveys, there is not much coherence among, nor coherence between, the datasets. Some datasets consolidate data from ages 55 to 64 and 65 to 74 while others focus on the age group 63 to 65. And data on retirement savings is often tracked separately from data on home equity, making it difficult to draw conclusions about the distributions of the combination of home equity and savings.1
Some attempts have been made to correlate and combine home equity and retirement savings data. For example, Tomlinson, Pfeiffer, and Salter (2016) showed retirement savings, home equity, and home values for married retirees ages 63 to 65 who had non-zero retirement savings (see Table 1).
If, as some economists project, the use of home equity for generating retirement income grows in prevalence in the coming years (e.g., Merton 2015; Guttentag 2017), this conjoint analysis of the total resources available to retirees will improve financial planners’ understanding of the true state of retirement readiness of the population who will be retiring in the next five to 10 years.
This paper introduces a new rule, called the “rule of 30.” As the rule gains acceptance—and as the limits of its applicability are determined—this analysis based on retirement savings plus home value becomes that much more important. Retirement savings are assumed to be held in a diversified portfolio of securities—typically, but not necessarily, in a 401(k) account or a rollover IRA.
Types of Retirees Considered
As previously noted, it can be difficult to draw conclusions about the distributions of the combination of home equity and retirement savings from the existing data. Nonetheless, for most segments of the population, from the “mass affluent” (who fit within the top quartile of Table 1) to the “almost affluent” (defined here as Table 1’s second quartile), home equity represents a significant component of total assets available in retirement.
Rather than extend the analysis of Tomlinson, Pfeiffer, and Salter (2016), this paper focused on four representative retirees drawn from Table 1 and explored more deeply the reverse mortgage strategies that each type of retiree might use to meet their retirement income objectives. As a part of that analysis, the following question was explored: is there an optimal percentage of total retirement income resources that a broad range of retirees could withdraw (from one or both sources) each year that would maximize retirement income while minimizing the probability of exhausting all assets before the end of retirement?
In addition to the combination issue noted earlier, another complicating factor in the data is that about 20 percent to 30 percent of retirees have mortgages still outstanding on their homes when they retire.2 Because of the reduced (or zero) HECM credit line available when a conventional mortgage is yet to be paid off, the analysis presented here considered only those retirees who own their homes free and clear, and whose value is consistent with the home equity values shown in Table 1. However, the majority of retirees own their homes free and clear.3 Therefore, the terms “home value” and “home equity” are synonymous in this paper.
As noted, Table 1 shows median values of both retirement savings and home equity. In order to better capture the range of financial situations among the population of retirees as well as the acute retirement income generation problems facing the retiree with significant home value but limited retirement savings, this study considered not only “typical” retirees but also “house rich/cash poor” retirees.
Table 2 describes the four representative retirees analyzed in this study.
Retiree No. 1: The mass-affluent retiree. Retiree No. 1, the typical mass-affluent retiree, has been defined and discussed in the existing literature. Sacks and Sacks (2012) considered a mass-affluent retiree with a home of value $417,000 at the outset of retirement and a portfolio of retirement savings of $800,000. Similarly, Salter, Pfeiffer, and Evensky (2012) considered a retiree with a home of value
of $250,000 and a portfolio of retirement savings of $500,000. (Although these figures place the hypothetical retiree at the low end of the “mass affluent” range, the ratio of home value to retirement savings is the same, 1:2.) Pfau (2016a) reviewed a series of previous papers and their respective algorithms, considering a retiree with a home value of $500,000 and a $1 million retirement portfolio, again replicating the 1:2 ratio of home value to retirement savings. With the possible exception of certain areas on the West Coast and in the Northeast where home values have climbed to extraordinary heights, these values would likely be typical of “mass-affluent” retirees.
The results of this study indicate that, in the case of the typical mass-affluent retiree considered, the probability of cash flow survival over a 30-year retirement would be at least 90 percent with an initial withdrawal rate of approximately 5 percent of the portfolio’s initial value. Thus, using the reverse mortgage credit line, in either the simple algorithm (referred to as the “coordinated strategy”) suggested by Sacks and Sacks (2012), or the more complex algorithm (referred to as a “standby line of credit”) suggested by Pfeiffer, Salter, and Evensky (2013), increased the initial withdrawal rate that had approximately a 90 percent probability of 30-year cash flow survival from Bengen’s (1994) 4 percent (with no use of home equity) up to 5 percent.
By contrast, if the reverse mortgage credit line was used only as a last resort, and not in either of these algorithms, the increase in effective safe withdrawal rate was negligible. Therefore, for this typical mass-affluent retiree, the reverse mortgage credit line used in either algorithm resulted in a roughly 25 percent increase in the retiree’s inflation-adjusted retirement income throughout his or her 30-year retirement.4
A question that arises, and one that is explored in the remainder of this paper, is: how, and to what extent, is the retirement income of the other three representative retirees affected by the use of one of those strategies, specifically the coordinated strategy of the Sacks and Sacks (2012) algorithm?
Retiree No. 2: The house-rich mass-affluent retiree. Retiree No. 2, the “house-rich” mass-affluent retiree, is defined here as one who has a home value of $800,000 at the outset of retirement and a retirement portfolio value of $400,000 at the same time. This representative retire has the same total retirement income resources as Retiree No. 1, but the opposite ratio of asset values (2:1).
For this retiree, his or her home value is substantially greater than the value of his or her retirement savings. Such a situation may have arisen because the retiree lives in a part of the country where exceptional increases in home value have occurred, or perhaps because of lifestyle choices resulting in buying a larger home at the expense of reduced retirement savings. This representative retiree does not appear to have been considered in any detail in the financial planning literature. Therefore, the situation of this type of retiree is examined in quantitative detail in later sections of this paper.
Retiree No. 3: The almost-affluent retiree. Retiree No. 3, the almost-affluent retiree, is one who has a home of value $150,000 at the outset of retirement and a retirement portfolio of $300,000 at the same time. This representative retiree is not quite affluent, having total retirement income resources of $450,000 at the outset of retirement.
Moreover, it follows from Table 1 that this retiree is not quite typical, because he or she has retirement savings greater than his or her home value, whereas the table (and other data) indicate that most retirees—especially those with total retirement income resources in the middle of the economic spectrum—have retirement savings that are less than their home values. It is worth noting, and relevant to the calculations set out in the later portion of this paper, that the ratio of home value to retirement savings (1:2) is the same for this retiree as for Retiree No. 1, the typical mass-affluent retiree.
Retiree No. 4: The house-rich almost-affluent retiree. Retiree No. 4, the “house-rich” almost-affluent retiree, is one who has a home value of $300,000 at the outset of retirement and a retirement portfolio of $150,000. This retiree has the same total retirement income resources as Retiree No. 3, but the ratio of home value to retirement savings (2:1) is the same as for Retiree No. 2. The amount of total asset value, plus the fact that home value is greater than retirement savings, makes this retiree more broadly representative than the others.
Assumptions and Background for the Analysis
Economic concerns of retirees. Retirees have several major economic concerns, most notably: (1) inflation-adjusted cash flow survival throughout retirement; (2) additional cash availability in the event of emergency or other unanticipated need; and (3) legacy.
It was assumed in this analysis that the overriding economic concern for many retirees is to maintain cash flow throughout retirement. Accordingly, the quantitative analysis presented in this paper addressed that concern.
Cash flow. Cash flow survival is defined here as a 90 percent or greater probability that cash flow to the retiree, based on the initial withdrawal and continuing at constant purchasing power each year thereafter, will continue for at least 30 years following the outset of retirement.
The measure of cash flow itself is expressed in terms of an “initial withdrawal rate.” Typically, this rate has been defined as a percentage of the value of the retirement savings portfolio at the outset of retirement. Many financial planners use this measure and some recommend that retirees adhere to a “4 percent rule” (Bengen 1994). Pfau (2014) examined several more nuanced approaches to withdrawal rates, exploring situations in which the 4 percent rule may be too low or too high.
The results presented here express the initial distribution rate in the traditional way so that comparisons can be made to the 4 percent rule, but these results also indicate that expressing the initial withdrawal rate as a fraction of total retirement income resources may be more useful and more broadly applicable. As shown below, in the context of investment returns consistent with historical averages, a “rule of 30” where the initial distribution rate is 1/30 of the total retirement income resources (including home value), provides a more stable and consistent retirement income strategy across various classes of retirees.5
The HECM’s growing line of credit. Also important to the analysis is the growing line of credit. A majority of the roughly one million reverse mortgage loans currently outstanding are HECMs.6 A unique feature of HECMs is that when some or all of the loan proceeds are taken in the form of a line of credit, the amount available to be taken grows over time. After the credit line is established, the amount available to be taken grows at the same rate as the interest applicable to the amount that actually is taken. (See the appendix for details on the assumptions related to the interest rate on the line of credit.)
The amount available when a reverse mortgage is established depends upon the age of the borrower at that time and is greater for an older borrower than for a younger borrower. However, the increment as a function of age is substantially smaller than the increment that results from an early establishment followed by the increase resulting from the application of the interest rate.
The effect of the HECM’s interest-based increase in the amount available is important in enabling a retiree to have cash available throughout a 30-year retirement. Moreover, at this time, reverse mortgages other than HECMs are not available as credit lines. Therefore, the reverse mortgage credit line considered in this paper was the HECM credit line.
Another important aspect of the HECM is the non-recourse feature. Regardless of the duration through which the HECM credit line is in place (and growing), the Federal Housing Administration guarantees that the retiree (or his or her heirs) will never have to pay back more than the value of the home. For many retirees, this guarantee, when combined with the growing line of credit feature, may be significant.
Reverse mortgage specifications. Two specific aspects of reverse mortgage credit lines affect the quantitative analysis (for general information about reverse mortgages, see Giordano (2015) and Pfau (2016b)). They are: (1) the amount available at the establishment of the reverse mortgage line of credit; and (2) the cost of the reverse mortgage credit line.
The amount of credit line initially available is a function of the age of the borrower at the establishment of the credit line and the prevailing expected rate. In this analysis, the borrower was assumed to be 65 years old. The prevailing expected rate at the time of this writing (May 2017) meant that the amount initially available was approximately 54 percent of the home value (the Monte Carlo simulation program determined the amount available at later ages for the spreadsheets using Strategy No. 2).
Other than approximately $125 for a mandatory counseling session, there are no out-of-pocket costs for establishing or maintaining a reverse mortgage line of credit. The costs for establishing the reverse mortgage itself include three parts (described in detail in Giordano (2015) and Pfau (2016b)), all of which become part of the debt. These amounts can be negotiated with the lender to be brought down from a high of approximately $12,000 to near zero, in exchange for higher ongoing interest rates.
The calculations in this analysis used fees of $7,500, comprised of $3,000 for the mortgage insurance premium (as prescribed by HUD), plus $3,000 origination fee (calculated as the average of the figures shown on the Mortgage Professor website, mtgprofessor.com), plus $1,500 closing costs.
The analytic technique used here was similar to that used by Sacks and Sacks (2012), although this paper used a similar spreadsheet model for each of the four representative retirees. The spreadsheet model used the following input parameters: (1) initial value of the retirement savings portfolio; (2) initial value of the retiree’s home; and (3) initial withdrawal rate.
The model used two worksheets run simultaneously.7 The two worksheets were identical in all respects (including the investment performance of the portfolio, the rate of inflation, and the amount drawn by the retiree) except for the strategy used to determine whether the retirement income was withdrawn from the portfolio, and/or the reverse mortgage line of credit was used (in other words, whether Strategy No. 1 or Strategy No. 2 was used).
On each worksheet, the calculations of investment gain or loss and of retirement income withdrawal were performed for each year in a 30-year period. The investment gain or loss was determined stochastically, as was the inflation adjustment to the withdrawal amount.
The 30-year calculation was repeated 10,000 times. In a certain number of those repetitions, the cash flow survived for 30 years, and in the other repetitions it did not. (The three most significant determinants of cash flow survival are the initial withdrawal rate, the sequence of investment returns, and the strategy for dealing with negative returns.) In each of the 10,000 repetitions, the initial withdrawal rate was the same, and the average investment return was the same, but the sequence of investment returns, being randomly selected, was not the same in each. A simple count was made of cash flow survival over the 10,000 trials (with the two worksheets run simultaneously in each trial and the results of the 10,000 trials shown on a histogram for each worksheet). The percentage of the repetitions in which the cash flow survived was termed the “cash flow survival probability.”
The primary focus was on the comparison of the cash flow survival probabilities of the two strategies for each of the four representative retirees.
The quantitative analysis was based on the premise that the retiree sought to draw on his or her total retirement income resources at a rate that yielded the maximum amount of constant purchasing power throughout a 30-year retirement. Therefore, in each part of the analysis, the initial withdrawal rate that resulted in a 90 percent cash flow survival probability was used.
The assumed portfolio. The securities portfolio held by the representative retirees in all of the analyses and results shown was assumed to be a 60/40 portfolio comprised of the following indices, in the following proportions:
60 percent equities: S&P 500 (40 percent); U.S. small stock (10 percent); and MSCI EAFE (10 percent).
40 percent fixed income: Lehman Brothers long-term government/credit bond index (10 percent); Lehman Brothers intermediate-term government/credit bond index (15 percent); and U.S. one-year Treasury constant maturity (15 percent).
A normal distribution of the investment returns was assumed from each asset class. The geometric mean and standard deviation projected for the investment return of each asset class, consistent with historical averages, are set out in Appendix A. More recent (more conservative) figures for the same asset classes are set out in Appendix B. Correlation matrices were also constructed and incorporated into the simulation program.
Because the portfolio composition was the same in each of the 30 years of each trial, the portfolio was, in effect, rebalanced each year.
Establishing the HECM line of credit. As indicated previously, the primary financial objective of many retirees, especially those in the house-rich categories, was assumed for this analysis to be inflation-adjusted cash flow survival throughout retirement. And for analytic purposes, the duration of retirement was assumed to be 30 years.
The model for the analysis was that in the first year of retirement, a certain amount was withdrawn from the portfolio, and each subsequent year’s withdrawal was equal to the previous year’s withdrawal, adjusted only for inflation. Thus, the annual withdrawals provided constant purchasing power throughout retirement. Following the well-established convention, the initial withdrawal was expressed as a percentage of the initial portfolio value.
This analysis also used two alternative strategies for establishing and drawing on a HECM line of credit to enhance the 30-year survival of cash flow.
Strategy No. 1. Establish a reverse mortgage credit line at the outset of retirement. At the beginning of the first year of retirement, the first year’s draw is taken from the portfolio. The amount of the draw is equal to 1/30 of the total retirement income resources (or 1/34, if conservative projections of investment returns are used). At the end of each year, the investment performance of the portfolio during that year is determined. If the performance was positive, the ensuing year’s income is withdrawn from the portfolio. If the performance was negative, the ensuing year’s income is withdrawn from the reverse mortgage credit line.8 This is the “coordinated strategy” described by Sacks and Sacks (2012).
Strategy No. 2: From the outset of retirement, withdraw retirement income only from the portfolio. Do not establish a reverse mortgage credit line unless and until the portfolio is exhausted. From and after that point, as the only source of retirement income, the credit line is drawn upon continuously unless and until it is exhausted. This is the “last resort strategy” described by Sacks and Sacks (2012).9
Figure 1 and Figure 2 demonstrate the dramatic increase of cash flow survival probability of Strategy No. 1 over Strategy No. 2, which is the strategy often recommended by many financial planners.10
The key findings reported in this paper are the following:11
Broad range of retirees. An effective coordinated approach to drawing upon total retirement income resources (defined here as the total of retirement savings plus home value) can be used across a broad range of retirees both in terms of their total retirement income resources and in terms of the ratio of their home value to the initial value of their retirement savings. These findings are explained in greater detail in the following paragraphs and are illustrated in Table 3.
For any given amount of total retirement income resources, the dollar amount of initial withdrawal was constant regardless of the ratio of home value to retirement savings. The dollar amount of the initial withdrawal that resulted in an approximately 90 percent probability of cash flow survival was the same across a broad range of ratios of home value to initial value of retirement savings portfolio. That dollar amount was determined as a fraction of the retirees’ total retirement income resources. This finding resulted when the coordinated strategy was used for the withdrawals, but not when the last-resort strategy was used.
Across a broad range of amounts of total retirement income resources, the applicable fraction was constant. In addition to the range of ratios described above, the fraction described above applies to a broad range of amounts of total retirement income resources. That is, once the fraction was determined for one value of total retirement income resources, the same fraction, applied to any other value of total retirement income resources, yielded, for that value, the applicable dollar amount of initial withdrawal that resulted in cash flow survival. This observation reflects that the computations scale up to greater amounts of total retirement income resources and scale down to lower amounts (see Table 3 and Table 4).
The relevant fraction is a function of the investment returns. If the investment return figures used are consistent with historical averages, the dollar amount of the initial withdrawal for any given total of retirement savings plus home value (at the outset of retirement) turned out to be 1/30 of that total. Accordingly, the finding is termed the “rule of 30.” If more recent (and more conservative) projections of investment returns were used, the dollar amount reflected in the result described above turned out to be 1/34 of the total of retirement savings plus home value. However, it is important to note that, with these more conservative projections, the 4 percent rule became a 3.2 percent rule. This result is analogous to the results found by Finke, Pfau and Blanchett (2013) and by Pfau (2014).
The findings using the “rule of 30” are shown for the four representative retirees in Panel A of Table 3. Panel B of Table 3 uses the “rule of 34.” These results are also shown in a more granular fashion for a larger number of retirees in Table 4 and in Figures 3 and 4.
Observations Regarding Cash Flow
Computations using the “rule of 30” and those using the “rule of 34” both resulted in dollar amounts for retirees No. 2 and No. 4 that were more than twice the amounts resulting from the safe withdrawal rate applicable when only the securities portfolio was drawn upon. Even for retirees No. 1 and No. 3, the “rule of 30” and the “rule of 34” both resulted in dollar amounts of cash withdrawal that were more than 25 percent higher than the amounts that could be safely withdrawn from the portfolio only.
In dollar terms, and in percentage of income terms, these results are significant. For example, retiree No. 4 who retires with a 401(k) account or rollover IRA valued in the vicinity of $150,000 is likely to have Social Security as his or her primary source of retirement income. Assume that his or her annual Social Security income is about $25,000 (adjusted for inflation). Using Strategy No. 1, an initial withdrawal rate of 10 percent of the retirement account ($15,000) annually adjusted for inflation provided a 29 percent greater total cash flow throughout a 30-year retirement than drawing according to the 4 percent rule (equal to $6,000 per year).
Cash flow survival probability. Figure 1 and Figure 2 set out the probabilities of cash flow survival for each of the four representative retirees. In each case, the initial withdrawal rate was selected to yield a 90 percent probability of 30-year (inflation-adjusted) cash flow survival when Strategy No. 1 was used. It turns out that, in every such case, the dollar amount of the distribution was equal to 1/30 of the total retirement income resources.
It is also noteworthy that when Strategy No. 2 was used, the cash flow survival probability was lower when the initial portfolio value was low compared with the home value, than when the initial portfolio value was high compared with the home value. That is because, with low initial portfolio values, under Strategy No. 2 the portfolio was exhausted sooner than with higher initial portfolio values. When then portfolio was exhausted sooner, the reverse mortgage credit line was drawn upon sooner, and it therefore must provide more years of withdrawals. Moreover, early withdrawals from the credit line (once it was established), coupled with relatively late establishment of the credit line, prevented the credit line from growing to a level from which it could sustain the retirement income withdrawals throughout the remainder of the retirement period.
Similar tests were performed with other combinations of portfolio values and home values, all with the same “total retirement income resources.” The rule of 30 was shown to apply in those cases as well, as set out in Table 3.
Other combinations of portfolio value and home value. In each case of analyzing other combinations of portfolio and home values, using Strategy No. 1 yielded a 90 percent probability of inflation-adjusted cash flow throughout a 30-year retirement, and in each case the dollar amount of the initial distribution was equal to 1/30 x total retirement income resources (see Table 4). These results are shown in graphic form in Figure 3.
When considering the results shown in Figure 3, keep in mind that both strategies accessed the home equity. The big difference was in the order in which the access occurred. Under Strategy No. 1, the home equity was accessed in each year following a year in which the volatility of the securities portfolio incurred an adverse investment return. Under Strategy No. 2, the home equity was only accessed if and when the securities portfolio had been exhausted.
Figure 3 shows that when Strategy No. 1 was used, a 90 percent probability of 30-year cash flow survival was independent of the ratio of initial home value to initial portfolio value over a wide range of such ratios.
Similar results to those shown in Figure 3 were obtained with values of total retirement income resources equal to $600,000, $750,000, $900,000 and $1.2 million. And although the results shown were obtained using the “rule of 30” with the investment return figures set out in Appendix A, essentially the same independence of ratio was shown with the investment return figures set out in Appendix B.
An obvious corollary of the constant dollar result is that the initial withdrawal that resulted in a 90 percent probability of cash flow survival, as a percentage of the initial portfolio value, varied widely across the range of ratios. This variation is illustrated in Figure 4. Thus, with the ratios of home value to portfolio value (at the outset of retirement) in the range from 0.5 to 2.0, that percentage ranged from about 5 percent to 10 percent when investment returns were consistent with historical averages, and from about 4 percent to 9 percent when investment returns were more conservative.
Limitations and Caveats
The analysis presented has the following limitations and caveats:
As noted earlier, the existing data on the distribution of the combination of retirement savings and home value is very sparse. In the aggregate, Americans have more home value than retirement savings; therefore, there is increasing focus on the use of home equity as a component of retirement income. As a result, there should be an increase in the amount and detail of such combination data. When such data becomes available, analysis similar to that presented here should be performed in order to refine the applicability of this research.
The top two key findings presented in this paper are: (1) when the “coordinated strategy” was used, a constant dollar amount yielded an approximately 90 percent probability of a 30-year inflation-adjusted cash flow survival across a wide range of ratios of home value to initial portfolio value; and (2) the same approach applied across a wide range of total retirement income resources. These findings are empirical observations; they are not mathematically determinable in closed form. Although these findings have been tested and validated for ratios of home value to initial portfolio value ranging from 0.5 to 2.0, it is not clear what the results would be for lower or higher ratios; that is, where there was little or no retirement savings portfolio or accumulated home equity. The findings presented in this paper are unlikely to have any application to a retiree whose total retirement income resources substantially exceeds the HECM limit of $636,150 by an order of magnitude or more.
The Monte Carlo simulations employed in the analyses presented in this paper are purely stochastic. That is, each year’s investment performance and inflation amount is treated as entirely independent of those parameters of the previous year. Other approaches exist that reflect the fact that actual financial processes are often subject to a kind of “homeostasis,” a reversion to the mean, often resulting from government intervention (such as the Fed changing interest rates to bring down inflation). Strategies No. 1 and No. 2 have not been tested under such approaches to determine whether the resulting cash flow sustainability results would be significantly different from the results obtained with the purely stochastic method employed here.
The analyses reported in this paper assumed that the “expected” interest rates, and therefore the principal limit factors (plfs), would remain constant. The expected rates are currently near the low ends of their ranges, so the plfs, and therefore the amounts available under reverse mortgage lines of credit, are near the high ends of their ranges. If the expected rates increase, the amounts available will decrease, and the effectiveness of the strategies considered would also decrease.
Finally, there has been no consideration of possible changes in the law or regulations governing reverse mortgages in this paper.
Implications for Planners
The foregoing results have great significance for baby boomer retirees who have limited total resources and/or have a disproportionate amount of their wealth in the value of their home.
A simple rule of 30 can be used by a broad range of retirees to help determine how much retirement income their total retirement resources can provide, with a small probability of outliving those resources. The availability of this rule can potentially make retirement income planning more straightforward for a large number of individuals currently considering their future retirement income needs.
In addition, the non-recourse feature of the HECM is significant over the long term (20-plus years into retirement). As a result, establishing a HECM line of credit as early as possible can provide the almost-affluent retiree—particularly if he or she is house rich and cash poor—with a significantly higher retirement income than a later establishment of the credit line, while reducing the probability of exhausting his or her assets.
See the May 2015 GAO report, “Retirement Security: Most Households Approaching Retirement Have Low Savings” and the 2016 Vanguard report, “How America Saves 2016.”
As a practical matter, for the minority—those who retire with a mortgage debt against their home—a mortgage-free situation could arise through “downsizing” at retirement. The extension of this analysis to situations where a mortgage exists is quite feasible, however, the fundamental results of such an analysis would not differ materially from those shown here.
In addition, as noted by Sacks and Sacks (2012) and Salter, Pfeiffer, and Evenksy (2012), the residual net worth of the retiree at the end of his or her 30-year retirement had a 67 percent to 75 percent likelihood of being greater if the coordinated strategy or the Salter, Pfeiffer, and Evensky algorithm was used, than if the last resort strategy was used. This greater residual net worth results in a greater legacy prospect.
Over the course of a lengthy retirement, aspects of any retiree’s financial situation and the financial environment can, and do, evolve. Accordingly, the “rule of 30,” just like the 4 percent rule, will be subject to mid-course corrections.
In addition, two other worksheets were run, using the hybrid strategies mentioned in endnote 9, simply to ascertain the results reported in endnote 10.
In cases where the investment performance was positive but less than the withdrawal amount scheduled for the ensuing year, only the amount of the positive performance is withdrawn from the portfolio, and the remaining portion of the scheduled withdrawal amount is taken from the reverse mortgage credit line. Also, if the investment performance was negative but the credit line has already been exhausted, the entire withdrawal will come from the portfolio.
Two “hybrid” strategies were also considered. In one, the HECM credit line is established at the outset of retirement but only used as a last resort. The other hybrid strategy is essentially the same as Strategy No. 1 except that the HECM credit line is not established until it is first needed to be drawn upon. These strategies are not analyzed in detail here because of space constraints and the fact that, in practice, neither is likely to be implemented.
The first hybrid strategy yielded a slightly greater cash flow survival probability than Strategy No. 1, but a substantially smaller legacy potential. The second hybrid strategy yielded results very similar to those of Strategy No. 1.