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Still Ignoring Largest Asset

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Home Equity Holds the Solution for America’s Retirement Crisis


reverse mortgage newsToday’s working Americans and pre-retirees are floating amongst economic waves pushing toward the shoals of financial shipwreck in retirement. While one is bobbing along the waves in their working years things seem fine, that is until one attempts to retire or is forced to cease working. The report “Falling Short: The Coming Retirement Crisis and what to Do About It” states that nearly half of working-age households are at risk of being unable to maintain pre-retirement standards of living in retirement.

In the midst of such a crisis it is unfortunate that many financial advisors ignore the largest asset that could be used to fill the gap: the home. “Many households have a little-recognized asset that they could turn to for income in retirement- the equity in their home”, said Alicia Munnell, director of the Center for Retirement Research at Boston College.

The truth is many are still counseled to pay off their mortgage prior to retirement to reduce future monthly expenses, a strategy that works in the short term. But when will advisors…

Download a transcript of this episode here.

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7 Comments

  1. Right on Shannon. It seems the industry lacks the fortitude to aggressively market the product. The truth is most retirees are unprepared for retirement, but they do posess survival skills that carry the day. However, many go without essentials that degrade their quality of life.
    For over 26 years the marketing efforts have the same content, the same lackluster appeal while our detractors hit us with every method possible, including untruths. I have been in the industry 12 years and I still hear people say, “isn’t that the loan that they take away your house?”

  2. Well done Shannon! As a 11 yr veteran, I have been involved with financial planners for years to educate them on the right uses of the reverse mortgage. It is an uphill battle, however; with Alice and the professors Salter/Evansky, the needle is moving slowly. Please continue penetrating the planners industry as they will see the light when more of their clients run out of money.

  3. Shannon,

    Like 401(k) accounts, IRAs were never intended to be a primary retirement plan. The conditions for the deductibility of the traditional IRA has always made that intention very clear.

    If a working stiff like me made maximum contributions to an IRA for the next 35 years at just an average 5% earnings rate, the account balance would be about $476K. If the money was put into an S & P 500 index fund whose effective rate was 8.43%, the account balance would be $1,043,000. Imagine if I was married and my spouse mirrored my contributions.

    So for a very simple retirement supplement account, it ain’t bad.

  4. You did a great job Shannon, you hit the nail on the head.

    I plan to send this video out to loan officers I am presently working with. I appreciate you producing the video, I plan to use it as a great sales tool.

    Make it a great day Shannon,

    John

  5. The problem with our ability to make a compelling case that HECMs should be a first option in financial product selection when considering ways to improve cash flow in retirement is:

    1) Our poor choice of financial terms used in describing how HECMs can provide additional cash flow at a reasonable cost. Simple things like calling debt proceeds income (the alleged story of HECMs) brings up a real question in most CPAs of not understanding the product. We do not need to twist what HECM proceeds are in order to make the HECM option attractive. When originators try to stay true to their vision of HECMs rather than HECM facts, as to CPAs and CFPs, the result is generally not what it could be.

    2) Originators need to be familiar with a wide array of uses of HECM proceeds in financial planning (not just ideas more suited to a loan of last resort or ones full of risk to the borrower without full disclosure of that fact to the financial advisor).

    3) CPAs in particular love numbers not just a horribly named and incomplete schedule of a proposed financial plan concept like our so called amortization schedule. The plan should not only show the impact to the debt but also its impact on the net asset base of the estate of a hypothetical borrower. The plan should not be based on any particular client of a financial planner but rather an expression of how a HECM could be best incorporated into the financial plan of an average retiree in the local market. This will wet the appetite of the financial planner to apply it to his own clients.

    4) In several places originators promote the idea of Standby Reverse Mortgages but seem to ignore the taking of HECM proceeds early in retirement promoted by the Sacks brothers, or the very interesting use of HECMs to increase the draw rate in the decumulating asset phase of a retiree as authored by Dr. Jerry Wagner. We need to understand these and many more approaches but we should also disclose their weaknesses and strengths.

    When we call HECM proceeds income, we make HECMs seem too good to be true. We also present a feeling of bait and switch (HECM proceeds are income but they increase the balance due on the mortgage — absolute confusion). Learn some of the best uses of HECMs in financial planning but remember ideas like paying off an existing mortgage only produces a temporary increase in cash flow. What may work with actual borrowers is much less likely to work with a competent CPA or CFP.

    Dr. Munnell who knows this product less than many of us is trying to contribute her part and more; we should be doing the same.

    (The opinions expressed in this comment are not necessarily those of RMS or its affiliates.)

  6. Many Americans have less than $100,000. in savings of liquid investments at the age of 62. Old fashion pensions are a thing of the past. The stock market is volatile and fixed income pays next to nothing for income. Social Security selection at 62 is unwise. It is better to wait till FRA 65/66 or age 70. If one cannot and desire to remain in your retirement home, a reverse mortgage may just be the right tool to make retirement years a bit brighter. Always seek more than one professional when making major life style decisions.

    • Mr. Cooper,

      I do not believe that anyone should be stopped from using this approach but rather any competent, ethical, and responsible advisor would show where the risk of this technique lies and its costs even if payment of those costs can be deferred to some future date.

      For those who have health issues which negatively impact their life expectancies, employing this strategy could be a senseless waste of assets. Beyond that life expectancies are generally averages, not minimums.

      In describing risk, one should clearly present the problem of death before the payback period ends and that is loss. If death occurs before benefits begin but after reaching 62, then not only will the estate owe on whatever a decedent borrowed plus accrued interest and MIP but would have lost access to the benefits that were not taken. Married beneficiaries will generally be subject to less risk but that is another subject.

      Putting some numbers to the situation above; if the benefits at 66 would have been $2,400 per month for an unmarried senior let us assume the choice is made at 62 to use $1,800 of HECM proceeds to replace Social Security benefits until age 70 when benefits will start. Let us assume that the average effective note interest rate on a monthly adjustable rate HECM is 4.1% (with a 2% margin with full origination fee) and that closing and out of the pocket costs (reimbursed at initial funding) total $11,000.

      So let us say that the senior died on her 71st birthday. That senior would have received $38,016 in Social Security benefits and $172,800 in HECM proceeds. Yet that same senior would have foregone $172,800 in Social Security benefits before turning 70 and the estate would owe $266,798 on the HECM; the difference (unadjusted for either inflation or earnings) is a net loss to the estate of $228,782. What benefit was the strategy to anyone other than the originator and lender?

      So how long is the payback period in this illustration? Well, starting at age 70, let us say that the borrower pays the amount in excess of the $1,800 per month or $1,368 per month to pay down the balance due on the HECM. The balance due at age 70 is $231,942. So the HECM would be completely paid off at age 96. If the senior paid nothing down on the HECM before death (or terminating covenant event) the balance due at 96 would be $929,267 and yet all the senior received was just $1,800 for 96 months or a total of $172,800.

      If the senior had simply taken the $1,800 per month at 62 and then taken tenure payouts of $1,368 per month starting at age 70 from a Standby Reverse Mortgage originated at age 62, the amount due on the HECM would be $34,609 at death but the senior would also have received $172,800 in Social Security benefits. If the senior lived to age 96, the senior would owe $990,055 using this strategy having received $426,816 in HECM proceeds; however, the potential loss in the intervening years up to approximately age 90 would be better and in most cases, much better under this strategy than the former.

      There are a lot of so called financial experts out there today who do not look at numbers or scenarios while proclaiming that one strategy is better than another. Yet it is clear that leaving benefits on the table in the years between 62 and 70 has a great potential for loss for many seniors.

      Emotional assurances are worthless. It is only after numbers are developed and scenarios are looked at that one can tell if the so called HECM deferral strategy is worth the immense risk it can pose for borrowers, especially single seniors.

      As a side point, the tax costs of significantly higher Social Security benefits is generally disproportionately higher than the amount of additional benefits. One reason is that more of the Social Security benefits become exposed to only a 15% income exclusion rate rather than a 50% or 100% income exclusion rate. While tax should not wag the dog, it can be a significant consideration especially if income in later years become subject to significantly higher income tax rates.

      While the HECM deferral MAY work, many times it is wiser and far less risky to keep working past 62 and delay taking HECM proceeds until after reaching 70. Facts and circumstances come into play but seniors who simply want to stop working eight years earlier than when they are eligible for the highest Social Security benefits available to them may be making a very costly decision.

      (The opinions expressed in this comment are not necessarily those of RMS or its affiliates.)


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