AUNT AND UNCLE’S HOUSING WEALTH CAN HELP YOUNGER RELATIVE HELP HERSELF

With no children of your own, the two of you (both retired for ten years) have always tried to be there for your six nieces and nephews, in terms of opening your home to them, taking them on trips, offering modest cash holiday gifts, contributing to 529 plans for them, and naming them as beneficiaries in your estate plan. With one of your nieces intellectually disabled and unable to attend college, you instead funded an investment account for her, allowing her to make withdrawals. You’ve been very pleased to see that she has decided to use some of the money to enroll in online courses, along with buying supplies to create jewelry which she sells on Etsy. (Your niece’s siblings and cousins are very supportive of her and have never resented the fact that your gifts to her surpass what you’ve given to them.)

By the time you learned about INvestABLE accounts, your niece had passed the age of 26, and had therefore become ineligible to start such an account. Now, at a recent seminar sponsored by a local charity that assists the physical and intellectually disabled, you’ve learned that the age for establishing an Indiana ABLE account was raised this year to 46. You now intend to set up an ABLE for your niece and begin contributing to that account instead of to her regular investment account. More than that, you are giving thought to altering your estate plan in general, doing more for all the nieces and nephews, yet finding ways to do that without jeopardizing your own financial security or crimping your own lifestyle.

As you re-examine all your gifting and estate planning options going forward, you might consider accessing your housing wealth in the form of a reverse mortgage. With no need to make monthly mortgage payments,* there should be no “lifestyle crimping” involved. In fact, cash withdrawals you make for gifting to the nieces and nephews will be non-taxable. Furthermore, the unused portion of your equity will grow at the same rate of interest as that being charged on the borrowed amounts.

Your niece, meanwhile, will be allowed to add funds she earns through her jewelry crafting to her own ABLE account. By the way, if your other nieces and nephews still have funds in their 529 accounts, those monies can be used for professional certifications or ongoing education expenses, even rolling over the money to Roth accounts.

The two of you are to be congratulated on keeping abreast of changes in the financial arena, and on continuing to think of the needs of loved ones along with your own.

*Borrower must occupy home as primary residence and remain current on property taxes, homeowner’s insurance, the costs of home maintenance, and any HOA fees. David Garrison, NMLS ID 1595194. Mutual of Omaha Mortgage, Inc. dba Mutual of Omaha Reverse Mortgage, NMLS ID 1025894. 3131 Camino Del Rio N 1100, San Diego, CA 92108. Indiana-DFI Mortgage Lending License 43321. Michigan 1st Mortgage Broker/Lender/Servicer Registrant FR0022702. These materials are not from HUD or FHA and the document was not approved by HUD, FHA or any Government Agency. Subject to credit approval. For licensing information, go to: www.nmlsconsumeraccess.org

Equal Housing Lender

LINKING HOUSING WEALTH TO LONG TERM CARE

After retiring and relocating to Hoosierland three years ago to be nearer the grandchildren, you’re looking forward to (hopefully) decades of “aging in place” in your much smaller and now beautifully refurbished and fully paid for Indiana suburban home. While in the course of relocating you had updated your estate planning documents in accordance with Indiana laws, you now have the time to pay more attention to details and together have begun to attend various in-person and online seminars on investments and estate planning. Both in your late sixties and in good health, and with both children doing well in their own right, you are determined to remain in control of your own “destiny”.

At these lectures and webinars, one topic that immediately caught your attention was long term care, because your policies have now three times been taken over by new insurance companies, and the premiums have now twice been significantly increased. At a recent session, you heard for the first time about the option to buy a combo life/long term care policy called linked benefit. You find the concept of making one (albeit very large) payment and never worrying about future increases very appealing in and of itself, but what you find really important is that, in the event you don’t need to use any or all of the benefits in the form of actual long term care costs, your children would “get the money back” in the form of a death benefit. 

The problem, needless to say, is one of funding such a large single-sum (true, the option exists to spread the linked benefit insurance over a few years). Both your retirement plan accounts and your joint investment accounts have done well this past year, but there is no way they could support withdrawals of that magnitude. Reluctant as you are to incur debt, the concept of locked-in Long term Care coverage is so appealing, and with stellar credit records, you’re considering applying for a home equity loan.

You’re to be complimented on remaining highly active in “remaining in control of your own destiny,” continuing to educated yourselves on planning options. Should you decide to move forward with the purchase of linked-benefit insurance coverage, consider accessing your housing wealth in the form of a reverse mortgage rather than a “forward” home equity loan.  

With a reverse mortgage, so long as you continue to occupy the home, there will be no need to make monthly mortgage payments.* The money you withdraw to make the insurance payment will be non-taxable, and the unused portion of your equity will grow at the same rate of interest as that being charged on the borrowed portion. 

When, at a future time, neither of you is able to occupy the home, your heirs will have the option to keep the home, possibly using the policy’s death benefit to pay off the loan, or surrender the home to the lender. (Since a reverse mortgage is by definition a non-recourse loan, heirs will never be left owing any money to the lender.)

Linked benefit insurance is a way to create a death benefit for your beneficiaries and a pool of money to pay for covered long term care needs. By “linking” long-term care with your housing wealth, you have the opportunity to avoid all three negatives you mentioned: (1) dealing with ever-increasing long term care premium notices. (2) tapping into your joint investment and your retirement accounts, and (3) new monthly mortgage payments.*

You’re to be congratulated for exploring options and “paying attention” to important retirement planning details, remaining “in control of your own destiny.”

*Borrower must occupy home as primary residence and remain current on property taxes, homeowner’s insurance, the costs of home maintenance, and any HOA fees. David Garrison, NMLS ID 1595194. Mutual of Omaha Mortgage, Inc. dba Mutual of Omaha Reverse Mortgage, NMLS ID 1025894. 3131 Camino Del Rio N 1100, San Diego, CA 92108. Indiana-DFI Mortgage Lending License 43321. Michigan 1st Mortgage Broker/Lender/Servicer Registrant FR0022702. These materials are not from HUD or FHA and the document was not approved by HUD, FHA or any Government Agency. Subject to credit approval. For licensing information, go to: www.nmlsconsumeraccess.org

Equal Housing Lender

THE “PAY YOURSELF” RULE OF RETIREMENT SPENDING

One of the scariest things about retirement, Donna Fuscaldo admits in a recent Kiplinger piece, is that you stop collecting a regular paycheck. The “Pay Yourself” rule of retirement spending is designed to enable retirees to be proactive instead of reactive with their spending, providing consistency by aligning withdrawals in retirement with the old paycheck mentality.

Daniele Beasley, a Wealth Advisor at Mission Wealth outlines the steps in this “simple” plan, recommending that prospective retirees adding up all their sources of income (Social Security, pension, investment income), considering the effects of inflation, their own longevity, short and long-term market volatility, and taxes (on IRA and pension withdrawals, as well as on the sale of investments), all in order to “create a paycheck” for themselves. “Sure, it requires a few steps,” Beasley comments, but “once you’ve completed them, you’re good to go”. Ironically, The Kiplinger article about being “good to go” ends with a reminder to “revisit your withdrawal rate at least annually to account for changes in market performance.”

Whatever your conclusion as to the likelihood of the “Pay Yourself Rule” succeeding in its goal of “dialing down retirement stress” for your clients, as a financial advisor it will be important for you to include their housing wealth in the planning process. For homeowners envisioning an “aging in place” retirement, for example, a HECM reverse mortgage set up as a line of credit can be the key to “regularizing” their income flow, in fact allowing them to reduce or even avoid ill-timed, tax-triggering, forced withdrawals from both qualified and non-qualified investment accounts. 

While your clients’ investment portfolios will always be subject to variations in return, their reverse mortgage line of credit is a “fixed” account, with the as-yet untapped portion of their equity growing at the same rate as the interest being charged on the borrowed portion. 

“It all starts with a plan,” Daniele Beasley stated, suggesting that “Your financial advisor or tax professional should be able to help you determine the percentage” for the Pay Yourself strategy, cautioning that “the rate should be reassessed annually to ensure it’s aligned with your current reality.” 

For clients anticipating having their home be the centerpiece of their “retirement reality”, consider the prominent role home equity can play in their “pay themselves” future.

David Garrison, NMLS ID 1595194. Mutual of Omaha Mortgage, Inc. dba Mutual of Omaha Reverse Mortgage, NMLS ID 1025894. 3131 Camino Del Rio N 1100, San Diego, CA 92108. Indiana-DFI Mortgage Lending License 43321. Michigan 1st Mortgage Broker/Lender/Servicer Registrant FR0022702. These materials are not from HUD or FHA and the document was not approved by HUD, FHA or any Government Agency. Subject to credit approval. For licensing information, go to: www.nmlsconsumeraccess.org

Equal Housing Lender

Despite having taken a different approach with your children, making clear that, once they’d completed their schooling, their finances would no longer be your concern, you’re now considering offering your very talented grandson help in launching a music school. Very passionate and hard working, he’s raised quite a bit of capital on his own, but needs a big chunk   of cash to renovate the building.

While you’re hardly in a position to offer any giant sum, you would like to, over the next year or so, commit a meaningful amount to the “cause.” Your own financial situation is relatively stable. Your home is paid off and in good shape. Over the last ten years, you’ve been able to manage well on retirement plan income, other investment income and social security, bringing in an occasional speaking engagement fee. The past year has been a good one, portfolio-wise, and neither of you has had any significant health issues to date. At the same time, you’re concerned that any significant financial spend, even if spread over two calendar years, might trigger an uncomfortable level of tax. 

One “tack” you apparently haven’t considered is using the equity accumulated in your home as the source of funds to help your grandson ready the structure to house his school. The two of you would arrange for a reverse mortgage set up as a line of credit. Since no principal or interest payments will be required, there will be no effect on the cash flow supporting your own income needs; draws from the line of credit will be tax-free.* Meanwhile, any unused portion of your line of credit will grow at the same rate as the interest being charged on the loan.

Just as, with the passage of years, the two of you have apparently changed your thinking (about offering financial help to offspring beyond their college years), using reverse mortgage funding might be a way help your mission-driven grandson help his students “make music.”

*Please consult a tax specialist.

David Garrison, NMLS ID 1595194. Mutual of Omaha Mortgage, Inc. dba Mutual of Omaha Reverse Mortgage, NMLS ID 1025894. 3131 Camino Del Rio N 1100, San Diego, CA 92108. Indiana-DFI Mortgage Lending License 43321. Michigan 1st Mortgage Broker/Lender/Servicer Registrant FR0022702. These materials are not from HUD or FHA and the document was not approved by HUD, FHA or any Government Agency. Subject to credit approval. For licensing information, go to: www.nmlsconsumeraccess.org

Equal Housing Lender

REVERSE MORTGAGE CAN BE GRANDPARENTAL GUARDRAIL

“It might be time to stop supporting your adult children,” the Economy section of your Indianapolis Star advised, with the part about grandparents’ own financial security being put at risk really “hitting home” to you. “There’s nothing wrong with providing financial support to adult children or grandchildren,” a Credit Karma consumer financial advocate is quoted as saying, “but if it begins to have a negative effect on your own finances, it’s probably time to set some guardrails.” 

All well and good, but when illness and job insecurity have rendered an adult child unable to provide for his own children’s needs, the two of you have been stepping up to help. Having only recently paid off a second mortgage you’d taken out to do an “aging in place” home redesign, you have now reached the point of increasing your withdrawals from your own investment accounts. Meanwhile, along with every else, you’ve been notified of a sharp increase in your prescription drug costs. Despite this “negative effect on your own finances, you cannot imagine standing by while your granddaughter is forced to drop out of college or allowing your grandson to halt his efforts to enroll next fall. Your daughter-in-law is working two jobs, while your son continues to have escalating medical debt as he recovers from a severe health setback.

Given your intention to “age in place”, you might consider using your housing wealth as the “guardrail” for your own financial security. You would begin by applying for a HECM reverse mortgage, set up as a “standby line of credit”. Unlike either your original mortgage or that second mortgage you just paid off, there are no mandatory monthly mortgage payments* due on a reverse mortgage (the house itself is the collateral for the non-recourse loan). You could draw on your equity as needed to help your son and grandchildren, even to help with your own medical costs. Meanwhile, the unused portion of your home equity would be credited with growth at the same rate of interest as that being charged on the borrowed funds. 

It does not sound as if the time has come for you to withhold support from your son and his family. On the other hand, turning your housing wealth into a “grandparental guardrail” might be a path well worth exploring.

https://mutualreverse.com/david-garrison

*Borrower must occupy home as primary residence and remain current on property taxes, homeowner’s insurance, the costs of home maintenance, and any HOA fees. David Garrison, NMLS ID 1595194. Mutual of Omaha Mortgage, Inc. dba Mutual of Omaha Reverse Mortgage, NMLS ID 1025894. 3131 Camino Del Rio N 1100, San Diego, CA 92108. Indiana-DFI Mortgage Lending License 43321. Michigan 1st Mortgage Broker/Lender/Servicer Registrant FR0022702. These materials are not from HUD or FHA and the document was not approved by HUD, FHA or any Government Agency. Subject to credit approval. For licensing information, go to: www.nmlsconsumeraccess.org

Equal Housing Lender

REVERSE MORTGAGE “OVERLAY”

Over the years, you’ve been the one in charge of guiding the direction of the investments, not only in your joint account, but in your own and your wife’s 401Ks (now IRA rollover accounts). Asset allocation has been the guiding principle throughout, but with both of you now entering your late seventies, you feel the need to start being even more cautious in your choices. The very recent drop in the market has you worried, and you’ve done some rebalancing in the rollover accounts, attempting to be strategic about the timing of mandatory IRA withdrawals (and of the choice of which assets to sell for the RMDs).

It’s comforting that, over the past two years, you have paid off the second mortgage you took out in order to do a total remodel of the house you’ve owned for the past thirty years, where you’re hoping to spend the rest of your lives. However, because that debt elimination was made possible only because of extra income from a long (but now ended) consulting gig; going forward (along with everyone else), you’re concerned about the escalating costs of utilities, gasoline, groceries – and your prescription medications. Pretty soon, you realize, you will need to increase “draws” from the joint account.

Given your intention to “age in place”, you might apply for a HECM reverse mortgage, set up as a “standby line of credit”. The unused portion of your home equity would be credited with growth at the same rate of interest as that being charged on the portion that represents borrowed funds, and you could consider that as representing part of the “loaner” asset portion of your allocation. 

Without in any way attempting to offer either investment of tax planning advice, we’d like to suggest you consider your own housing wealth as to be an important element in your asset allocation planning. Portfolio managers sometimes incorporate “overlays” using options or derivatives to reduce risk by offsetting one type of investment “against” the other. One of the advantages is that the managers can “adjust” the level of risk without incurring the transaction costs of buying or selling the stocks.

In a sense, through a reverse mortgage, your housing wealth would be an “overlay”, serving as a “backup” source of funds should, as you mentioned, your living costs escalate — or as emergency needs arise in the future. Unlike either your original mortgage on the home or the second mortgage, with a reverse mortgage, no monthly mortgage payments* are required. Meanwhile, any un-borrowed portion of your HECM line of credit will grow at the same rate as the interest charge on borrowed funds.

You mentioned being “strategic” about the timing of mandatory IRA withdrawals and the choice of which assets to sell in taking those RMDs. A HECM reverse mortgage might serve as yet another important way to be “strategic” in managing your financial affairs.

https://mutualreverse.com/david-garrison

*Borrower must occupy home as primary residence and remain current on property taxes, homeowner’s insurance, the costs of home maintenance, and any HOA fees. David Garrison, NMLS ID 1595194. Mutual of Omaha Mortgage, Inc. dba Mutual of Omaha Reverse Mortgage, NMLS ID 1025894. 3131 Camino Del Rio N 1100, San Diego, CA 92108. Indiana-DFI Mortgage Lending License 43321. Michigan 1st Mortgage Broker/Lender/Servicer Registrant FR0022702. These materials are not from HUD or FHA and the document was not approved by HUD, FHA or any Government Agency. Subject to credit approval. For licensing information, go to: www.nmlsconsumeraccess.org

Equal Housing Lender

CONSIDERING A REVERSE MORTGAGE?  PURPOSE TRUMPS TIMING 

After much soul-searching (plus attending a number of seminars on the subject of reverse mortgages and the pros and cons of aging in place), the two of you are seriously contemplating taking out a reverse mortgage on your home. While you have done some updating of your home to make it more suitable to your everyday comfort, there are still some modifications that would make “aging in place” feasible. 

Over the past few months, you noticed all the news comments about the Fed having dropped interest rates, increasing the buying and selling of homes; you’re not sure how specifically that applies to your situation. You’re locked into the rate you’re paying on the four remaining years on your existing mortgage, but on a new mortgage, the lower rates might prove an advantage.

In your discussions about reverse mortgages, your wife, still in her early seventies, is naturally worried about managing a complex transaction on her own should you die first (you are in your early eighties). At the same time, the stark reality is, were you to die first, without your Social Security benefit, she would have difficulty keeping up with living costs.

The “truth” about “interest rate timing” when it comes to investments – or mortgages – is that we don’t know. Yes, rates today are lower than they have been, and no, your current forward mortgage rate has not been lowered. In a reverse mortgage, future interest rates will impact two elements of the arrangement: the amount of the loan for which you qualify, and how much you’ll be charged in interest. The important difference (between your current forward mortgage and reverse mortgage funding) is that future rises in interest rate would benefit you –  because the un-borrowed portion of your equity would grow at the same rate as the interest being charged on the loan balance. 

Not only would the line of credit enable you to do the remaining updates on the home, but, should you predecease your wife, causing her to lose your social security benefit; the equity in your home would be a needed resource.

When it comes to a reverse mortgage (just as is true for most major life choices) — purpose trumps timing.

https://mutualreverse.com/david-garrison

David Garrison, NMLS ID 1595194. Mutual of Omaha Mortgage, Inc. dba Mutual of Omaha Reverse Mortgage, NMLS ID 1025894. 3131 Camino Del Rio N 1100, San Diego, CA 92108. Indiana-DFI Mortgage Lending License 43321. Michigan 1st Mortgage Broker/Lender/Servicer Registrant FR0022702. These materials are not from HUD or FHA and the document was not approved by HUD, FHA or any Government Agency. Subject to credit approval. For licensing information, go to: www.nmlsconsumeraccess.org

Equal Housing Lender