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

HECM V. HELOC – THE 3 BIG DIFFERENCES THAT MAKE THE DIF FOR SENIORS

At any age, clients’ housing wealth represents a financial resource for them, along with their investment accounts, their rental properties, and their cash reserves. At different times in their lives, your financial planning clients may have chosen to tap the value in their home to fund home improvements, make new investments, launch business ventures, make charitable gifts, or help family members. Pre-retirement, tapping into housing wealth is typically accomplished by clients in one of three ways:

• a home equity loan (a lump sum loan with payment installments, a fixed interest rate, and a fixed period of time for repayment).
• a cash-out refinance – replacing their mortgage with a new, larger loan, clients receive the difference in cash.
• a home equity line of credit, or HELOC. This is a revolving line of credit (typically with a variable interest rate), from which the client can draw as needed.
  

As your clients move into retirement, particularly for those who have made a decision to “age in place” rather than moving to a retirement community, the tie between their planning and their housing wealth takes on greater significance than ever before. For seniors who are “house rich, cash poor”, home equity represents a resource to help them cope with unforeseen repair costs or medical bills. For other senior borrowers, knowing they will be in a position to help children facing medical emergencies — or grandchildren facing college debt — makes having ready access to funds a reassuring prospect. At the same time, these retired clients can hardly afford to take on debt repayment schedules, which is why a HECM (Home Equity Conversion Mortgage) can represent the ideal compromise.

Being careful to explain that reverse mortgage financing is outside your own area of expertise as an advisor, (your clients would need to work with a reverse mortgage specialist), it’s important for you to understand the three most important differences between a HELOC and a HECM in relation to retirees’ best use of their resources.

• A HELOC is a recourse loan (the lender can pursue the borrower if the home’s value is insufficient to satisfy the debt); a HECM reverse mortgage is non-recourse, meaning that should the loan balance exceed the property value, the FHA insurance will covers the difference; the only security for repayment is the home itself).
  
• With a HELOC, borrowers must make at least minimum monthly mortgage payments* to avoid late fees and protect their credit score. No monthly mortgage payments* are mandatory on a HECM reverse mortgage. In a HELOC, you do not earn interest or see “growth” on un-borrowed equity.

• On a HECM reverse mortgage, any un-borrowed portion of the line of credit grows at the same rate as the interest rate charged on borrowed funds. (This happens regardless of the home’s value at that point in time.)

For senior borrowers, those three differences can mean a lot!

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

PREPARING RESOURCES NOW FOR SPENDABILITY LATER

While you’re not planning to sell your home, having decided years ago that aging in place would be the best course of action, you had rejoiced in the fact that, over the past few years, the market value of your home had increased substantially. In fact, using a home equity line of credit (now three months away from being completely paid off), you were able to finance new HVAC, replace the roof, and create a ground-floor bed and bath.

A divorcee now entering your seventies, you’ve been able to generate part time income to supplement a small pension and social security, and, until now, you’ve avoided taking withdrawals from your individual investment account. While you realize you’ll need to take IRA withdrawals in a couple of years, you have not touched that money until now.

Because you want to preserve the chance to tap the value in your home again should it ever become necessary, it worries you to read that homes in Indiana have begun to stay on the market longer, signaling that the big price “boom” may be over. Meanwhile, along with everyone else, your living costs have risen (you’ve already received notice from your pharma plan of bigger co-pays). Without being too “paranoid,” you’re trying to be smart about “gearing up” to remain financial self-sufficient in the years to come.

Since your plan is to continue occupying your home, you might consider converting your “housing wealth” (home equity) into a contingent source of spendable income using a reverse mortgage set up as a “line of credit.” This move would address two of the concerns you mention in looking towards the future:

a) Should stagnation or even a decline in the value of your home come to pass in the future, even were the reverse mortgage balance to exceed the property value, neither you (nor your heirs) would ever be liable for the deficiency. 

b) If and when you take withdrawals from the line of credit, the money will be tax-free.* What’s more, the unused portion of your equity will be growing at the same rate as that being charged on the loan.

A reverse mortgage can be a way for you to prepare your housing resource now for “spendabillity” later. 

https://mutualreverse.com/david-garrison

*Please consult a tax advisor. 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