Managing the timing and sources of your income in retirement

Managing your sources of income in retirement is never easy and is completely difference from managing the income you received during your working years.

As a retired person, you can receive income monthly, quarterly, annually and in some cases not on a regular basis. And most likely you’ll receive income from investments that you’ll need to monitor, manage and protect to ensure that they last. It can be overwhelming at times.

Here’s an overview on the different types of retirement income, some practical advice and ideas for potential retirement income, such as leveraging your home equity with a reverse mortgage: https://bit.ly/2rW1eRM.

HUD raises costs on reverse mortgages

The Trump administration announced Tuesday that it was raising the premiums for most reverse mortgages and lowering the maximum amount that can be borrowed in an effort to stem the tide of losses to the Federal Housing Administration (FHA) insurance fund.

FHA’s overseer, the U.S. Department of Housing and Urban Development (HUD), said the reverse mortgage program has been a big net loser for the insurance fund over the years, and is perilously close to needing a bailout from taxpayers. Effective Oct. 2, it was restructuring the annual premiums and lowering the principal limit factor, which determines how much a person can borrow.

HUD officials said the change will result in a net increase in costs for most borrowers, and could potentially reduce the initial volume of reverse mortgages by 10 to 20 percent annually. The upfront premium will be increased to 2 percent. Currently, the upfront charge is either 0.5 percent or 2.5 percent, depending on how much is drawn in the first year. The annual premium will be reduced to 0.5 percent from 1.25 percent.

Also the maximum loan limits will be reduced.

Reverse mortgages, which are formally known as home equity conversion mortgages (HECMs) can be taken as a lump sum, line of credit or through monthly payments. HUD officials presented the theoretical case of a 62-year-old borrower, with a reverse mortgage at 5 percent. For each $100,000 in home equity, the borrower will now be allowed to borrow $41,000, which is down from $52,400.

Reverse mortgages, which represent a fraction of the overall FHA loan guarantees (there were fewer than 50,000 in fiscal 2016], have been a source of volatility for the insurance fund. Borrowers are projected to incur more losses in future years than they pay in premiums. HUD said the program has already resulted in a net cost of $11.7 billion to the FHA MMI fund since fiscal 2009. The economic value of the program at the end of the last fiscal year was estimated at negative $7.7 billion, the agency said. This number has bounced around, however. In fiscal 2015, by contrast, the HECM program was valued at a positive $7.4 billion.

A drag on the MMI fund
HUD officials say that the program is being propped up by the premium payments of younger borrowers of traditional forward mortgages. Reverse mortgages are a reason that HUD has not been able to lower the premiums on a traditional FHA loan. In a fact sheet distributed to reporters, HUD said that if it didn’t make the changes, it “would require an appropriation from Congress for FHA to endorse new reverse mortgages in FY 2018.”

The overall value of the insurance fund in fiscal 2016 was at at healthy $27.6 billion. The MMI’s capital ratio also increased to 2.32 percent, which is above the 2 percent minimum established by Congress. The fund has required only one bailout in its history, a $1.7 billion appropriation from the U.S. Treasury in fiscal 2013. This cash infusion was largely due to HECM losses, HUD said.

“Today, younger, lower-income homeowners with traditional FHA-insured ‘forward mortgages’ are routinely bailing out the HECM program through the mortgage insurance premiums they pay, placing a significant burden on the overall health of FHA’s Mutual Mortgage Insurance Fund,” the fact sheet said. “We can no longer tolerate putting American taxpayers and future generations of seniors at risk. Quite simply, the HECM program is losing money and can no longer remain viable in its present form.”

FHA insures almost all reverse mortgages, which are available to homeowners 62 and over. With a reverse mortgage, a homeowner can borrow against the value of a home. The loan doesn’t have to be repaid so long as the borrower remains in the home. A reverse mortgage carries fees, interest, and the borrower is required to pay property taxes and maintain the home.

The terms of a reverse mortgage depend on the amount of equity in the home, and the age of the borrower. Generally speaking, the younger the borrower, the less that can be borrowed and the higher the loan cost. The actual maximum loan limits are based on tables that factor in age and equity.

The reaction to HUD’s move was mixed.

The nation’s largest mortgage trade group, the Mortgage Bankers Association, praised the move as a way for the program to remain financially viable.

The National Reverse Mortgage Lenders Association (NRMLA) said the changes will increase the costs and reduce the benefits for most borrowers.

“We believe that there are alternative options for better managing the HECM program to reduce its overall costs and will continue to advocate for such beneficial changes to the program,” NRMLA President Peter Bell said. Bell did note that HUD’s action showed a commitment to the program and also to stabilizing the insurance fund and avoiding Treasury draws.

This story is excerpted from ScotsmanGuide.com.

‘Tis the season to appreciate

Happy Holidays!
I just heard a lovely and touching song, “Make Me A Channel of Your Peace” which reminds me of the human phenomena that inspires us during the holiday season. We have an opportunity to dig a little bit deeper and try a little bit harder to just be kind to one another. Parties, perfectly wrapped presents, and bright shiny lights are exciting and celebratory, but to be kind, is simply one of the best gifts of all. The lyrics are about seeking to understand each other rather than be understood, to console rather than be consoled, to forgive rather than be forgiven, and from the bottom of our over flowing and grateful hearts, to share and show love. What a beautiful sentiment.

Housing decisions in retirement — should I stay or should I go?

I’m happy to announce the release of Dr. Wade Pfau’s book on Reverse Mortgages:
How to use Reverse Mortgages to Secure Your Retirement. Dr Wade Pfau holds a doctorate in Economics from Princeton University, and is currently a professor of Retirement Income in the PHD program at The American College of Financial Services. “A rare, unbiased analysis of how reverse mortgages can fit into a prudent regiment income plan form one of the nations leading researchers. Both consumers and financial advisers can benefit form a fresh look at this often-dismissed option” Mary Beth Franklin, nationally recognized expert in Social Security Strategies. If you or anyone you know is interested in reading this book, it would be my pleasure to send a complimentary copy to you.

Buy a Home with a Reverse Mortgage
By Rachel L Sheedy, Kiplinger’s Retirement Report

Most seniors take out a reverse mortgage to help them stay in their existing home as they get older. But Myra Simmons, 67, took advantage of a little-known product: She used a reverse mortgage to finance a new home.

Myra’s 83-year-old husband, Billy, was having trouble using the stairs in their two-story townhome in Fort Meyers, FL. The couple sold their home and used a ‘reverse mortgage for purchase’ to move into a one-story house nearby. “Now, I take what would have been my mortgage payment and put it in savings,” says Myra, who works for the local county sheriff’s office.

The Home Equity Conversion Mortgage (HECM) for Purchase was created by Congress four years ago to streamline home-buying transactions and cut costs, says Peter Bell, president of the National Reverse Mortgage Lenders Association. Before, seniors would buy a new home, incurring closing costs, and then take out a reverse mortgage on the new home, triggering new closing costs. The HECM for Purchase rolls this into one transaction and one set of closing costs.

For there to be equity to cover the accrued interest, the HECM for Purchase requires that you pay about half of the home’s sales price with your own cash. The reverse mortgage picks up the difference. “Essentially, the money you’re putting in is your equity,” says Ted George a certified financial planner in Scotts Valley, CA.

To pay your half, you can use money from savings, the sale of your other house, or a gift from a family member. But the money cannot be borrowed.

Reframe the Game
By Amara Rose, HECM World
Retirement. It’s no longer a “retreat” from life (if it ever was). As we’ve explored multiple times, people are retiring later or downshifting from full time to part time employment, or moving into a consulting role or some other line of work, rather than simply leaving the job market altogether. And those who do fully retire from the work world are still fully engaged in life — sometimes so busy they wonder how they ever fit a job into their day.

Here are some suggestions gleaned from a retirement workshop for how we might reframe “retirement.” Ideas take their inspiration from sports, advertising, and plain old ingenuity.

Reverse mortgage professionals who enjoy creativity, consider these concepts:

• Act 2
• Between Jobs
• Bonus Years
• Continuum
• Creative Aging
• Downshifting
• Encore
• Field of Possibilities
• Growing Bolder
• Inspirement
• Life 2.0
• Living More
• My Time
• Next Chapter
• Next Stage
• Post-grads
• Prime Time
• Protirement
(it’s not for beginners!)
• Rebalancing
• Re-engagement
• Refirement
• Regeneration
• Repotting (in new soil)
• Retreads
• Rewirement
• Sage-ing
• Seasoned
• Success to Significance
• The Creative Age
• The Gifted Years
• Third Half
• Third Quarter
• Unstoppable

‘Tis the season to appreciate.
It has been such a great pleasure for me to associate with each and every one of you this year. Though many changes have taken place by way of HUD/FHA updates to policies, a reverse mortgage still remains a viable financial program with great benefits.

A deep and heartfelt thank you to all of the patient and understanding clients who went through these challenges with us. It is my sincere joy to be involved in this process with you and to witness first hand, the increase in quality of life and peace of mind that the program brings to so many. I’m looking forward to serving you in 2017.

Thank you…

—Cynthia Kee

Ways to use a reverse mortgage

Nine surprising ways to use a reverse mortgage
By Mary Beth Franklin, Investment News

Reverse mortgages allow homeowners age 62 or older who own their home outright or who have a small mortgage balance to convert the equity in their primary residence into a liquid, tax-free asset. Borrowers can take their money in a lump sum or as a monthly payment, or set up a line of credit. Interest accrues on borrowed funds. Unused lines of credit continue to grow at the same compounded interest rate as the cost of money.

Financial advisers who dismissed reverse mortgages in the past may want to take a second look. Consumer protections have increased and set-up fees have been dramatically reduced. Leading researchers believe reverse mortgages could solve some of the income challenges of retirees who saved too little to finance a retirement that could last decades. Click through to find out the various ways to use a reverse mortgage — some of them may surprise you.

1. Pay off an existing mortgage
Using a lump sum from a reverse mortgage to pay off a traditional mortgage balance instantly increases a retiree’s monthly cash flow and reduces portfolio withdrawal needs. “It really improves the odds for retirement success to not carry a mortgage into retirement,” said Wade Pfau, professor of retirement income at The American College of Financial Services.

2. Replace a home equity line of credit
Unlike a HELOC, a reverse mortgage can never be reduced, frozen or cancelled, and there are no monthly loan repayment requirements. A reverse mortgage is not due until the borrowers sell the home, move out permanently or die. The estate or heirs can never owe more than the house is worth, even if it is less than the amount borrowed.

3. Protect your portfolio
“Should your portfolio decline significantly in value, borrow from the line of credit for your needs, then repay the loan when your portfolio recovers,” said John Salter, associate professor of personal financial planning at Texas Tech University. Interest payments are tax-deductible if retirees itemize their deductions on their income tax returns.

4. Fund future long-term care or income needs
A 62-year-old couple with no long-term-care insurance may want to set up a reverse mortgage line of credit. With a home worth $625,000, their initial line of credit at current interest rates would be worth $327,375, according to Tom Dickson, founder of the Financial Experts Network. Left untouched, the equity line would be worth $613,365 in 10 years and $1,149,143 in 20 years, said Mr. Dickson, a co-designer of the reverse mortgage modeling now part of MoneyGuidePro. The couple could tap the loan for future long-term care costs, as long as they remained in their home, or to serve as a deferred annuity if they needed additional income in the future.

5. Create a Social Security bridge
Supplement income with monthly payments from a reverse mortgage either for a set number of years (term) or for as long as you live in your home (tenure). Term payments can provide an income bridge to allow a retiree to delay claiming Social Security until benefits are worth the maximum amount at age 70, said Shelley Giordano, author of “What’s the Deal with Reserve Mortgages?” (People Tested Media, 2015).

6. Manage taxes
Proceeds from a reverse mortgage are tax-free. Tapping a reverse mortgage can decrease withdrawals from taxable retirement accounts, reducing income taxes and the amount of Social Security benefits subject to income taxes. For higher-income retirees, tax-free reverse mortgage payments can reduce their modified adjusted gross income that can trigger higher monthly Medicare premiums.

7. Pay Roth conversion taxes
Sometimes the only thing preventing a retiree from converting a traditional retirement account to a Roth IRA is the amount of income taxes owed on the converted amount. Tax-free proceeds from a reverse mortgage can pay Roth conversion taxes all at once or over several years, reducing future income taxes and possibly reducing future Medicare premiums.

8. Buy a new home
A reverse mortgage can be used to purchase a new home. Rather than using all of the proceeds from a home sale, downsizers can use some of the sale profits and take out a reverse mortgage to make up the balance, resulting in a new home without monthly payments and additional cash to add to savings for future needs or to supplement current income.

9. Gray divorce strategy
Older couples can use a reverse mortgage to divide a marital housing asset in a divorce. In one scenario, the spouse remaining in the home can take a lump sum distribution from a reverse mortgage to buy out the other spouse. In a second scenario, the marital home can be sold and each ex-spouse can use some of the proceeds from the home sale and each of them can get a reverse mortgage to buy their respective new homes, according to Shelley Giordano, chair of the reverse mortgage industry’s Funding Longevity Task Force.

Summer resources for you…

CKee_photo_200x200Dear Friends, Colleagues and Neighbors,

You’re not a number, you’re family to me.  I remain committed to helping you achieve your financial goals. Being able to sit and visit with you face to face allows me a deep understanding of what is important to you, and better helps me assist you in navigating through the reverse mortgage process.

A heartfelt thank you to each one of you who have so graciously allowed me to walk through the process of your loan with you, as well as referring neighbors, friends and family my way. It is such a blessing for me to witness the exciting changes that happen in the lives of my clients due to this incredible mortgage program.

—Cynthia Kee

Grandmother with grandchildren painting with paintbrush and colorful paints


12 Steps to Happiness

From Sonja Lyubomirsky, The How of Happiness

  1. Do more activities that truly engage you
  2. Savor life’s joys
  3. Learn to forgive
  4. Practice acts of kindness
  5. Nurture relationships
  6. Cultivate optimism
  7. Avoid over-thinking and social comparison
  8. Develop strategies for coping
  9. Count your blessings
  10. Strengthen your spiritual connections
  11. Commit to your goals
  12. Take care of your body


The Value of Financial Advice

By Wade Pfau

I am often asked whether it is worth the cost to hire a financial advisor. That is an excellent question with an answer that depends on many factors.

Good financial planning decisions extend well beyond where and how you invest. Two major research efforts have attempted to quantify how good financial decision-making can enhance one’s lifetime standard of living. It is important to understand what this research means, because this may not always equal a higher portfolio return in the short term. The research identifies how good financial management can enhance sustainable lifetime income on a risk-adjusted basis. The ability to spend more than you could have otherwise can be interpreted as meaning that the assets earned a higher return net of taxes and fees to make that spending possible.

In the field of finance, achieving “alpha” means earning more money than expected. This generally is achieved through either timing market trends correctly or picking winning individual securities.

In practice, it is very difficult to achieve alpha from market timing and security selection, which explains the rise of indexing. Low cost index funds generally perform better than the majority of actively managed funds seeking alpha, at least after accounting for management fees. After fees, alpha is often negative for actively managed funds. Those who understand this point can dramatically simplify their portfolio by filling it with well-diversified low-cost index funds. Financial advisors who only focus on selecting investments will really struggle to add value.

The value of financial advice

 

Reverse Mortgages — a Potential Tool for Financial Professionals and their Clients
By Shannon Hicks

According to the U.S. Census Bureau, the typical married couple entering retirement has $92,000 in non-equity assets and $192,000 in home equity. With that in mind does it really make sense to advise a client to sell securities in a down market to maintain their retirement cash flow without mentioning home equity?

In Jamie Hopkin’s recent article in Investment News Hopkins says, “Far too many financial advisers overlook home equity as part of a retirement income plan. With heightened regulatory concerns about doing what is in the best interest of the client, it would be prudent to explore and discuss home equity strategies with clients.”

Consider a client over age 62 with $300,000 in home equity. If the market is down 25% is it truly in the client’s best interest to sell stocks at a loss without at least considering what may be their largest asset?

The Home Equity Conversion Mortgage (HECM), better known as the reverse mortgage, is an FHA-insured mortgage for homeowners 62 or older which allows them to access a portion of the equity in their home without requiring monthly mortgage payments.

One strategy is the standby reverse mortgage. This approach allows the homeowner to secure a HECM line of credit. This credit line is unique in that the unused portion grows each year, no payments are required and the credit line cannot be frozen or reduced if housing values were to fall as long as the borrower meets the ongoing obligations of the loan.

Utilizing the standby reverse strategy one could access a portion of the HECM line of credit to meet income needs in years when the market is down allowing the portfolio to recover. A great way to overcome sequence of returns risk. Several Monte Carlo simulations have shown this approach to substantially increase the longevity of the portfolio and sustainable withdrawals.

Curious?
Reverse mortgages can be a viable option for many senior homeowners seeking to make changes in their lives they may not have thought possible. Is a Government Regulated Reverse Mortgage right for you? Get the facts. I welcome the opportunity to help demystify the process and share my knowledge and expertise with you. Feel free to call me at 707-812-2102 for your complimentary personal assessment.

When you refer a family member or friend who funds a reverse mortgage with me, I will donate $250 in your name to a charity of your choice.

 

 

When to Consult the Experts

You’ve heard it before, but it bears repeating, especially because seniors themselves are often loath to admit they’re growing older: there are certain situations where it’s wise to get expert guidance before a reverse mortgage client or prospect may actually need it. Here are four areas where seniors should consider reaching out for advice in advance.

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