What Is a Reverse Mortgage?
As a senior, your most significant asset may be your home. If money is tight in retirement, you may be interested in getting a reverse mortgage. Here, we’ll discuss everything you need to know about reverse mortgages so you can make the best decision. What is a reverse mortgage? With a traditional mortgage, you take out a loan to finance a home and pay your lender back over time by making a monthly mortgage payment. A reverse mortgage works the opposite way — instead of making a monthly payment, you receive payments based on your home equity. This option is only available to older homeowners who meet eligibility criteria, which we’ll discuss below. You might also hear a reverse mortgage referred to as a home equity conversion mortgage, or HECM. How a reverse mortgage works With a reverse mortgage, you enter into an agreement where a lender pays you based on your equity in your home. Your lender doesn’t take ownership of your home, and you’re still required to cover the costs associated with it, like property taxes, homeowners insurance, and other maintenance costs or expenses. You can use the money from a reverse mortgage for any purpose — it doesn’t have to relate to your home. As a borrower, you have a few options when it comes to receiving your reverse mortgage proceeds: You’ll need to consider your specific needs when determining which option is best for you. Who qualifies for a reverse mortgage? There are certain criteria you’ll need to meet to qualify for a reverse mortgage, according to Steve Irwin, President of the National Reverse Mortgage Lenders Association (NRMLA): How much money can you get from a reverse mortgage? The amount of money you can get from a reverse mortgage loan depends on your age and the value of your home, as well as the current interest rate and the type of reverse mortgage you get. However, you shouldn’t expect to get the cash equivalent of the full value of your home. Rather, you’ll get just a portion of it. How much does a reverse mortgage cost? Just as there are closing costs associated with a regular mortgage, so too will you pay a number of fees when you enter into a reverse mortgage agreement. First, there’s a loan origination fee, which is either $2,500 or 2% of the first $200,000 of your home’s value — whichever is higher. From there, you’ll pay 1% for any amount of home value over $200,000. The maximum fee you’ll pay is $6,000. You’ll also need to pay for an appraisal and a compulsory housing counseling session. Plus, you should factor in mortgage insurance premiums — specifically, 2% at closing plus an annual fee equal to 0.5% of your loan balance. You may also be on the hook for monthly loan servicing fees that top out at $30 for fixed-rate loans and $35 for adjustable-rate loans. And there may be some additional third-party fees you’re charged at your lender’s discretion. Types of reverse mortgages There are different reverse mortgage types you might choose from: Pros and cons of a reverse mortgage A reverse mortgage is an excellent idea for some people — but not everyone. Here are the pros and cons of getting a reverse mortgage. Pros There are some advantages to a reverse mortgage: Cons On the other hand, reverse mortgages have their drawbacks. Avoiding reverse mortgage scams The reverse mortgage industry has long been blasted for its predatory practices. In fact, low-income areas are often targeted in an effort to get desperate homeowners to sign up. To avoid falling victim to a scam, you’re better off reaching out to lenders about a reverse mortgage rather than responding to unsolicited offers. You should also avoid signing any contracts or documents you don’t understand. If you have questions about the process, reach out to the Department of Housing and Urban Development at 1-800-347-3735. Is a reverse mortgage a good idea? It can be. With a reverse mortgage, you get access to income without having to sell your home and move. If you’re a senior homeowner with a lot of equity in your home, it could be an easy way to borrow. Just be aware of the drawbacks before moving forward. You may decide that you’re better off with a home equity loan or line of credit than a reverse mortgage. Or, you may decide that the cost of owning your existing home is too high, even with those reverse mortgage payments. There’s no right or wrong answer, so ultimately, it will boil down to your financial needs and what you’re comfortable with. Reverse mortgage resources from NRMLA The NRMLA offers additional information and resources at ReverseMortgage.org, including: By: Maurie Backman
Should You Look Into a Reverse Mortgage if You Need Funds for Retirement?
A lot of people look forward to someday stepping away from the hassles of the working world and getting to retire. However, being able to actually end your career relies upon having the money to cover your expenses in the absence of a job. AARP notes that you’ll need to replace about 80% of your pre-retirement income in order to live comfortably, and depending on your hopes and dreams for your retirement, you might want the flexibility to spend more money on travel and crossing items off your bucket list. And this is where some people run into trouble. If you haven’t been able to sock money away in a brokerage account to invest and grow it over your career, you might be lacking the savings to comfortably retire. Social Security payments will not match your old salary, and if you’re a long way off from retiring, how much they cover could change over time. For some people, a reverse mortgage looks like an attractive option. But what is a reverse mortgage, and are they worth considering? What is a reverse mortgage? You’re probably familiar with the concept of a mortgage loan. You stretch out the cost of buying a home over many years (15- and 30-year mortgage terms are common) in exchange for being charged interest on the loan by your mortgage lender. As you make your payments, you build up more and more home equity, until eventually, you’ve paid the loan off entirely and the home is yours outright. Along the way, you can also borrow against your home equity in the form of additional mortgages, home equity loans, and home equity lines of credit. A reverse mortgage is another way of borrowing against your home equity, but the loan is repaid when you no longer live in the home. Interest and fees are added over time to the amount you borrow, and eventually, you’ll have to pay the money back (along with these extra costs) by selling the home (or if you’ve passed on, your heirs will handle this). You can receive the money as a lump sum, in monthly installments, or as a line of credit you can draw from as needed. The most common type is called a HECM (or home equity conversion mortgage), and you must be 62 or older to qualify. There are other conditions to meet — the home must be your primary residence, you must keep up with maintenance and property taxes, and you must not have any outstanding federal debt, like unpaid income taxes. Is it a good idea to do this? Like so many aspects of personal finance, deciding whether to get a reverse mortgage to help you pay for retirement is just that: personal. So, I can’t answer this question for you! But here’s a look at the upsides and downsides of taking out a reverse mortgage. Pros If you’ve spent years building home equity, getting to access it to cover your living costs in retirement can certainly be a good thing. And you don’t even have to move out, you can remain in the home you love, and it’ll stay in your name. The payments you receive from your reverse mortgage aren’t taxable, so that can improve your bottom line at a time of life when money can be tight. And reverse mortgages are a type of non-recourse loan, which means they are backed by the value of the home itself, rather than any other assets, so the amount due can never be more than your home is worth. Cons A reverse mortgage is not free, and there’s no guarantee that you’ll qualify. You’ll have to meet the conditions noted above as well as others (for example, if you own a co-op, your home might not be eligible). And you’ll have to pay closing costs, just like with a traditional mortgage. Those fees will eat into the money you’d get from your home equity. And eventually, your reverse mortgage must be paid off. Perhaps it’s your intention to leave the home to your heirs when you die and have them handle selling it to pay off the loan (or paying it off otherwise). If not, it’ll be on you to sell your home and move. And if you pass away before your spouse, they may or may not be able to remain in the home. If things are looking a little tight in your retirement budget, and you have a lot of home equity, a reverse mortgage could be just the ticket for you. But consider the pros and cons and speak with a HUD counselor if you’re intending to go with a HECM (which is backed by HUD). You deserve the most stress-free retirement you can get, and this includes finding ways to cover your costs. By: Ashley Maready
What to Do When Social Security Is Not Enough to Live On
What to Do When Social Security Is Not Enough to Live On Social Security provides a crucial source of income for millions of Americans during their retirement years. However, for many individuals, especially those with limited savings or high medical expenses, relying solely on Social Security benefits may not be enough to cover their basic needs. If you find yourself in this situation, here are some steps you can take to improve your financial situation and ensure a more comfortable retirement. 1. Assess your expenses: Start by analyzing your monthly expenses and identify areas where you can cut back. Creating a budget can help you prioritize your needs and make necessary adjustments. 2. Explore part-time work: Consider taking up part-time employment to supplement your Social Security income. This can provide additional income and keep you engaged in a meaningful activity. 3. Maximize other income sources: Look into other potential sources of income, such as pensions, investments, or rental properties. Diversifying your income streams can help mitigate the impact of an inadequate Social Security benefit. 4. Downsize your living arrangements: If housing costs are a significant portion of your expenses, downsizing to a smaller, more affordable home can help reduce your monthly expenses and free up funds for other necessities. 5. Utilize government assistance programs: Investigate whether you qualify for any government assistance programs, such as Medicaid or Supplemental Nutrition Assistance Program (SNAP). These programs can provide additional support for healthcare and food expenses. 6. Cut unnecessary expenses: Evaluate your discretionary spending and eliminate any unnecessary expenses. This might include cable TV subscriptions, dining out, or non-essential subscriptions. 7. Consider relocating: Moving to a more affordable area can significantly reduce your overall cost of living. Research different regions to find places with lower housing costs, taxes, and healthcare expenses. 8. Access home equity: If you own a home, consider exploring options to tap into your home equity. This could involve downsizing, taking out a reverse mortgage, or renting out a portion of your property. 9. Seek financial advice: Consult with a financial advisor who specializes in retirement planning to help you navigate your financial situation. They can provide guidance tailored to your specific circumstances and help you make informed decisions. 10. Explore part-time entrepreneurship: If you have a skill or passion, consider turning it into a small business or offering freelance services. This can not only supplement your income but also provide a sense of fulfillment. 11. Evaluate your healthcare costs: Medical expenses can be a significant burden for retirees. Research different healthcare insurance options and ensure you are taking advantage of all available benefits, such as Medicare or Medicaid. 12. Take advantage of senior discounts: Many businesses offer discounts for seniors, ranging from restaurants to travel. Take advantage of these discounts to stretch your dollars further. 13. Join a community organization: Engaging with local community organizations can provide access to resources and support networks. These organizations often offer services and programs specifically designed for seniors. 14. Prioritize self-care: Taking care of your physical and mental well-being is crucial during this phase of life. Focus on maintaining a healthy lifestyle, managing stress, and seeking support when needed. Common Questions: 1. Can I work while receiving Social Security benefits?Yes, you can work while receiving Social Security benefits. However, if you haven’t reached your full retirement age, there are limits on how much you can earn before your benefits are reduced. Once you reach full retirement age, you can work and earn as much as you want without any reduction in your benefits. 2. Can I receive other benefits while receiving Social Security?Yes, you may be eligible for other benefits such as Medicaid, SNAP, or low-income housing assistance. Contact your local social services agency to determine your eligibility for additional support. 3. What is a reverse mortgage, and how does it work?A reverse mortgage allows homeowners aged 62 and older to convert a portion of their home equity into cash. This loan does not require monthly mortgage payments and is repaid when the homeowner sells the property or passes away. 4. How can I find affordable healthcare insurance options?Visit the official Medicare website (medicare.gov) to learn about available healthcare insurance options for seniors. Additionally, your state’s health insurance marketplace can provide information on subsidized plans based on your income. 5. Are there any resources available for job placement or career change assistance?Yes, many organizations provide job placement and career change assistance specifically targeted at seniors. One such program is the Senior Community Service Employment Program (SCSEP) funded through the U.S. Department of Labor. 6. Can I start a small business while receiving Social Security benefits?Yes, you can start a small business while receiving Social Security benefits. However, you must report your income accurately and ensure it does not exceed the allowable earnings limit. 7. How can I find affordable housing options?Contact your local housing authority or nonprofit organizations specializing in affordable housing to explore available options. Additionally, websites like housingmaps.com can help you locate affordable rentals in your area. 8. Are there any tax breaks or credits available for seniors?Yes, seniors may qualify for various tax breaks and credits. Consult with a tax professional or use tax software to ensure you are taking advantage of all available deductions and credits. 9. Can I receive Social Security benefits from a deceased spouse?Yes, as a surviving spouse, you may be eligible to receive survivor benefits based on your deceased spouse’s work record. Contact the Social Security Administration for more information. 10. Can I receive Social Security benefits while living abroad?In most cases, yes. However, there are specific rules and restrictions for receiving Social Security benefits while living abroad. It is advisable to contact the Social Security Administration to understand the implications and requirements. 11. Are there any educational opportunities or scholarships for seniors?Yes, many colleges and universities offer educational opportunities and scholarships specifically for seniors. Contact local educational institutions to inquire about available programs. 12. Can I receive Social Security benefits if I am
Homeowner’s Insurance Premiums are Surging in These Five States
American homeowners, especially older ones, are being crushed by record increases in homeowners insurance premiums. Money.com reports these five states saw the largest increase in premiums from May 2021 to May 2023. The spike in premiums is attributed to a perfect storm of a spike in natural disasters, record insurance losses, and higher construction prices. Natural disasters such as wildfires have long-lasting impacts. For example, in the wake of New Mexico’s most destructive wildfires insurers began hiking homeowners insurance premiums. The same can be said for Colorado, Idaho, and California. In the wake of the disastrous and deadly Maui Fire island residents will soon face the same challenge. As a result of the surging cost of premiums, many older homeowners without a mortgage on their home have chosen to forego homeowners insurance altogether. The Insurance Information Institute reports that 5% more homeowners have not purchased homeowners insurance than just two years ago. Such homeowners are very likely house-rich but cash-poor. Even worse, their greatest source of wealth is now at risk of being wiped out. One disaster could push an older homeowner into complete financial ruin or possible homelessness. Reverse mortgage professionals who originate in states with marked premium increases should reach out to their local property and casualty insurance agents. Ask if they’ve seen an increase in homeowners insurance policy cancelations. If the agent has noted an increase of clients opting out of insuring their home you can explain that reverse mortgage could provide the means needed to purchase a policy and protect what’s likely their largest asset. Working with an agent While the insurance agent cannot divulge the identity of homeowners who’ve canceled their policy, they can make contact and recommend the homeowners arrange a meeting to learn how a reverse mortgage could help get them insured again. This is a potential win-win-win scenario. The homeowner wins by protecting their home. The insurance agent wins back a client. The originator wins a sale but most importantly, helps eliminate the risk of a homeowner losing their home to a disaster or fire. by Shannon Hicks September 19, 2023
How a HECM could save uninsured homeowners from disaster
The casino is a suitable place to roll the dice and take your chances- win or lose. However, gambling with the security of your largest asset and risking the roof over your head is not. Survey reveals more homeowners are uninsured The Insurance Information Institute reports that 5% more homeowners have not purchased homeowners insurance than just two years ago. That’s not surprising considering skyrocketing premiums in several states, most notably California and Florida. Are most of these homeowners well off with substantial assets to self-insure their homes? Not necessarily. The Institute’s survey showed that half of those who chose to forego insurance on their home have an annual income below $40,000. While wealthy individuals may have the ability to self-insure, most Americans pool their risk with an insurance company that has the financial capacity to absorb the expense of repairing or rebuilding a home. A risky gamble As we know, if you have a mortgage on your home you are required to carry a homeowners insurance policy. The lender must protect the collateral that secures the loan. In a recent column in TheMessenger.com David Stevens, a former head of the Federal Housing Administration and the Mortgage Bankers Association said the Insurance Information Institute ‘survey suggests many of these homeowners may be retirees with a paid-off home who are living on a fixed income. The role of inflation Inflation is…likely influencing the decision for these homeowners to forgo homeowners insurance. Stevens said, “For some people who are living on a fixed income, who have seen the prices of necessities like food and energy go up significantly in the last two years, it’s one they might have to make, however reluctantly”. Insurify, an online insurance marketplace, projects the average cost of home insurance will be $1,784 this year, 17% more than in 2021. Residents of some states are getting charged more than three times that, it said. Homeowners living on a fixed income who cannot afford homeowners insurance are also at risk of falling behind on their property taxes. Stevens noted, “As long as you don’t have a mortgage on your house, you won’t get kicked out if you don’t pay for home insurance, but you will get kicked out if you don’t pay your property taxes”. How a HECM can save the home How could a reverse mortgage literally help save the home these at-risk individuals live in? Let’s do the math. Let’s say a couple has a home worth $300,000 that’s been fully paid off but they cannot afford homeowners insurance. Should they lose their home to a natural disaster or fire they could easily find themselves homeless not having the money to rebuild. However, utilizing a reverse mortgage this couple could take out an annual withdrawal from a Home Equity Conversion Mortgage’s available credit line (or principal limit) to pay the annual premiums. This strategy would give them peace of mind and most importantly protect them from becoming permanently unhoused. Of course, the reverse mortgage’s initial closing costs, FHA insurance premiums, and accrued interest would add to the loan’s balance but they’ve succeeded in protecting what is likely their largest asset and may help ensure the home remains for their heirs to inherit. “At lower income levels, homeowners’ insurance may be perceived as a discretionary purchase,” the Insurance Information Institute said in a report about its survey. “Weather does not discriminate by income, and low-income homeowners remain at risk… Logic would suggest that only a small proportion of low-income homeowners could withstand the total loss of their home from an unforeseen weather event without insurance coverage”, said Robert Dietz, chief economist at the National Association of Home Builders. Conclusion If you originate reverse mortgages in Florida, California, or any state where homeowners insurance premiums have skyrocketed you may want to consider marketing to this at-risk group. After all, a reverse mortgage could literally save the roof over their head. by Shannon Hicks September 4, 2023
Silver Divorce
You might be going through, or considering, a separation or divorce but the end of a relationship does not necessarily mean that you will have to sell your home. Your home may be able to give both partners a new start. For many, their home is their largest asset and where most of their net worth has accumulated. There are mortgage products available that can allow you to buy out the other party while enabling you to stay in your home. A divorce or separation doesn’t always mean you will have to sell your property. You will require a finalized separation or divorce agreement, as that is required by the lender and the agreement needs to clearly detail the asset allocation and any joint debts that need to be cleared. The mortgage funds can only be used to buyout the other party’s equity the home unless it is clearly laid out in the separation agreement that some joint debts need to be paid out to a maximum of 95% of the value of the property. The property must be your primary residence. Sometimes friends or siblings have bought a home and live together in the property. This program may be used in that circumstance also, but this will require an exception for an approval by the mortgage insurer. There are insured mortgage programs available that could help you stay in your home in the event of a separation, divorce or dissolution of a relationship by purchasing the home from your ex-spouse or partner for up to 95% of the home’s value. To qualify for this program you must be able to afford the mortgage payment on your own along with your other liabilities. Not only must the lender approve your application but also a mortgage insurer. Both parties must also be on title on the home prior to the separation. There are some differences between two of the programs. With the first mortgage insurer, the funds can only be used for a spousal buy-out or the dissolution of a relationship. This could be friends, relatives, etc. There cannot be any matrimonial debts or pre-payment penalties or fees included in the new financing. With the other mortgage insurer, the funds can only be used for a spousal buy-out and no other relationship breakdown but the new financing can include matrimonial debts if they are listed on the separation or divorce agreement. They will also allow pre-payment penalties and fees to be included. To qualify for both of these programs you must have good credit and earn sufficient income to support the mortgage payments. It’s so important to seek the advice of a mortgage broker very early in the process, as they can guide you along the way to a successful separation so you can both have the best possible outcome going forward. If you already have a separation agreement in place, they can show you how the value in your home can make it work out for you both. If you have any questions on this program, please give me a call at 1-941-624-4804 or email me at todd@homeforlifefl.com
5 Sources of Retirement Income You Probably Haven’t Considered Yet
If your retirement budget is feeling tight, consider these extra income sources. Planning for retirement can involve a lot of number crunching and strategy to ensure you’ll have enough money to live the life you want. While most people think of their investment accounts and Social Security as their main sources of retirement income, you may have quite a few other options available to you to help make sure you get to live your golden years in style. Here are five sources of retirement income you probably haven’t considered yet. 1. Home equity If you own your home outright, it may be a viable source for additional income in retirement. You could simply sell your home, downsizing to a smaller house. Doing so would give you access to a portion of the equity previously stuck in your home. You could spend the proceeds immediately or invest it for the future. Another option is to stay in your home and refinance. You may use a cash-out refinance to tap the equity in your home. The drawback of a cash-out refi is that you’ll now have a monthly mortgage payment to make. If that isn’t in your retirement budget, you may want to consider another option. A reverse mortgage is a home loan that uses the equity in your house, but it doesn’t need to be repaid with monthly installments. Instead, the mortgage company will recoup its loan when the property is sold. There are several ways to structure a reverse mortgage, and you could receive monthly income from your home. The biggest drawbacks of a reverse mortgage are that the interest rate is variable and they can have hefty up-front costs. 2. Annuities If you can lock in a great interest rate on a fixed annuity, it might be worth exploring the option for retirement. An annuity is a contract with an insurance company that will pay out a certain amount of money to you on a regular basis for the life of the contract. You can buy a lifetime annuity that will pay you every month until you pass away. That said, there are a lot of pitfalls with annuities. Some have hefty upfront costs and charge high ongoing fees. Be sure to understand the rate of return you’ll get on your money in the annuity and make sure the benefits outweigh the costs. 3. Health savings accounts You may have some money lying around in a health savings account that could be used as a source of retirement income. A health savings account, or HSA, is a special tax-advantaged account designed to help people with high-deductible health insurance plans pay for medical care. Employers will often help fund the account as part of their company-sponsored insurance benefit. There’s a tax benefit to using your HSA funds to pay for qualified medical expenses. However, the great thing about an HSA is that when you turn 65, you can use the funds for anything. The only catch is that you’ll have to pay income tax on the distributions. If you have an HSA and you don’t have a lot of medical expenses, you can look into investing the money in the account with the goal of saving it for retirement. If a medical emergency comes up along the way, you can always tap those funds early. 4. Rental income When people think of rental income, they think of owning a duplex or apartment building and renting it out. But you can generate rental income a lot of different ways these days. You’ll probably be driving a lot less in retirement. Maybe you only need one car most of the time. You can rent out a car on Turo. Maybe you’ll be going on vacation more often and for longer. You can rent out your home on Airbnb while you’re on vacation. Maybe you have some great period furniture that you’ve held onto throughout the years. You can rent it to staging companies (for home sales) or rent it as set dressing. You can rent just about anything you own these days and generate some income. 5. Part-time employment or a passion project You may surprise yourself and find you have a job in your retirement. A lot of retirees take on part-time employment in a low-stress environment. Not only does it provide a nice source of income, it can fill the days with meaning and activity. Others pursue a passion project in retirement. And after a few years, they start generating meaningful income from that project. Working in retirement can provide health and financial benefits, but be sure you understand how working in retirement will impact the rest of your finances and your overall retirement plans as well. Supplement your retirement If you think you might have to cut something from your retirement budget, be sure to review the above list for opportunities to supplement your income. Social Security and investments may only take you so far, so be sure to take advantage of any other resources you have at your disposal to achieve the best retirement for you. By Adam Levy– Sep 4, 2023
Reverse mortgage requirements
Key takeaways Reverse mortgages are a way for older Americans to access the equity in their homes and use it to fund retirement while still allowing them to live in the home. Such a mortgage pays the homeowner each month out of the home’s equity rather than the homeowner paying money to the lender. However, reverse mortgages can be complex, and there are strict rules and guidelines dictating who qualifies for these mortgages. These rules also dictate how much income a reverse mortgage can provide and how much they cost. It’s important to understand reverse mortgage requirements and rules if you’re considering this financial option. Reverse mortgage requirements There are a variety of requirements and eligibility guidelines to meet to qualify for a reverse mortgage. Reverse mortgage age limit First and foremost, the homeowner must be 62 or older. This is true for government-sponsored home equity conversion mortgages (HECM) and most private reverse mortgages. However, a small number of lenders may offer options for people as young as 55. Other reverse mortgage qualifications Beyond the age requirements, for reverse mortgages, you must meet the following additional requirements. The home you’re seeking a reverse mortgage on must be your primary residence. That means it must be the address where you spend most of the calendar year. Other reverse mortgage requirements are that your house must be in good shape, and you must participate in counseling that’s provided by a HUD-approved reverse mortgage counseling agency. During the counseling session, an agent will review your eligibility for a reverse mortgage and also discuss the financial ramifications. For instance, those who take out a reverse mortgage loan when they’re too young risk running out of money later in life, during a time when it’s likely income will be lower and healthcare bills may be steeper. Alternatives to reverse mortgages for those that don’t qualify If you’re looking to turn your home equity into funds but can’t qualify for a reverse mortgage due to age or other restrictions, consider some of the following options: Reverse mortgage requirement FAQs Mia Taylor Fri, September 1, 2023
Americans are raiding their 401(k)s
The data is in! More Americans are raiding their 401(k) accounts because of financial difficulties reports CNN. The most recent report from Bank of America released last Tuesday reveals that hardship withdrawals from 401(k)s increased 36% in Q1 of this year when compared to Q2 of 2022. The data was drawn from Bank of America’s analysis of their client’s employee benefits program which includes over 4 million plan participants. Hardship Withdrawals Hardship withdrawals can be taken for a variety of reasons including, purchasing a home, paying for educational expenses, and medical costs, or avoiding foreclosure or eviction to name a few. The IRS defines a retirement plan hardship withdrawal as, a “distribution from a participant’s elective deferral account made because of an immediate and heavy financial need, and limited to the amount necessary to satisfy that financial need. The money is taxed to the participant and is not paid back to the borrower’s account.” Keep in mind that not all 401(k) plans include a hardship withdrawal provision. Even worse, these withdrawals cannot be repaid like a loan which means the plan participant has permanently reduced their account’s earning potential. In part, hardship withdrawals are likely being fueled by inflation. As the cost of living surges consumers may opt to charge everyday expenses they once paid in cash. The New York Federal Reserve data shows that since 2019 overall household debt holdings have increased by $3 trillion while credit card debt exceeded $1 trillion for the first time! A future retirement crisis for younger workers Consequently, younger workers are likely to find themselves cash poor and hopefully house rich by the time they reach their 60s. But what about older Americans? Many have increased their systematic withdrawals from retirement savings to deal with the effects of inflation which substantially decreases the duration of their sustainable withdrawals- or how long that money will last. Others have chosen to work longer continuing to save and hoping the markets will be kind to their portfolio. Accessing untapped home equity is not guaranteed While this financial drama plays out millions of older Americans are sitting on, more precisely living in a substantial sum of home equity. Why do so few choose to even consider a reverse mortgage? One reason is many homeowners believe they will be able to tap into their home equity in the future should they need to. However, that strategy is risky at best. Lenders and banks routinely tighten their credit to consumers when economic conditions are uncertain or negative. Imagine the frustration when they learn that the value of their home is stuck in the bricks and mortar of their house unless they choose to sell. And despite what history has taught us most homeowners conveniently forget that their home’s value could drop, even significantly. How much of their home’s equity would be left then? Facing the hard truth So what can reverse mortgage professionals do? One is to understand the basic mechanics of retirement such as sustainable withdrawals, the distribution phase, required minimum distributions, and common pension benefits for surviving partners. Another key takeaway is to broach the question of how long their money will likely last. Some simple math can tell you roughly how long their current monthly distributions are sustainable. You certainly don’t want to give financial advice, but you also don’t want to ignore the elephant in the room. Even better, partner with financial professionals in your market who know these metrics better than anyone and who are well-versed in approaching these sensitive discussions. There’s no denying that Americans’ retirement is in disarray. The question is when will their largest asset be considered as a potential source of much-needed cash flow? by Shannon Hicks August 21, 2023
Some Extra Potential Sources of Retirement CashYou may have several sources of cash available to you for retirement that you had not considered, although using them to fund your retirement should be done only after careful consideration.
One such source is your home. One approach for retirees traditionally has been selling their homes and moving into a smaller home, then pocketing the difference. However, a slow housing market has hurt the ability of many seniors to tap their home equity in this manner. An alternative is reverse mortgages. They allow homeowners to tap home equity even if they can’t sell their home. With a reverse mortgage, a homeowner (usually 62 or older) borrows against the equity in the home and receives regular payments. Those payments are tax-free, just as the proceeds from any type of loan are not subject to income tax. Although a reverse mortgage is a loan, you are not required to repay anything until you sell or vacate the home. You must remain current on your tax and insurance payments, though. When a reverse mortgage borrower sells the house or dies, the lender will be repaid, plus interest. Typically, repayment will come from the sales proceeds. Reverse mortgages have upfront costs, paid by the borrower. Therefore, borrowers should intend to stay in the house for a while, after getting a reverse mortgage, to justify paying the initial charges. Another potential source of cash is a life insurance policy you no longer need. Perhaps your kids are finished with school and living independently. You might not want to keep paying steep premiums every year. One possibility is to surrender your policy. If it has cash value, you may wind up with some money. Another option is to sell your policy. This type of transaction is called a life settlement. Institutional investors buy pools of such policies and keep paying the premiums while awaiting a payoff. In some situations, you might get more from a sale than from a policy surrender: * You must have a severe health condition. Investors often buy from elderly individuals so a sale might work for your parents. * You must have the right kind of insurance policy. Buyers prefer universal life policies because they permit reductions in premium payments. Term life policies that can be converted to universal life also may be sought by buyers.