Retirement Income Blog

  
Seniors who are in a cash flow bind because of increasing expenses or a drop in their investment income may want to look into tapping one of their most valuable assets: their homestead.

There are several ways to do this.  Homeowners could sell the home, but they would have to move.  Or they could take out a loan against it, which would leave them with payments to make each month.  The third choice is a reverse mortgage.   

A reverse mortgage is a non-recourse loan that lets homeowners over 62 years old convert the equity in their house into cash.  Yet it allows them to still live there, and retain title and ownership.  The lender will give the payout all at once, as a fixed monthly income (up to lifetime), as a line of credit, or as a combination of these.

The money will have to be paid back with interest when your clients die, sell the home, or permanently move out.  But they or their heirs have the option to pay off the reverse mortgage at anytime and keep the house.  And the amount that must be repaid can never exceed the value of the home.  Furthermore, if the sales price exceeds the amount owed, the excess will go to the homeowner or their estate.

There is no income or medical requirement to qualify for a reverse mortgage.  And borrowers can use the money any way they wish, for example, to pay daily living costs, medical bills, or travel expenses. 

The size of the reverse mortgage depends on several factors, including the youngest homeowner’s age, the home’s value, and current interest rates.  The money they receive will be tax-free and will not affect Social Security or Medicare benefits.  However, it could influence Medicaid qualification. 

Take for example, Bill and Marge, ages 65 and 63 respectively.  They own their home, which is valued at $250,000.  Bill had to close his part-time consulting business because of health problems, and the loss of this income forced them to cancel a once-in-a-lifetime cruise that they had been planning for the past year.  A reverse mortgage offered Bill and Marge the following options:¹          

            Single lump sum or line of credit - $140,285

            Lifetime monthly income - $784

 They chose the line of credit and took out enough to pay for their cruise and single-pay LTC insurance policies. They’ll keep the balance of the available cash for another vacation, for an emergency, or to supplement their income in the future.

More information and a list of reverse mortgage lenders in your state are available from the National Reverse Mortgage Lenders Association.  This source of retirement income promises to become more common as baby boomers with inadequate retirement savings tap whatever home equity they have.

 
¹ http://www.rmaarp.com/estimates.htm

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Selecting the right retirement financial planner is important to you.
Here are questions to ask a retirement financial planner candidate that will help distinguish one from the other.

1. What experience do you have with retirement financial planning?
Find out the percentage of his clients by age category.  You want to make sure that the bulk of his clients are similar to you so that he has experience in actual planning for people like you.

2. What are your credentials and what do they mean?

There are retirement financial planners with great credentials that are not that competent and vice versa.  But credentials do illustrate an individual’s willingness to engage in further learning and take on additional work.  Find out what work was required to earn each credential as there are some credentials in the financial services industry that have little value.

3. What services do you offer?
Likely, you need assistance with retirement income planning, tax reduction, budgeting, possibly estate planning and portfolio management.  If his list of services does not match your needs, then move on to another retirement financial planner candidate.

4. What is your approach to retirement financial planning?
When you ask this question, you look for a thoughtful systematic approach.  It might sound like this:

1. First, we estimate the income you will need in retirement based on your desires.
2. Next, we calculate the sufficiency of your current financial resources to achieve that income.
3. If the resources are insufficient, then I present you with alternatives to fix the deficiency as best we can.
4. Next, we document a spending plan, a retirement plan that takes into account which pots of money get used first, tax minimization and a portfolio design.
5. Then we implement what you agree on.
6. Last, we meet every 6 months to review progress and account for any changes in your desires or circumstances.

If the retirement financial planner cannot easily state their approach in a concise and chronological manner, find a professional that will.

5. How can I tell that you’re competent?
Don’t be afraid to ask this challenging and direct question to a prospective retirement financial planner.  If he cannot give you an answer that inspires confidence, then why trust him with your financial future?

6. How will I pay for your retirement financial planning services?
As part of your financial planning agreement, the financial planner should clearly tell you in writing how she will be paid for the services to be provided.

Retirement Financial Planners can be paid as follows:

• Fees based on an hourly rate, a flat rate, or on a percentage of your assets
• Commissions paid by a third party from the products sold to you to carry out the financial planning recommendations.
• Commissions are usually a percentage of the amount you invest in a product.
• A combination of fees and commissions whereby fees are charged for the amount of work done to develop financial planning recommendations and commissions are received from any products sold.

In addition, some planners may offset some portion of the fees you pay if they receive commissions for carrying out their recommendations. You would prefer to deal with a professional that works on a fee basis rather than commissions that may be “buried” or hidden in products.

7. I have assets of  $xxxxxx.  How much do you typically charge someone like myself and what are the components of those charges?
This question gives clarity to the answer from question 6.

8. Will my retirement financial plan look like those for your other clients?
If the planner tells you everything is totally customized, be ready to pay a fortune or the planner is not being honest.  If most of the retirement financial planner’s clients are between age 55 and 65, then the plans SHOULD look similar from one another as people in the same circumstances have similar retirement planning issues.  It’s the similarity among the retirement financial planner’s clients that gives him the experience you desire.
9. Have you ever been publicly disciplined for any unlawful or unethical actions in your professional career?
While you may think this is an important question, there is no reason to ask it as you can get this information on the Internet.  The planner is either responsible to the SEC, FINRA and/or the State Department of Insurance.  All 3 list disciplinary records and in 15 minutes, you can check the background of any potential retirement financial planner.

10. What do I get in writing?
If the retirement financial planner offers little in witing, walk.  At minimim, you should get a list oif fees and services, disclosure of any conflicts of interest, a written plan and an investmemnt policy statement.  While these dont need to be lengthy, a reputable retirement financial planner will provide documents that serve these purposes.

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