Boomer Retirement Sad Truth
Around thirty 30 years ago, when the Boomers were in their 20s and 30s, the transition of responsibility for retirement savings shifted from the employer to the individual with the development of individual retirement accounts, IRAs and 401(K)s. Initially they were introduced as a supplement to pensions and social security, not a replacement. Yet the change allowed many companies to drop their employer-paid pensions, making individual retirement accounts and Social Security income the primary and often only retirement funding vehicle people have access to.
Boomers were happy to take control of these new programs and opened up new IRAs and 401(K)s with great projections for their retirement savings. With annual contributions and market growth, the individual retirement accounts would provide them with a comfortable retirement.
But to the surprise and misfortune of all the Boomers, the following thirty 30 years brought four historic market crashes that ultimately decimated Boomers’ retirement savings projections.
Thanks to the brutal combination of these past financial crises, along with the rising cost of health care and the dim outlook of our Social Security program, today’s Boomers have a huge financial gap between what they will need in savings and what they actually have to retire on without making drastic lifestyle changes.
If you’re in this group, you’re in a tough spot—there’s no way around it. It’s true that there’s no magic formula that will instantly give you a multi-million-dollar nest egg, but with an open mind, a different way of thinking, careful planning, disciplined budgeting, and a positive outlook, you can still have a decent retirement.
The purpose of the book is to introduce an option that applies to many retirees. This option will utilize your currently untapped assets to bridge the financial gap and increase monthly income, while still maintaining your current lifestyle and living the American retirement dream of: Financial Security, leaving an Inheritance and Living in My Own Home.
Sure, I want you to obtain all of your retirement goals and objectives, but my primary concerns are that you will always have your home to live in and that you will not outlive your money. The realization of these core objectives becomes so overwhelming to retirees that they start to compromise their perception of the American Dream and begin to consider alternatives. I call these alternatives to retirement “Plan B.”
Each of these core objectives needs careful attention and planning. The goal of this book is to address all three by focusing on the last objective—securing your home for your retirement years.
In my normal course of business, I have seen thousands of clients’ portfolios. I see their income, their savings, their home loans and home values. I talk with them about their goals and their dreams. As a Boomer myself, I can fully relate to their situations. When I talk to clients who are Boomers, at times I feel like I am talking to myself. I have been down the same road—I have the same dreams, and I have many of the same concerns for my own retirement plans.
As I analyze and think of all my Boomer clients between the ages of 55 and 65, I am so sorry to say that 50 percent of them come to me not knowing how they are going to retire on their current savings and are considering other Plan B options.
Several years ago, I set out to find a solution that would put my clients back on track with minimal risk and minimal life style change. As a mortgage banker and a real estate broker, I understand the financial pros and cons of mortgage lending as well as the pros and cons of real estate. I am aware of and understand all the various loan options offered by the banking industry. I tapped into my experience and resources in the industry to find a way to help my clients renew their Plan A vision for retirement.
When I found the answer to my question, the solution, I went into test mode. I had many meetings with my support team—my attorney, financial advisor, and accountant—to test my conclusions. After our analysis, they all concluded that for the right person, in the right situation, my solution is a sound strategy.
Fundamentally, my solution is very simple. Restructure current non-liquid assets into a liquid asset. We are not adding or investing; there’s no buying or selling. We are simply restructuring what you already have. And the best part is that the restructure has very little additional risk.
Two Words That May Change Your Life
If the next two words bring about any negative thoughts, please stick with me. Hear me out. There is a lot of misinformation out there, and I want you to have a clear understanding of this potentially life changing alternative.
“Reverse Mortgage.” These two words can drastically change your outlook for retirement. Forget what you’ve heard in that past. Trust me; the new updated reverse mortgages are not the old unfriendly reverse mortgages of past years.
You do not lose your home to the government. You remain one hundred percent owner of your home. When you die, your children still get all of the equity in your home. And it is not expensive.
In recent years, the government has made reverse mortgage loans very user-friendly and affordable. Now called a Home Equity Conversion Mortgage (HECM), it is a great tool to satisfy all the objectives we have covered.
A reverse mortgage will:
- Secure your home
- Allow you to maintain your financial self-sufficiency and your pre-retirement standard of living
- Enable you to pass on wealth to your family
- Make it possible to create a rainy day fund
Theory Behind The Solution
As a financial problem solver, I begin with the end in mind. What is the end goal? At the end of the process, will we end up where we want to be?
By design, retirement meets our financial needs and objectives by depleting the funds we have saved just for this season of life. I know it runs counter to the notion of always having abundant savings at hand, but think about it. We saved through all our employment years for retirement so that we can now deplete what we have saved. And, to complicate things, we hope to not outlive our retirement funds. After saving for so long, it is not easy to change our mindset from “saving” to “depleting,” but that is exactly the way retirement works.
Fundamentally, our retirement goal is very simple. At retirement, we want to begin using our savings to live on, while at the same time securing our home, ensuring that our income does not run out, remaining in control of our finances, enjoying life, and hopefully having something to leave our family.
That’s exactly what a reverse mortgage loan does. It secures your home while allowing you to use the equity to increase your spendable income.
Let me try to explain how this works and how easy it really is. I tell my clients to think of their assets and income as “buckets.” Each bucket is filled with money. I love the mental picture of these buckets because I can visualize a full bucket of money, a depleting bucket of money, and an empty bucket.
In my explanations, I narrow it down to three basic assets buckets: a saving bucket, a Social Security/pension bucket, and a home equity bucket. Although most retirees have several types of investments and sources of possible retirement income, I keep it as simple as possible since these are the three categories most assets fall under.
Retirement savings are your 401(k), your IRA, and other types of savings that are drawn on once retired. These funds are, for the most part, liquid. This means they can be converted into cash quickly with minimal impact to the value.
Each month you deduct steady income from these savings accounts. The negative aspect of drawing funds from qualified retirement savings, except for a ROTH IRA, is that these funds are taxable when you draw from them as income, reducing your spendable income. And furthermore, when you draw on the funds, the balance is being depleted. If you have other sources to draw from, it is my suggestion to withdraw as little as possible out of your savings account. Why? Keeping a higher balance will allow compound interest to work and build up the balance. If you keep depleting your savings, it can result in the retiree’s biggest retirement fear—once your savings are gone, they’re gone. My solution will reveal other sources so you can maintain your savings.
Pension or Social Security income
Your pension and Social Security income are fairly straightforward. They are regular payments made during a person’s retirement from their past employer or from Social Security. Once you start collecting, you get the same amount every month for life.
Equity is the difference between your home value and the amount you owe on the home. Equity continues to grow, or appreciate, regardless of how much is owed on the property. The concept of growth regardless of equity is one of the most valuable aspects of real property. The negative side of equity is that it is not liquid by nature. Equity is an asset that remains in your home. It’s locked, and you cannot use the equity without converting it to cash. You can convert it to cash by selling the home and paying off any loans, or you can convert it to cash by getting a new conventional home loan with a cash-out refinance or a home equity line. The problem with refinancing or getting a home equity line is you’re getting a bigger loan, and the higher loan will cause your payment to go up. And if you sell your home, you create another problem—finding a new place to live and paying all the extra costs of moving.
Three Asset Sources But Only Two Income Sources
While there are three assets sources—savings, Social Security, and home equity—only two of them, savings and monthly Social Security, will provide you with spendable income that you can draw from. You do not have access to your home equity without selling your home or refinancing it.
Spendable Income by Receiving Income From All Three Sources
The beauty of a reverse mortgage is that you convert your third source, your home equity, into additional monthly spendable income. In most cases, you can increase your spendable income between $1,000 to $2,000 a month.
How does a reverse mortgage increase spendable income and savings?
Depending on your age and the value of your home, a reverse mortgage will give you around 50 percent of your home value. If your home value is $600,000, you can get a reverse mortgage for approximately $300,000.
With the funds from the reverse mortgage, your existing home loan is paid off. Not having a mortgage payment will increase your spendable income by whatever your mortgage payment was. If your mortgage payment is $1,800 and you get a reverse mortgage, you will increase your spendable income by $1,800 because you no longer have to make that payment.
Depending on the amount you qualify for on a reverse mortgage, you can receive funds in addition to paying off your existing home loan. These additional funds can come to you in a cash lump sum, a credit line, or monthly payments made to you. These additional funds can be used for anything you want—home repairs, travel, college, savings, or even to spoil your grandchildren.
Keep in mind that with a reverse mortgage, you never make a monthly payment on the funds you receive regardless of whether funds are used to pay off the existing loan or you get the funds in a lump payment, a credit line, or monthly payments.
Depletion of Assets, Buckets of Money, and Death
Let’s go back to my bucket illustrations. We know that retirement is when we shift from building our assets to depleting our assets to live on. But what bucket do you pull money from first? And what are the pros and cons of pulling from each of the different buckets?
When a person dies, 99 percent of the time, his or her assets are liquidated by their family, combined into cash, and distributed per the instructions in their will or trust.
To analyze this a little more closely, let me ask you the same questions that I ask my clients.
“When you die, if all of your asset buckets, including your home, are liquidated, converted to cash, put into one estate bucket, and then distributed, does it really make a difference if you depleted your savings bucket or your home equity bucket while alive?”
Almost all my clients agree that it doesn’t matter in the long run which bucket is depleted while they are alive as long as the other objectives are not compromised. Specifically, they want a secured home to live in and income that will live on and not run out.
The other question I ask is: “What makes you feel secure?”
The number one reply is, “Knowing my money will not run out before I die.” And the number two reply is: “That I will have a place to live.”
Logically speaking, home equity or a paid-off house equals security. But really the security we want is not the equity in the home but what that equity yields—no mortgage payment and a place to live.
Old school retirement planning said our equity is more important than our savings. Today I disagree with that statement. If you have your home secured, I would rather see you secure your savings before you secure your home equity.
Leaving an Inheritance
The objective of passing on wealth has always been a traditional core retirement objective. Most of us would like to leave something to our children and grandchildren. With a reverse mortgage, you can still pass on wealth through the equity in your home.
Remember, you remain one hundred percent owner of your home when you get a reverse mortgage. And your home continues to appreciate in value. This appreciation retains much of your equity, even after the depletion with a reverse mortgage.
With every idea, especially financial ideas come the “naysayers”—all the people who try and convince you not to move forward in an area that is outside their comfort zone.
If you Google “reverse mortgage loans,” you will find as many naysayers as there are believers. The naysayers have three similar oppositions to reverse mortgage loans:
- When you get a reverse mortgage loan, you are increasing debt.
- Reverse mortgage loans are too costly.
- Your heirs might not get your house.
Let me address these three common objections.
Regarding increasing debt: The reverse mortgage loan is a loan that needs to be paid back when you die or when you leave the home. All loans are considered debt. So if we isolate the word “loan,” I have to agree with the naysayers. But consider what the reverse loan is secured against. The loan is secured against the home’s equity. The equity is yours. It is what a large portion of your payments have gone toward for many years. The fact is, when you’re borrowing from the equity, you’re borrowing from yourself. The term “reverse” refers to a reverse position with the bank. In a conventional loan, you pay the bank. In a reverse loan, the bank is now paying you back your equity, the same payments you have made to them in the past. It is a very difficult concept, but the bottom line is, the debt the naysayers are referring to is paid back by your decreased equity when you leave the home or when you die. You never have to actually write a check to pay the loan back; you just get less of your equity back— which is what depletion of equity is. Naysayers call it debt; I call it a depletion of equity.
The second thing naysayers don’t like about a reverse mortgage is, according to them, it is too expensive. Yes, there are lenders who charge high fees, but on the other hand, there are lenders who will credit you all the costs and fees, making it a no-cost no-fee loan to you. This is why you need to shop for the best deal. All lenders charge different costs and fees, and you need to find an experienced loan officer who you can trust.
These naysayers will also tell you that the mortgage insurance cost of the loan is too much. But in the same breath, they recommend other types of insurance, such as health insurance, life insurance, or auto insurance. It is true there is a monthly fee coming out of your equity called mortgage insurance. But like all insurance products, there is a benefit to the insurance. In a reverse mortgage, the insurance guarantees that the borrower can live in the home for as long as they want and guarantees that the borrower or the borrower’s family will never owe more than the value of the home. Naysayers call this an unworthy expense. I call it security.
It appears that naysayers do not appreciate the fact that with a reverse mortgage you have a place to live for as long as you desire. Or perhaps they don’t value the improved quality of life that a reverse mortgage can offer because of the extra spendable income and the convenience of not having a mortgage payment to make.
In reality, the naysayers themselves would benefit from a change of attitude—a shift in perspective that would could allow them to view home equity as an asset owned by the homeowner and appreciate the value of converting that asset into spendable cash.
Lastly, the notion that a reverse mortgage means your heirs might not get the house is very misleading. Regardless of the type of mortgage loan on your home, your loan balance needs to be paid off by your heirs when you die. If your heirs want the home, they need to pay off any existing loans with cash or by putting a new loan on the property. So to rebut the naysayers your heirs can keep the property if they want to; they just need to pay off any loan balance. But as we discussed in the previous chapter, most of the time your heirs will sell the home and divide the remaining equity per your instructions in your living trust or will.
Problem with Naysayers
The thing that frustrates me the most about reverse mortgage naysayers is that their critical attacks result in very challenging consequences—spend less, make do without, ask the government for help, get a roommate, move in with family, or sell your home and move to a less expensive area away from family and friends.
Naysayers, are any of these options a desirable solution? In my view, they are nothing close to the American Retirement Dream. I want to see Baby Boomers living close to family, hosting family gatherings in the family home, spoiling their grandchildren, and growing old with life-long friends. I believe that during retirement, you should be able to maintain the same life style that you had when you were working. I want you to continue to go out to dinner, going on vacations, and giving of your time to your church and charitable causes. Working more and spending less is not a reasonable solution to the retirement problem.
I believe securing your home for as long as you want to live in it and increasing your spendable income by converting your own equity is an Easy WIN Solution.